<PAGE>
As filed with the Securities and Exchange Commission on May 20, 1999
Registration No. 333-73369
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
Amendment No. 4 to
FORM S-1
REGISTRATION STATEMENT
Under
The Securities Act of 1933
----------------
DIRECTCHEF, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Delaware 5099 94-3304637
(State or other jurisdiction
of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
----------------
5179 Overland Avenue
Culver City, California 90230
(310) 253-9751
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
----------------
Roger M. Laverty
Chief Executive Officer
DirectChef, Inc.
5179 Overland Avenue
Culver City, California 90230
(310) 253-9751
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
----------------
Copies to:
<TABLE>
<S> <C>
Daniel J. Winnike, Esq. Armando Castro, Esq.
John E. Stoner, Esq. Brobeck, Phleger & Harrison LLP
Howard, Rice, Nemerovski, Canady, Falk &
Rabkin Two Embarcadero Place
A Professional Corporation 2200 Geng Road, Building 2
1755 Embarcadero Road, Suite 200 Palo Alto, California 94303
Palo Alto, California 94303 (650) 424-0160
(650) 842-8500
</TABLE>
----------------
Approximate date of commencement of proposed sale to the public: As soon
as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
----------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This Prospectus is not an +
+offer to sell these securities, and we are not soliciting offers to buy these +
+securities, in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED MAY 20, 1999
[DirectChef Logo]
6,250,000 Shares
Common Stock
We are offering 6,250,000 shares of our common stock. This is our initial
public offering and no public market currently exists for our shares. Our
common stock has been approved for quotation on the Nasdaq National Market
under the symbol "DCHF." We anticipate that the initial public offering price
will be between $10.00 and $12.00 per share.
---------------
Investing in the common stock we are offering involves risks.
See "Risk Factors" beginning on page 9.
---------------
<TABLE>
<CAPTION>
Per
Share Total
----- -----
<S> <C> <C>
Public Offering Price.............................................. $ $
Underwriting Discounts and Commissions............................. $ $
Proceeds to DirectChef............................................. $ $
</TABLE>
The Securities and Exchange Commission and state securities regulators have
not approved or disapproved these securities, or determined if this prospectus
is truthful or complete. Any representation to the contrary is a criminal
offense.
We have granted the underwriters a 30-day option to purchase up to an
additional 937,500 shares of common stock to cover over-allotments. BancBoston
Robertson Stephens expects to deliver the shares of common stock to purchasers
on , 1999.
---------------
BancBoston Robertson Stephens
The Robinson-Humphrey Company
Thomas Weisel Partners LLC
The date of this prospectus is , 1999
<PAGE>
[Insert Graphics]
[GRAPHICS OF PRODUCTS AND FACILITIES APPEAR HERE]
INSIDE FRONT COVER: LOGO OF DIRECTCHEF, INC. APPEARS AT TOP OF PAGE. LOGO
INCLUDES TAGLINE "YOUR COMPLETE SOURCE FOR PROFESSIONAL RESTAURANT AND KITCHEN
EQUIPMENT & SUPPLIES!" UNDERNEATH ARE PICTURES DEPICTING THE FOLLOWING PRODUCTS
AND FACILITIES:
PICTURE #1, UPPER LEFT SIDE:
[COMMERCIAL KITCHEN INTERIOR INCLUDING COOKING EQUIPMENT, WORK
SPACES AND HOOD VENTILATION]
PICTURE # 2, UPPER RIGHT SIDE:
[INTERIOR OF STAINLESS STEEL INSTITUTIONAL KITCHEN FACILITY]
[CAPTION RUNNING UNDER PICTURES 1 AND 2: WE DISTRIBUTE FOODSERVICE
EQUIPMENT AND SUPPLIES TO A VARIETY OF CUSTOMERS, INCLUDING
INDEPENDENT RESTAURANTS, MULTI-UNIT CHAINS, INSTITUTIONAL
FOODSERVICE KITCHENS, HOTELS AND OTHER PLACES WHERE FOOD IS
PREPARED.]
PICTURE #3, LOWER LEFT SIDE:
[INTERIOR OF ECONOMY RESTAURANT FIXTURES, INC. INCLUDING GONDOLAS
STOCKED WITH RESTAURANT EQUIPMENT AND RELATED MERCHANDISE AND
SALES COUNTERS]
[CAPTION: WE SELL OUR PRODUCTS THROUGH A VARIETY OF CHANNELS, SUCH
AS LARGE CASH AND CARRY FACILITIES, CATALOGS AND A DIRECT SALES
FORCE]
PICTURE # 4, LOWER RIGHT SIDE:
[DEPICTION OF DIRECTCHEF.COM WEBSITE HOMEPAGE]
[CAPTION: DEVELOPING A BUSINESS-TO-BUSINESS AND RETAIL ELECTRONIC
COMMERCE CAPABILITY]
2
<PAGE>
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of our common stock.
Until , 1999, all dealers that buy, sell or trade our common stock,
whether or not participating in this offering, may be required to deliver a
prospectus. This requirement is in addition to the dealers' obligation to
deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 4
Risk Factors............................................................. 9
Forward-Looking Statements............................................... 17
Use of Proceeds.......................................................... 18
Dividend Policy.......................................................... 18
Capitalization........................................................... 19
Dilution................................................................. 20
Selected Financial Data.................................................. 21
Formation of DirectChef, Inc............................................. 23
Management's Discussion and Analysis of Financial Condition and Results
of Operations.......................................................... 24
Business................................................................. 48
Management............................................................... 55
Certain Transactions..................................................... 58
Principal Stockholders................................................... 61
Description of Capital Stock............................................. 62
Shares Eligible for Future Sale.......................................... 65
Underwriting............................................................. 66
Legal Matters............................................................ 67
Experts.................................................................. 67
Additional Information................................................... 68
Index to Financial Statements............................................ F-1
</TABLE>
---------------------
We will purchase six foodservice equipment and supply companies for cash
and shares of our common stock at the same time as we complete this offering.
In this prospectus, we generally speak as if we have already acquired these six
companies. When we need to discuss these six companies, we refer to them as
"our companies."
3
<PAGE>
PROSPECTUS SUMMARY
This summary provides an overview of the key aspects of the offering.
Because this is a summary, it may not contain all of the information that is
important to you. You should read the entire prospectus carefully, including
the risk factors and the financial statements, before you decide to invest.
DirectChef, Inc.
We are a full-service national distributor of foodservice equipment and
supplies. Our companies have been in business for periods ranging from 18 to
108 years. Upon completion of this offering, based on total revenues, we will
be one of the largest providers of foodservice equipment and supplies in the
United States.
We believe that our size and presence in multiple markets will allow us to
offer larger regional and national customers value-added products and improved
service while still maintaining our focus on local customers. We currently
serve our customers through direct sales, cash and carry stores and catalogs.
We have also established, and intend to develop sales through, our
directchef.com Internet website. We intend to expand each of these sales
channels with particular emphasis on the Internet. We believe the Internet will
provide us with a cost effective distribution channel, an easy to use reorder
option for our commercial customers and broader access to retail customers.
Our products and services are used by all businesses that sell food and
beverages. Those businesses include regional and national restaurant chains,
independent restaurants, hotels, businesses, schools, health care facilities,
casinos, stadiums and prisons. In 1998, our pro forma combined net revenues
were $129.7 million.
We sell over 10,000 products. We serve more than 25,000 customers, through
a network of eleven facilities located in four states and our catalogs, as well
as on the Internet. Our products include heavy equipment, such as ranges and
refrigeration units, as well as smaller disposable items, such as china,
glassware and silverware. Our revenues come from the sale of equipment and
supplies. More than 40% of these sales come from our customers' replacement of
existing equipment and supplies. We also offer a full range of design,
construction and installation services for restaurants and other foodservice
facilities.
In 1998, the foodservice equipment and supply industry had revenues of $13
billion, while the entire foodservice industry had revenues of $351 billion.
Comprised of over 12,000 companies, the foodservice equipment and supply
industry is highly fragmented. We believe most of these companies are small,
owner operated companies with limited access to capital. According to recent
surveys by Foodservice Equipment and Supply magazine, the industry has grown at
5% per year over the last seven years.
Our goal is to become the largest national single-source distributor of
foodservice equipment and supplies in the United States. We intend to grow by:
. acquiring other foodservice equipment and supply companies
. pursuing business to business electronic commerce opportunities
. expanding complementary products and services
. opening new cash and carry stores
. expanding alternative sales channels and building brand name recognition
for directchef.com
4
<PAGE>
Our management team includes executives with extensive experience in both
foodservice distribution and consolidating industries. We will implement and
pursue the following operating strategies and efficiencies:
. utilize volume purchasing to reduce product cost
. use the Internet to improve our supply chain
. improve management of inventory
. provide strong incentives to management
. maintain day-to-day management responsibility at our local operations
. analyze the policies and procedures at each of our companies and adopt
the best policies and procedures for use throughout our operations
5
<PAGE>
The Offering
<TABLE>
<C> <S>
Common stock offered by DirectChef.............. 6,250,000 shares
Common stock to be outstanding after this
offering...................................... 9,474,919 shares
Use of proceeds................................. To pay the cash portion of
the purchase price for our
companies, for future
acquisitions and for general
corporate purposes, including
continued development of our
electronic commerce strategy.
See "Use of Proceeds."
Proposed Nasdaq National Market Symbol.......... "DCHF"
</TABLE>
Unless we tell you otherwise, references to numbers and percentages of
shares of common stock assume that the underwriters do not exercise their over-
allotment option.
We were incorporated in June 1998 in Delaware. Our executive offices are
located at 5179 Overland Avenue, Culver City, California 90230 and our
telephone number is (310) 253-9751.
6
<PAGE>
Summary Pro Forma Combined Financial Data
(In thousands, except shares and per share data)
We will complete the acquisitions of our companies at the same time as we
complete this offering. The following unaudited pro forma combined statement of
operations data present our financial data adjusted to give effect to the
acquisitions of our companies, completion of this offering and application of
the net proceeds from the offering as if these events occurred at the beginning
of each period presented. The following financial data also gives effect to pro
forma adjustments described in "Notes to Unaudited Pro Forma Combined Financial
Statements" elsewhere in this prospectus. The unaudited pro forma combined
balance sheet data give effect to the acquisitions and to this offering and the
application of the estimated net proceeds from the offering as if they occurred
on March 31, 1999. The unaudited pro forma data does not necessarily indicate
the results we would have obtained had these events actually occurred on that
date or our future results. See "Selected Financial Data," "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
the Unaudited Pro Forma Combined Financial Statements and historical financial
statements of our companies, including, in each case, the notes thereto,
appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
Pro Forma Combined
--------------------------------
Three Months
Year Ended Ended
December 31, 1998 March 31, 1999
----------------- --------------
<S> <C> <C>
Statement of operations data:
Net revenue.................................. $ 129,700 $ 30,386
Cost of revenue.............................. 104,885 24,662
---------- ----------
Gross profit................................. 24,815 5,724
Selling, general and administrative
expenses................................... 20,117 5,073
Goodwill amortization........................ 1,107 279
---------- ----------
Income from operations....................... 3,591 372
Interest expense and other, net.............. (111) (44)
---------- ----------
Income before income taxes................... 3,480 328
Income tax expense........................... 1,605 187
---------- ----------
Net income................................... $ 1,875 $ 141
========== ==========
Basic net income per share .................. $ 0.20 $ 0.01
========== ==========
Diluted net income per share................. $ 0.19 $ 0.01
========== ==========
Shares used in computing(1)
Basic net income per share.................. 9,474,919 9,474,919
========== ==========
Diluted net income per share................ 9,856,042 9,856,042
========== ==========
Balance sheet data:
Working capital.............................. $ 28,750
Total assets................................. 98,917
Long-term obligations, excluding current
installments............................... 230
Stockholders' equity......................... 75,320
</TABLE>
- --------
(1) Pro forma combined shares used in computing basic net income per share
includes: (a) 1,639,375 shares issued in connection with our formation; (b)
316,474 shares that we will issue on conversion of Series A Preferred
Stock; (c) 1,269,070 shares that we will issue to owners of our companies
in connection with our acquisitions of those companies; and (d) 6,250,000
shares that we will issue in this offering. Pro forma combined shares used
in computing diluted net income per share further includes 381,123 net
shares assumed issued upon exercise of outstanding stock options.
7
<PAGE>
Summary Individual Company Financial Data
(In thousands)
The following table presents summary income statement data for each of our
companies for each of their three most recent fiscal years. The historical
income statement data shown below do not give effect to:
. the pro forma adjustments related to reductions in salary, bonuses and
benefits that the owners of our companies have agreed to
. any other pro forma adjustments reflected in the Unaudited Pro Forma
Combined Financial Statements included elsewhere in this prospectus
The income statement data presented below has been derived from financial
statements of our companies for the periods reflected in their historical
financial statements included elsewhere in this prospectus. The fiscal years
presented for each of our companies end on December 31, except for East Bay's
fiscal year, which ends on September 30, Curtis's fiscal year, which for 1996
ended on June 30, 1996, and Castino's fiscal year for 1996 and 1997, which
ended on March 31, 1997 and 1998, respectively.
<TABLE>
<CAPTION>
Three Months
Ended March
Fiscal Years Ended 31,
----------------------- --------------
1996 1997 1998 1998 1999
------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
Raygal:
Revenues............................... $22,213 $33,678 $33,038 $6,267 $8,198
Income from operations................. 557 1,853 1,725 149 291
East Bay:
Revenues............................... $20,368 $23,681 $29,916 $5,938 $7,466
Income from operations................. 153 321 564 148 109
Economy:
Revenues............................... $16,676 $19,884 $22,703 $4,530 $4,945
Income (loss) from operations.......... 674 688 916 (110) (17)
Curtis:
Revenues............................... $22,839 $19,933 $20,279 $4,268 $4,305
Income from operations................. 568 164 650 103 80
Bintz:
Revenues............................... $12,600 $13,097 $17,835 $4,733 $4,358
Income from operations................. 452 307 740 203 285
Castino:
Revenues............................... $ 5,729 $ 5,921 $ 5,929 $1,312 $1,114
Income (loss) from operations.......... 134 109 17 (31) (93)
</TABLE>
8
<PAGE>
RISK FACTORS
You should carefully consider the following risks and other information in
this prospectus before purchasing the common stock we are offering.
Our lack of experience managing our companies may negatively affect our
operating results
We have entered into definitive agreements to acquire our companies at the
same time as we complete this offering. To date, our companies have operated as
independent entities, and our activities have been limited to preparing for
this offering and the acquisitions of our companies. Our management has only
recently been assembled and has not worked with our companies. We have not had
experience managing the combined operations and we might not be effective in
doing so. If we are not, the combined future operating results of our companies
would be adversely affected.
The pro forma results included in this prospectus may not reflect the results
of combining our companies
The Unaudited Pro Forma Combined Financial Statements included elsewhere in
this prospectus give effect to the acquisitions of our companies, as more fully
described in the notes to those statements. Those pro forma results, however,
do not necessarily indicate the actual results of operations that would have
occurred had the acquisitions occurred at the beginning of the period presented
or the results that may occur in the future.
Failure to integrate our companies successfully will result in significant
operating inefficiencies, which may reduce our profitability
Our success as a new national foodservice equipment and supply company will
depend in large part on our ability to integrate the operations and management
of our companies and other companies we may acquire in the future. Our
companies have all operated independently for substantial periods of time. For
us to be successful in integrating the operations of our companies, we will
need to adopt management practices that encourage cooperation in the pursuit of
business opportunities and in reducing redundant costs. We envision that our
most significant challenges in integrating foodservice equipment and supply
companies will be:
. managing inventory to assure product availability without an excessive
working capital investment
. adopting integrated marketing programs to maximize company-wide sales
. establishing a purchasing strategy that takes advantage of the combined
purchasing power of our companies
. eliminating duplicative costs, such as the costs associated with
maintaining multiple equipment and supply warehouses in the same region
. establishing systems and controls that enable us to effectively manage
the combined operations of all of our companies
If we fail to integrate our companies successfully, we will experience
significant operating inefficiencies, which may reduce our profitability.
We may not be profitable, in which event the market value of our shares would
decline
We may not achieve profitability in the near term, if at all. During the
period from June 1998 (inception) through the completion of this offering, we
incurred a loss because we had no revenues and incurred costs relating to our
organization, our search for companies to acquire and our development of the
management team and infrastructure required to support our anticipated growth.
If we do not operate profitably, the market value of our shares would very
likely decline.
9
<PAGE>
Acquisitions, which are a key element of our growth strategy, present numerous
risks that may negatively affect our operating results
We expect acquisitions of other foodservice equipment and supply companies
to be an important aspect in our growth. Investors should be aware that there
are a number of risks associated with those acquisitions, such as:
. failure of foodservice equipment and supply companies we acquire to
achieve expected results
. diversion of our management's attention
. our failure to retain key personnel, customers and suppliers of
companies we acquire
. risks associated with unanticipated conditions, events or liabilities of
companies we acquire
Because acquisitions are an important element of our growth strategy, we are
susceptible to the adverse consequences of any of these factors. These
consequences include restructuring charges and other non-recurring charges that
may arise from the change in control of businesses and our failure to achieve
the benefits expected from our acquisition strategy.
Our decentralized operating strategy could result in inconsistent operating and
financial practices, resulting in our inability to effectively manage our
companies
Management of each acquired company will retain responsibility for day-to-
day operations, as well as profitability and growth. This operating strategy
could result in inconsistent operating and financial practices if our internal
processes and procedures are not adequate for monitoring our local operations.
This, in turn, could adversely affect our revenues and profitability.
Our failure to acquire additional companies will limit our growth, which will
negatively affect our revenues
If we fail to acquire additional businesses, our ability to grow in the
future would be limited. One of our strategies is to increase revenues and the
markets we serve through the acquisition of additional foodservice equipment
and supply companies. We may not be able to identify companies to acquire that
meet our location, product mix and/or financial result requirements. This
inability to identify companies to acquire may result from companies in a
particular geographic area not meeting our requirements. It may also result
from owners of companies that do meet our requirements choosing not to become
part of a larger business. Even if we identify companies that meet our
requirements, we may not be able to acquire them on terms that we find
acceptable in light of our financial resources at the time of any proposed
acquisition. In addition, we may face competition for companies to acquire from
other foodservice equipment and supply companies.
Our fixed price contracts may result in lower profits or losses
A significant portion of our revenues from design, construction,
fabrication and installation work are, and will continue to be, generated under
fixed price contracts. We must estimate the costs of completing a particular
project, and the cost of labor and materials may vary from our original
estimate. These variations and other risks inherent in performing fixed price
contracts may result in different revenue and gross profits from those we
originally estimated, which could result in reduced profitability or losses on
projects. Depending upon the size of a particular project, variations from
estimated contract costs could have a significant impact on our operating
results for any fiscal quarter or year. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
We will need to upgrade or replace our computer systems and software before the
year 2000 and the costs may negatively affect our financial results
Many currently installed computer systems and software products cannot
distinguish 21st century dates from 20th century dates. This inability to
distinguish 21st century dates from 20th century dates will cause
10
<PAGE>
system failures or miscalculations if not promptly corrected. For businesses
such as ours, those system failures or miscalculations would result in a number
of disruptions to operations, including the temporary inability to process
transactions, send invoices or engage in similar normal business activities.
For this reason, we will need to upgrade or replace our software and computer
systems before the year 2000. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Directors, officers and shareholders of our companies may exercise substantial
control over our business
Following the acquisitions of our companies and the completion of this
offering, our executive officers and directors as well as former stockholders
of our companies will beneficially own approximately 31.0% of the outstanding
shares of common stock. If acting in concert, they will be able to exercise
substantial control over our affairs, to elect the entire board of directors
and to control the outcome of any matter submitted to a vote of stockholders.
See "Principal Stockholders."
Substantial proceeds of this offering are payable to our affiliates
Of the net proceeds of this offering, $41.4 million will be paid as the
cash portion of the purchase price for our companies. Messrs. Breznikar,
Rothkopf and Weinstock, each of whom will receive a portion of the proceeds,
will become members of our board of directors and/or holders of more than 5% of
our common stock. See "Principal Stockholders."
Members of our management team will receive substantial benefits from this
offering
As of March 1, 1999, members of our management team owned 1,670,872 shares
of common stock in aggregate. They acquired these shares for an aggregate
purchase price of $332,422, or an average of $0.20 per share. Upon completion
of this offering, their shares will be worth approximately $18,379,592 based on
an assumed public offering price of $11.00 per share. In addition, Messrs.
Breznikar and Rothkopf, who will become members of our board of directors, will
receive stock worth approximately $2.9 million and cash in the amount of
approximately $8.8 million as part of the purchase price for their companies.
Other benefits that will be received by some or all of our existing management
and by these individuals as a result of completing the offering include:
. increased value of their employee stock options and eligibility for
future option grants
. ongoing employment with us
. membership on our board
. releases from guarantees provided by the former owners of our companies
If we fail to acquire additional companies in strategically located markets, we
may not realize the expected benefit of our investment in electronic commerce
One of the key elements of our electronic commerce strategy is to acquire
additional foodservice equipment and supply companies in strategically located
markets to enhance our nationwide distribution capabilities. The success of
this strategy will affect our ability to fulfill orders throughout the United
States. Many of the products that we offer are difficult and expensive to ship
long distances. We may not be able to fulfill nationwide orders economically if
we do not acquire companies located in strategic markets or establish a
distribution source close enough to our customers to make shipping to those
customers viable. Our failure to acquire companies located in strategic markets
or otherwise establish a distribution source close enough to our customers to
make shipping to those customers viable will adversely affect our ability to
develop our electronic commerce distribution channel. This failure would limit
our ability to grow.
Shares issued in our acquisition program could dilute existing stockholders,
causing our share price to decline
We anticipate using our common stock, along with cash and debt, to finance
future acquisitions. To the extent that we use common stock as consideration
for acquisitions, the interests of existing stockholders could
11
<PAGE>
be diluted. This would especially be the case if our common stock had a low
market value at the time of issuance in an acquisition.
We may be unable to obtain funds for future acquisitions, which will limit our
growth
We cannot readily predict the timing and success of our future acquisition
efforts and the associated capital requirements. If we do not have sufficient
cash to finance our acquisition program, our growth could be limited. If our
common stock does not maintain a sufficient market value, or if the owners of
companies we acquire in the future are unwilling to accept common stock as part
of their consideration, we may be required to utilize more cash, if available,
or debt. The commitment letter for our credit facility provides that the loan
documents will contain limitations on our ability to use cash, other than the
proceeds of this offering, to make acquisitions without the prior approval of
our lenders. Upon completion of this offering, we will have approximately
$22.6 million of net proceeds remaining for future acquisitions and working
capital after payment of the cash portion of the purchase price for our
companies and related expenses. Many factors affect the availability of
financing. If:
. our financial performance or results of operations decline, making us
unattractive to equity investors or lenders
. the market for our common stock or equity securities in general declines
. conditions in the credit markets change, resulting in the unavailability
of debt financing on terms acceptable to us
. we are unable to satisfy the financial covenants and ratios set forth in
our proposed bank line of credit
. we enter into agreements with lenders or investors that require us to
satisfy ratios or other tests or that contain other restrictions on our
ability to raise capital
we may not be able to obtain the financing needed for our acquisition program.
If we are not able to obtain the necessary financing, we will not be able to
acquire additional foodservice equipment and supply companies, which will limit
our growth. See "Risk Factors--Dependence on Acquisitions for Future Growth"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Combined Liquidity and Capital Resources."
We may not achieve the benefits we expect to derive from our proposed
investment in electronic commerce if we are not able to successfully implement
our new electronic commerce strategy
We are in the process of implementing a business strategy that is focused
on providing products and other services to businesses and individual consumers
via the Internet. We intend to invest $4-5 million in developing our electronic
commerce capabilities and our information systems and to devote substantial
management attention to electronic commerce. To date, we have not generated any
significant revenues via the Internet. While numerous sources, including those
noted in this prospectus, predict rapid growth of electronic commerce, these
predictions do not specifically address growth of electronic commerce in our
industry. There is no established model for the sale of our products and
services over the Internet and we are not certain that our Internet website
will be used by our intended customers. We are investing in a new distribution
channel with which we have very little experience. We expect that our strategy
will require changes in our business operations, sales and implementation
practices, customer service and support operations and management focus. We are
also facing new risks and challenges, including a lack of meaningful historical
financial data upon which to plan future budgets. If we are unable to implement
our Internet strategy successfully, we will lose our investment in electronic
commerce. Additionally, implementation of our electronic commerce strategy may
divert our management's attention, resulting in lost opportunities for growth
and operating efficiency.
12
<PAGE>
Acquisitions may produce substantial amounts of goodwill that will result in
significant amortization expense in future periods
When we acquire companies, we may have to recognize significant accounting
charges that may negatively affect our financial results. We expect that we
will account for acquisitions under the purchase method of accounting.
Acquisitions accounted for under the purchase method are likely to generate
goodwill, or other intangible assets. Goodwill generally represents the
difference between the purchase price of an acquired entity and the fair value
of the tangible and separately measurable intangible net assets of that entity.
Consequently, acquisitions of new businesses typically will result in
substantial amortization charges. Although non-cash in nature, these charges
could have a significant impact on our reported operating results. Acquisitions
also may force us to recognize significant one-time related charges.
As a result of the acquisitions of our companies, we will record annual
amortization expense for acquisition-related intangible assets of $1.1 million.
Taking into account these acquisitions, our pro forma as adjusted balance sheet
as of March 31, 1999 includes an amount designated as goodwill that represents
45.2% of pro forma total assets and 59.3% of pro forma total stockholders'
equity.
Our failure to determine or amortize goodwill properly could negatively affect
our financial results
If we conclude at any time that we have not accurately determined or
amortized the goodwill recorded in connection with the acquisitions of our
companies, this could result in a significant charge against our earnings.
Generally accepted accounting principles require that goodwill and all other
intangible assets be amortized by the asset holder over the period during which
the holder expects to derive benefit from the asset. With respect to the
goodwill recorded in connection with the acquisitions of our companies, we have
determined that period to be 40 years. It may be that we have not accurately
determined this amortization period. Further, if we fail to recognize
separately a material intangible asset having an actual benefit period of less
than 40 years, or if we have overestimated the benefit period for material
portions of the goodwill recorded in connection with the acquisitions, then:
. earnings reported in periods immediately following the acquisitions will
be overstated
. in later years, we will be burdened by a continuing charge against
earnings without the associated benefit to income that generally has
been factored into the purchase price paid
Our quarterly results may fluctuate, resulting in fluctuations in our stock
price
Our quarterly results of operations may be subject to fluctuations as a
result of:
. timing and cost of acquisitions
. timing of inventory purchases
. timing and amount of rebates from suppliers
. fluctuations in consumer demand
. changes in our relationships with equipment suppliers
. extreme weather conditions
. general economic conditions
As a result of these and other factors, our quarterly operating results may
change significantly from quarter to quarter and may not be indicative of the
results to be expected for the full year. Quarterly results are also not
necessarily meaningful as an indication of our future performance. In addition,
from time to time, our quarterly operating results may not meet the
expectations of securities analysts and investors. If that occurs, the market
price of our common stock could suddenly decline.
13
<PAGE>
Changes in the foodservice business may negatively affect our business
Our revenues and earnings are especially sensitive to events that affect
the health of the restaurant business. A number of factors could result in a
temporary or longer-term overall decline in demand for foodservice equipment
and supply services, including:
. a decline in consumer spending
. a decline in consumer confidence
. a decline in restaurant use
. a decline in the number of new restaurants being opened or remodeled
. higher unemployment
The occurrence of any of these events or any other events negatively
affecting the restaurant business would likely have the effect of reducing our
revenues and profitability.
Competition in the foodservice equipment and supply industry may adversely
affect our business by causing us to lose sales or operate at a reduced level
of profitability
We are engaged in a highly fragmented and competitive industry comprised of
approximately 12,000 foodservice equipment and supply distributors. Competition
is based primarily on service, selection, location and price. We compete with a
large number of foodservice equipment and supply companies on a regional and
local basis. Some of these competitors have greater financial resources than we
do, and some are divisions of large public companies. As a result of
competitive conditions, we risk losing customers and declining profit margins.
Competition for acquisition candidates may cause us to lose acquisition
opportunities or pay higher prices
Competition for acquisition candidates could result in our losing
acquisition candidates to other bidders and paying higher prices for companies
that we acquire. We may face competition for companies to acquire from
competitors that are also attempting to consolidate foodservice equipment and
supply businesses. Some of these competitors are larger than we are. Other
smaller foodservice equipment and supply businesses may also seek to effect
acquisitions from time to time.
Our failure to create and implement an integrated information technology system
would adversely affect our ability to conduct our business
Our failure to create and implement an integrated information technology
system would severely limit our ability to implement our operating strategy and
to conduct our business. Because we were formed only recently, for some time
after this offering each of our companies will use its own accounting and
financial reporting systems. We are beginning the process of selecting and
implementing the systems required to consolidate accounting and financial
reporting activities at our headquarters in Culver City, California. We
anticipate that we will need to upgrade and expand our information technology
systems on an ongoing basis as we expand operations and complete further
acquisitions. We may encounter unexpected delays and costs in connection with
implementing new or updated information technology systems or the systems may
not perform in accordance with our expectations when installed. If our systems
are delayed or are less effective than we anticipate, our ability to
effectively manage our combined operations would be reduced.
Our inability to obtain the equipment our customers desire could cause us to
lose sales and adversely affect our business
Our inability to obtain any particular type of equipment could adversely
impact our relationship with customers that require the equipment and,
ultimately, cause us to lose sales. Some types of foodservice
14
<PAGE>
equipment and supplies are available from only a limited number of sources. If
for any reason those sources became unavailable to us, we may not be able to
continue to sell that equipment unless an alternative supplier is located. In
addition, some of our customers may prefer to purchase particular brands of
equipment that may not be available to us.
If more of our employees unionize, we could incur higher ongoing labor costs or
service disruptions
If more of our employees unionize, or if we acquire a company with
unionized employees, we could incur higher ongoing labor costs and could
experience a significant disruption of operations in the event of a strike or
other work stoppage. Most of the employees of our companies currently are not
subject to collective bargaining agreements. Nevertheless, approximately 10
trucking and warehouse employees at East Bay are unionized and additional
employees may unionize in the future.
Anti-takeover provisions in our charter documents could discourage changes in
control that offer stockholders a premium over market prices
We have included provisions in our charter documents that could make it
more difficult to effect a change of control without the consent of the board
of directors. This could be the case even if a majority of the stockholders are
in favor of the proposed change in control. These provisions include:
. our board of directors' ability to issue up to 5,000,000 shares of
preferred stock without stockholder approval. The board may also
determine the economic, voting and other rights of the preferred stock.
Our board could use the issuance of preferred stock to impede or prevent
transactions that would cause us to suffer a change in control
. our board of directors will be divided into three classes. Our charter
documents include the requirement that the number of directors in each
class be as equal as possible given the total number of directors on the
board. Only one class of directors will stand for election at each
annual meeting of stockholders. The classification of our board means
that at least two annual meetings will be necessary to change a majority
of the board, which could impede or prevent transactions that would
cause us to suffer a change in control
By impeding change in control transactions not approved by our board of
directors, we may reduce the likelihood of a transaction that could result in
stockholders receiving a premium over the market price for their shares.
The price of our common stock may fluctuate
Prior to this offering, there has been no public market for the common
stock. We intend to have our common stock listed for trading on the Nasdaq
National Market. The initial public offering price will be determined by
negotiations between the underwriters and us and may not be indicative of the
market price for the common stock after this offering. See "Underwriting" for a
discussion of the factors considered in determining the initial public offering
price of the common stock. We do not know the extent to which investor interest
will lead to the development of an active public market. Investors may not be
able to resell the common stock at or above the initial public offering price.
Many factors could cause the market price of the common stock to fluctuate
substantially including:
. our future acquisitions
. variations in operating results
. loss of a key supplier or customer
. changes in activities of our competitors, either in their operations or
their acquisition programs
. changes in earnings estimates by securities analysts
These fluctuations, as well as general economic, political and market
conditions, may have a material adverse effect on the market price of the
common stock. See "Underwriting."
15
<PAGE>
A significant number of shares eligible for future sale may decrease our stock
price
The market price of our common stock could drop as a result of sales of a
large number of shares of common stock in the market after this offering, or
the perception that such sales could occur. These factors could also make it
more difficult for us to raise funds through future offerings of common stock.
There will be 9,474,919 shares of common stock outstanding immediately
after this offering. All of the shares sold in this offering will be freely
transferable without restriction or further registration under the Securities
Act of 1933, except for shares purchased by us or our affiliates. Transfer of
the remaining 3,224,919 shares of common stock that will be outstanding upon
completion of this offering is restricted by federal securities laws. These
securities may only be sold in the future without registration under the
Securities Act to the extent permitted under Rule 144, Rule 701 or an exemption
under the Securities Act. In connection with this offering, all holders of
restricted securities have agreed not to sell their shares without the prior
written consent of BancBoston Robertson Stephens for a period of 180 days after
the date of this prospectus. In addition, the former stockholders of our
companies have agreed not to sell their shares for a period of one year after
the date of this prospectus.
Upon completion of this offering, 280,000 shares of common stock will be
issuable upon exercise of currently outstanding options, all of which will be
vested and will be restricted by the lock-up agreements described above. See
"Shares Eligible for Future Sale."
16
<PAGE>
FORWARD-LOOKING STATEMENTS
With the exception of historical information, the matters discussed in this
prospectus may include forward-looking statements that involve risks and
uncertainties. Discussions containing such forward-looking statements may be
found in the sections titled:
. Prospectus Summary
. Risk Factors
. Management's Discussion and Analysis of Financial Condition and Results
of Operations
. Business
as well as in this prospectus generally. Forward-looking statements are based
on a variety of assumptions made by management regarding the future, over which
we have little or no control. A number of important factors, including those
identified under Risk Factors and elsewhere in this prospectus, could cause our
actual results to differ materially from those described in our forward-looking
statements or financial information.
17
<PAGE>
USE OF PROCEEDS
The net proceeds from the sale of the 6,250,000 shares of common stock we
are offering are estimated to be approximately $62.5 million. Our calculation
of net proceeds assumes an initial public offering price of $11.00 per share
and deducts estimated underwriting discounts and commissions and offering
expenses. Approximately $41.4 million of the net proceeds will be used to pay
the cash portion of the purchase price for our companies, all of which will be
paid to their former stockholders. A portion of the net proceeds, which we
currently expect will be in the range of $2 to $3 million over the 12 months
following completion of this offering, will be used to further develop and
implement our electronic commerce strategy and to develop a company-wide
information system. The remaining net proceeds will be used for future
acquisitions and for general corporate purposes. While we cannot predict at
this time the precise amounts that we will spend in these manners, we expect
that most of the remaining proceeds will be used in future acquisitions. Before
the net proceeds are used, we will invest them in short-term, investment-grade,
interest-bearing securities. While we are continuously considering possible
acquisition prospects as part of our growth strategy, we presently have no
agreements, arrangements or other understandings to acquire any companies other
than our companies.
In addition to the proceeds of this offering, we have entered into a
commitment letter with a bank regarding a revolving credit facility between
$50.0 million and $75.0 million. Our entering into the credit facility is
subject to our completing loan documentation with the bank and other
conditions. We expect to utilize the credit facility for future acquisitions
and for working capital. We also anticipate using our common stock as
consideration for future acquisitions.
DIVIDEND POLICY
We intend to retain all earnings, if any, to finance the expansion of our
business, and do not anticipate paying any cash dividends on our common stock
in the foreseeable future. Any future dividends will be paid at the discretion
of our board of directors after taking into account various factors, including,
among other things, our:
. financial condition
. results of operations
. cash flows from operations
. current and anticipated cash needs and expansion plans
. the income tax laws then in effect and the requirements of Delaware law
In addition, our credit facility may restrict or prohibit our ability to pay
dividends.
18
<PAGE>
CAPITALIZATION
The following table sets forth, as of March 31, 1999, (a) our actual
capitalization and (b) our capitalization on a pro forma combined basis giving
effect to the acquisitions of our companies, the completion of this offering
and the application of the estimated net proceeds from the offering. This table
should be read in conjunction with the Unaudited Pro Forma Combined Financial
Statements and notes to those statements appearing elsewhere in this
prospectus. The indicated number of shares of common stock outstanding excludes
847,487 shares of common stock issuable upon exercise of stock options granted
under our stock option plan that will be outstanding upon completion of this
offering. Options to purchase 472,500 of these shares were outstanding at March
31, 1999.
<TABLE>
<CAPTION>
At March 31, 1999
--------------------
Pro Forma
Actual Combined
-------- ----------
(In thousands)
<S> <C> <C>
Short-term debt (including current portion of long-term
debt)................................................. $ -- $ 3,152
======== =========
Long-term debt (excluding current portion).............. $ -- $ 194
-------- ---------
Stockholders' equity:
Preferred stock, $0.001 par value, 5,000,000 shares
authorized; 316,474 issued and outstanding; none
issued and outstanding on a pro forma basis........... -- --
Common stock, $0.001 par value, 40,000,000 shares
authorized; 1,639,375 shares issued and outstanding;
and 9,474,919 shares issued and outstanding on a pro
forma basis........................................... 2 9
Additional paid-in capital.............................. 1,313 75,617
Retained earnings (accumulated deficit)................. (306) (306)
-------- ---------
Total stockholders' equity............................ 1,009 75,320
-------- ---------
Total capitalization.................................. $ 1,009 $ 75,514
======== =========
</TABLE>
19
<PAGE>
DILUTION
The deficit in our pro forma combined net tangible book value as of March
31, 1999 was $31.9 million, or $9.89 per share of common stock, after giving
effect to the acquisitions of our companies. "Pro forma net tangible book
value" per share represents the amount of our total tangible assets reduced by
our total liabilities and divided by the total number of shares of common stock
outstanding after giving effect to the acquisitions of our companies. After
giving effect to the sale of the 6,250,000 shares of common stock we are
offering at an assumed initial public offering price of $11.00 per share, and
after deducting estimated underwriting discounts and commissions and offering
expenses, our pro forma net tangible book value at March 31, 1999 would have
been approximately $30.7 million, or $3.24 per share. This represents an
immediate increase in net tangible book value of $13.13 per share to existing
stockholders and an immediate dilution of $7.76 per share to new investors. The
following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.............. $11.00
Net tangible book value per share before this offering..... $(9.89)
Increase attributable to new investors..................... 13.13
------
Pro forma net tangible book value per share after this
offering................................................... 3.24
------
Dilution per share to new investors.......................... $ 7.76
======
</TABLE>
The following table summarizes, after giving effect to the acquisitions,
the number of shares of common stock purchased from us, the total consideration
paid to us and the average price per share paid by existing stockholders and by
new investors. In this table the amount shown as total consideration paid by
existing stockholders represents the combined stockholders' equity of our
companies before pro forma adjustments, reduced by the cash portion of the
consideration payable to the owners of our companies in connection with the
acquisitions.
<TABLE>
<CAPTION>
Total
Shares Purchased Consideration
----------------- ----------------- Average Price
Number Percent Amount Percent Per Share
--------- ------- -------- ------- -------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Existing stockholders... 3,224,919 34.0 $(28,745) (71.9) $ (8.91)
New investors........... 6,250,000 66.0 68,750 171.9 11.00
--------- ----- -------- ------
Total................. 9,474,919 100.0% $ 40,005 100.0%
========= ===== ======== ======
</TABLE>
20
<PAGE>
SELECTED FINANCIAL DATA
We will complete the acquisitions of our companies at the same time as we
complete this offering. The following selected historical financial data as of
December 31, 1998, and for the period from June 17, 1998 (inception) to
December 31, 1998, has been derived from our audited financial statements. The
selected historical financial data as of and for the three months ended March
31, 1999 has been derived from unaudited financial statements, which have been
prepared on the same basis as the audited financial statements and, in our
opinion, reflect all adjustments, consisting of normal recurring adjustments,
necessary for a fair presentation of such data. Our unaudited pro forma
combined statement of operations data presents financial data, adjusted to give
effect to the acquisitions of our companies and the completion of this offering
and application of the estimated net proceeds from the offering as if they
occurred at the beginning of each period presented. The pro forma combined
statement of operations data:
. includes, within selling, general and administrative expenses, a
reduction of $731,000 and $200,000, respectively, for the year ended
December 31, 1998 and for the three months ended March 31, 1999 in
salaries and rental payments to which the owners of our companies have
agreed, net of corporate office executive salaries
. gives effect to the amortization over a 40-year period of the goodwill
recorded from the acquisition of our companies, which is partially
deductible for tax purposes
. assumes a corporate income tax rate of 40%
Our unaudited pro forma combined balance sheet data presents financial data
giving effect to the acquisitions as if they occurred on March 31, 1999. The
unaudited pro forma combined balance sheet data also gives effect to the sale
of the 6,250,000 shares of common stock we are offering and application of the
estimated net proceeds from the offering as if it occurred on March 31, 1999.
The following selected financial data is qualified by reference to, and should
be read in conjunction with, "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and our Unaudited Pro Forma Combined
Financial Statements and historical financial statements of our companies,
including, in each case, the notes to these statements, included elsewhere in
this prospectus.
<TABLE>
<CAPTION>
Period From
June 17, 1998 Three Months
(inception) to Ended
December 31, 1998 March 31, 1999
----------------- --------------
<S> <C> <C>
Statement of Operations Data:
DirectChef, Inc.
Net revenue................................... $ -- $ --
Cost of revenue............................... -- --
---------- ----------
Gross profit................................ -- --
Selling, general and administrative expenses.. 52 56
Other costs................................... -- 198
Goodwill amortization......................... -- --
---------- ----------
Income (loss) from operations................. (52) (254)
Interest expense and other, net............... -- --
---------- ----------
Income (loss) before income taxes............. (52) (254)
Income taxes.................................. -- --
---------- ----------
Net income (loss)............................. $ (52) $ (254)
========== ==========
Basic net income (loss) per share............. $ (0.03) $ (0.16)
========== ==========
Diluted net income (loss) per share........... $ (0.03) $ (0.16)
========== ==========
Basic weighted average shares outstanding
(1)......................................... 1,639,375 1,639,375
========== ==========
Diluted weighted average shares outstanding
(1)......................................... 1,639,375 1,639,375
========== ==========
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
Three Months
Year Ended Ended
December 31, 1998 March 31, 1999
----------------- --------------
<S> <C> <C>
Pro Forma Combined
Net revenue................................... $ 129,700 $ 30,386
Cost of revenue............................... 104,885 24,662
---------- ----------
Gross profit................................ 24,815 5,724
Selling, general and administrative expenses.. 20,117 5,073
Other costs................................... -- --
Goodwill amortization......................... 1,107 279
---------- ----------
Income from operations........................ 3,591 372
Interest expense and other, net............... (111) (44)
---------- ----------
Income before income taxes.................... 3,480 328
Income taxes.................................. 1,605 187
---------- ----------
Net income ................................... $ 1,875 $ 141
========== ==========
Basic net income per share.................... $ 0.20 $ 0.01
========== ==========
Diluted net income per share.................. $ 0.19 $ 0.01
========== ==========
Basic weighted average shares outstanding
(1)......................................... 9,474,919 9,474,919
========== ==========
Diluted weighted average shares outstanding
(1)......................................... 9,856,042 9,856,042
========== ==========
</TABLE>
<TABLE>
<CAPTION>
At March 31,
1999
-----------------
Pro Forma
Actual Combined
------ ---------
(In thousands)
<S> <C> <C>
Balance Sheet data
Working capital (deficit)..................................... $ (642) $28,750
Total assets.................................................. 1,865 98,917
Long-term obligations, excluding current installments......... -- 230
Stockholders' equity.......................................... 1,009 75,320
</TABLE>
- --------
(1) Actual basic and diluted shares represent the actual weighted average
outstanding shares. Pro forma combined basic shares includes (a) 1,639,375
shares issued in connection with our formation; (b) 316,474 shares that we
will issue on conversion of Series A Preferred Stock; (c) 1,269,070 shares
that we will issue to owners of our companies in connection with the
acquisitions; and (d) 6,250,000 that we will issue in this offering. Pro
forma combined diluted shares further includes 381,123 net shares assumed
issued upon exercise of outstanding stock options.
22
<PAGE>
FORMATION OF DIRECTCHEF, INC.
We were formed as a new Delaware corporation in June 1998 to consolidate
foodservice equipment and supply companies. Our founders were Ross Berner, Mark
McKinnney and Roger Laverty. Since our formation we have focused mainly on
entering into acquisition agreements with our companies, preparing to manage
our expanded operations when the offering is completed and completing the
offering. Following the offering we intend to continue to operate our companies
and grow our business both internally and through acquisitions as described
under "Business." Information about use of the proceeds from this offering and
the sufficiency of these proceeds to fund future activities is provided under
"Use of Proceeds" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Combined Results of Operations--Our
Companies--Combined Liquidity and Capital Resources." A brief description of
each of our companies is set forth below.
Raygal, Inc., headquartered in Irvine, California, was founded in 1971.
Raygal operates through one design and distribution facility. Raygal had 1998
net revenue of $33.0 million, and employed 45 people as of December 31, 1998.
Ygal Sonenshine, the President and founder of Raygal, will sign a three-year
employment agreement with us upon completion of this offering. Mr. Sonenshine
will continue to manage Raygal's operations.
East Bay Restaurant Supply, Inc., headquartered in Oakland, California, was
founded in 1954. East Bay operates through one distribution facility and
warehouse and one sales office. East Bay had 1998 net revenue of $29.9 million,
and employed 73 people as of December 31, 1998. John Breznikar, who has been
President of East Bay since 1985, will sign a three-year employment agreement
with us upon completion of this offering. Mr. Breznikar will continue to manage
East Bay's operations and will help us identify potential companies to acquire.
Mr. Breznikar will also serve on our board of directors. Mr. Breznikar is on
the executive committee of Equipment Distributors Inc., an industry buying
group, and is a member of the Foodservice Equipment Trade Association.
Economy Restaurant Fixtures, Inc., headquartered in San Francisco,
California, was founded in 1964. Economy operates through one distribution
facility, one warehouse and one sales office. Economy had 1998 net revenue of
$22.7 million, and employed 66 people as of December 31, 1998. Mike Weinstock
is the Chief Executive Officer and founder of Economy. Chuck Rothkopf is the
President of Economy and joined the company in 1976. Upon completion of this
offering, Mr. Weinstock will sign a three-year employment agreement with us and
will continue to manage Economy's operations. Mr. Rothkopf will sign a three-
year consulting agreement with us. The agreement provides that he will help us
identify potential companies to acquire. Mr. Rothkopf will also serve on our
board of directors. Mr. Rothkopf is President of Allied Buying Corporation, an
industry buying group, and a member of its executive committee and board of
directors, and is also a member of the Foodservice Equipment Trade Association.
Curtis Restaurant Equipment, headquartered in Eugene, Oregon, was founded
in 1963. Curtis operates through two distribution facilities. Curtis had 1998
net revenue of $20.3 million, and employed 42 people as of December 31, 1998.
Mike Curtis, the President and founder of Curtis, and Dan Curtis, the company's
Executive Vice President, will each sign a three-year employment agreement with
us upon completion of this offering. They will continue to manage Curtis's
operations.
Bintz Distributing Co., headquartered in Salt Lake City, Utah, was founded
in 1891. Bintz operates through one distribution and warehouse facility. Bintz
had 1998 net revenue of $17.8 million, and employed 40 people as of December
31, 1998. Bill Williams, who has served as President of Bintz since 1986, will
sign an 18-month employment agreement with us upon completion of this offering.
Mr. Williams will continue to manage Bintz's operations.
Castino Restaurant Equipment and Supply, Inc., headquartered in Santa Rosa,
California, was founded in 1974. Castino operates through one distribution
facility and one warehouse, from which it sells used equipment. Castino had
1998 net revenue of $5.9 million, and employed 22 people as of December 31,
1998. David Castino, the President and founder of Castino, will sign a three-
year employment agreement with us upon completion of this offering. Mr. Castino
will continue to manage Castino's operations.
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis in conjunction with
our Financial Statements and our companies' Financial Statements and the
respective notes to those statements, and "Selected Financial Data," appearing
elsewhere in this prospectus. Our discussion in this prospectus contains
forward-looking statements that involve risks and uncertainties, such as
statements regarding our plans, objectives, expectations and intentions. You
should read the cautionary statements made in this prospectus as applicable to
all related forward-looking statements wherever they appear. Our actual results
could differ materially from those discussed here. Factors that could cause or
contribute to such differences include those discussed in "Risk Factors" as
well as those discussed elsewhere in this prospectus.
Introduction
Our net revenue comes from selling a wide range of products and services to
customers in the foodservice industry. Our products, which are collectively
known as foodservice equipment and supplies, include heavy equipment, such as
ranges and refrigeration units, as well as smaller disposable items, such as
china, glass and silverware. We also offer design, construction and
installation services for restaurants and other foodservice facilities. The
revenue we receive for these services represents less than 10% of our total
revenue. However, the ability to offer these services is valuable in
positioning us to make the equipment sales required in these facilities.
We recognize revenue from the sale of equipment and supplies sold directly
to the customer when risk of ownership passes to the customer, generally upon
shipment or customer pick up. We recognize revenue under design and
construction contracts by the percentage of completion method, measured by
comparing the percentage of costs incurred to date to total costs estimated for
each contract. Revenue from these contracts consists primarily of equipment
sales. Provision for estimated losses on uncompleted contracts is made in the
period the losses become apparent.
Cost of revenue from the distribution and sale of foodservice equipment and
supplies represents our cost of purchased merchandise less applicable discounts
and rebates. Contract costs include all direct material, subcontractor labor
cost and indirect costs related to contract performance, such as indirect
labor. Selling, general and administrative expenses consist primarily of our
occupancy costs compensation and benefits, fees for professional services,
depreciation of office equipment, advertising and other general office
expenses.
Our companies' results of operations reflect different tax structures (S
corporations or C corporations) that have influenced their historical level of
owner compensation. Gross profit margins and selling, general and
administrative expenses as a percentage of net revenue may not be comparable
among the individual companies.
We anticipate that, following the acquisitions of our companies, we may
realize savings from:
. consolidation of insurance programs
. our ability to borrow at lower interest rates than our companies
. coordination of purchasing from vendors to secure greater volume price
reductions
We anticipate that these savings will be partially offset by costs related
to our new corporate management and by the costs associated with being a public
company. We believe that neither these savings nor costs can be quantified
because the acquisitions have not occurred, and there have been no combined
operating results upon which to base any assumptions. As a result, we have not
included any potential savings in the financial information included elsewhere
in this prospectus.
We will account for the acquisitions of our companies using the purchase
method of accounting. The purchase method of accounting requires that companies
record the excess of the fair value of the consideration
24
<PAGE>
paid in an acquisition over the fair value of the net assets acquired as
"goodwill." We have been designated as the "accounting acquirer" in the
acquisitions. Based on management's preliminary analysis, we anticipate that
the historical value of the assets and liabilities of our companies, with the
exception of inventories, will approximate fair value and will result in
goodwill of approximately $44.7 million. We will amortize this goodwill over
its estimated useful life of 40 years as a non-cash charge to operating income.
Management has not identified any other material tangible or intangible assets
to which we could reasonably allocate a portion of the purchase price.
Combined Results of Operations--Our Companies
The combined results of operations of our companies for the periods
presented do not represent combined results of operations presented in
accordance with generally accepted accounting principles. They are only a
summation of selected data from the statements of operations of our individual
companies on a historical basis. The combined results also exclude the effect
of pro forma adjustments and may not be comparable to, and may not be
indicative of, our post-combination results of operations because, among other
things:
. our companies were not under common control or management during the
periods presented
. we will incur incremental costs related to our new corporate management
and the costs attributable to being a public company
. we will use the purchase method of accounting to record the acquisitions
of our companies, resulting in goodwill that will be amortized over 40
years
. the combined results of operations data does not reflect the reduction
in salaries, bonuses and benefits of the owners of our companies and the
potential cost savings, synergies and efficiencies that we may achieve
through the integration of the operations of our companies
The following table sets forth, for the periods indicated, unaudited
combined results of operations data, and that same data as a percentage of
combined net revenue, of our companies:
<TABLE>
<CAPTION>
Three Months Ended March
Years Ended December 31, 31,
---------------------------------------------- ----------------------------
1996 1997 1998 1998 1999
-------------- -------------- -------------- ------------- -------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenue............. $100,425 100.0% $116,194 100.0% $129,700 100.0% $27,048 100.0% $30,386 100.0%
Cost of revenue......... 80,428 80.1 93,855 80.8 104,292 80.4 21,839 80.7 24,514 80.7
-------- ----- -------- ----- -------- ----- ------- ----- ------- -----
Gross profit............ $ 19,997 19.9% $ 22,339 19.2% $ 25,408 19.6% $ 5,209 19.3% 5,872 19.3%
======== ===== ======== ===== ======== ===== ======= ===== ======= =====
</TABLE>
Combined Results of Operations for the Three Months Ended March 31, 1999
Compared to the Three Months Ended March 31, 1998 (unaudited)
Net Revenue. Net revenue increased $3.3 million, or 12.3%, from $27.1
million for the three months ended March 31, 1998 to $30.4 million for the
three months ended March 31, 1999. This increase reflects increased volume at
Raygal and East Bay due to timing of completion of certain contracts and
aggressive sales and marketing.
Gross Profit. Gross profit increased $664,000 or 12.7%, from $5.2 million
for the three months ended March 31, 1998 to $5.9 million for the three months
ended March 31, 1999. The gross profit increase reflects favorable product mix.
Combined Results of Operations for 1998 Compared to 1997
Net Revenue. Net revenue increased $13.5 million, or 11.6%, from $116.2
million in 1997 to $129.7 million in 1998. This increase was principally due to
increased volume at East Bay, Bintz and Economy reflecting aggressive sales and
marketing and generally favorable economic conditions.
25
<PAGE>
Gross Profit. Gross profit increased $3.1 million, or 13.7%, from $22.3
million in 1997 to $25.4 million in 1998. As a percentage of net revenue, gross
profit increased from 19.2% in 1997 to 19.6% in 1998. The gross profit
percentage increase reflects purchasing efficiency and favorable product mix at
our companies.
Combined Results of Operations for 1997 Compared to 1996
Net Revenue. Net revenue increased $15.8 million, or 15.7%, from $100.4
million in 1996 to $116.2 million in 1997. This increase was primarily due to
increased volume at Raygal and, to a lesser extent, East Bay, due to a
strategic focus on securing larger projects and generally favorable economic
conditions.
Gross Profit. Gross profit increased $2.3 million, or 11.7%, from $20.0
million in 1996 to $22.3 million in 1997. As a percentage of net revenue, gross
profit decreased from 19.9% in 1996 to 19.2% in 1997 reflecting lower margins
on larger projects.
Combined Liquidity and Capital Resources
Upon completion of the acquisitions of our companies and this offering and
application of the estimated net proceeds from the offering, we will have, on a
pro forma combined basis as of March 31, 1999, approximately $22.6 million of
cash and cash equivalents, $28.8 million of working capital and $3.3 million of
outstanding indebtedness.
Our companies generated $3.0 million of net cash from operating activities
during 1998, primarily at Raygal and Economy. Net cash used in investing
activities was $274,000, primarily relating to purchases of property and
equipment. Net cash used in financing activities was $2.6 million, consisting
of distributions to stockholders of $3.2 million offset by net borrowings of
$734,000, principally from stockholders. At December 31, 1998, our companies
had working capital of $10.0 million and total debt, including debt to
stockholders, of $5.2 million, of which $4.8 million was classified as current.
We have entered into a commitment letter with the Bank of America under
which the bank will act as an agent for a $50-$75 million revolving credit
facility. A revolving credit facility is one that allows us to borrow, repay
and reborrow against our credit line. We anticipate that we will use the credit
facility for acquisitions, capital expenditures, refinancing of existing debt
and general corporate purposes. The commitment provides that the facility will
bear interest at a variable rate based on the London Interbank Offered Rate,
the bank's prime rate or the Federal funds rate, and on our ratio of debt to
earnings. The commitment also provides that the facility will contain
conditions and covenants regarding
. maintenance of financial ratios
. our ability to incur additional indebtedness or pay dividends
. the amount of cash we can use on acquisitions without the banks' consent
Our entering into the credit facility is subject to our completing loan
documentation with the bank and other conditions.
We believe that the proceeds from this offering, together with our cash
flows from operating activities and available financing alternatives, will be
sufficient to meet our 12-month cash requirements.
Our companies spent an aggregate of $289,000 on purchases of property and
equipment in 1998. We expect to make comparable expenditures in the current
year for recurring additions to property and equipment. We expect to generate
funds for such expenditures from earnings and related cash flow. Additionally,
we expect to invest approximately $4-$5 million for development of an
electronic commerce capability and development of management information
systems. We expect that approximately $2-$3 million of this amount will be
invested over the 12 months following the completion of this offering. We also
intend to pursue acquisition opportunities as part of our long-term business
strategy. Funds for those expenditures are expected
26
<PAGE>
to be provided from operating cash flow, issuance of additional shares of
common stock, proceeds from this offering and other available financing
alternatives, including amounts available under our credit facility.
Year 2000 Compliance
The year 2000 issue in computers arises from the common industry practice
of using two digits to represent a date in computer software code and databases
to enhance processing time and save storage space. Therefore, when dates in the
year 2000 and after are indicated and computer programs read the date "00", the
computer may default to the year "1900" rather than the correct "2000". This
could result in incorrect calculations, faulty data and computer shut downs,
which could cause disruptions in operations.
We and our companies are reviewing the risks of failure to achieve year
2000 compliance with regard to our internal operations, information systems and
software applications and the impact on us of our outside vendors', lessors'
and lenders' ability to operate. We and our companies believe our internal
operations, information systems and software applications are likely to be
compliant by November 1999.
We have not yet developed a comprehensive contingency plan to address the
risk of operational problems and costs likely to result from a failure by us or
by an outside vendor or business partner to address year 2000 readiness. We
intend to develop a comprehensive contingency plan after we acquire our
companies. Current year 2000 compliance plans are discussed separately under
each of our companies' results of operations.
Presently, we and our companies do not believe that effecting year 2000
compliance will result in material investments, nor do we and our companies
anticipate effecting year 2000 compliance will have material adverse effects on
our business operations or financial performance. We cannot assure you,
however, that failure to achieve year 2000 compliance will not materially
adversely affect us and our companies. Additionally, we cannot guarantee that
year 2000 compliance issues not yet identified or fully addressed will not
materially affect our and our companies' operations or expose us to third party
liability.
Raygal Results of Operations
Raygal's primary business is designing and installing commercial kitchens
and interiors. Raygal has one facility located in Irvine, California.
The following table sets forth selected statement of operations data, and
that same data as a percentage of net revenue, for the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended
Years Ended December 31, March 31,
------------------------------------------- --------------------------
1996 1997 1998 1998 1999
------------- ------------- ------------- ------------ ------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenue............. $22,213 100.0% $33,678 100.0% $33,038 100.0% $6,267 100.0% $8,198 100.0%
Cost of revenue......... 19,229 86.5 29,623 88.0 28,793 87.2 5,579 89.0 7,324 89.3
------- ----- ------- ----- ------- ----- ------ ----- ------ -----
Gross profit............ 2,984 13.4 4,055 12.0 4,245 12.8 688 11.0 874 10.7
Selling, general, and
administrative
expenses.............. 2,427 10.9 2,202 6.5 2,520 7.6 539 8.6 583 7.1
------- ----- ------- ----- ------- ----- ------ ----- ------ -----
Income from operations.. 557 2.5 1,853 5.5 1,725 5.2 149 2.4 291 3.6
Other income (expense),
net................... 96 0.4 47 0.1 81 0.2 13 0.2 7 0.0
------- ----- ------- ----- ------- ----- ------ ----- ------ -----
Income before income
taxes................. 653 2.9 1,900 5.6 1,806 5.5 162 2.6 298 3.6
Income tax expense...... 14 0.1 18 0.1 17 0.1 2 0.0 3 0.0
------- ----- ------- ----- ------- ----- ------ ----- ------ -----
Net income.............. $ 639 2.9% $ 1,882 5.6% $ 1,789 5.4% $ 160 2.6% $ 295 3.6%
======= ===== ======= ===== ======= ===== ====== ===== ====== =====
</TABLE>
27
<PAGE>
Raygal Results for the Three Months Ended March 31, 1999 Compared to the Three
Months ended March 31, 1998 (unaudited)
Net Revenue. Net revenue increased by approximately $1.9 million, or 30.8%,
from approximately $6.3 million for the three months ended March 31, 1998 to
$8.2 million for the three months ended March 31, 1999. This increase in net
revenue was primarily due to timing of completion of certain contracts.
Gross Profit. Gross profit increased by approximately $186,000, or 27.0%,
from approximately $688,000 for the three months ended March 31, 1998 to
$874,000 for the three months ended March 31, 1999. As a percentage of net
revenue, gross profit decreased from 11.0% for the three months ended March 31,
1998 to 10.7% for the three months ended March 31, 1999. The decrease as a
percentage of net revenue was because the mix of contracts contained different
levels of estimated gross profit.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by approximately $44,000 or 8.2%, from
approximately $539,000 for the three months ended March 31, 1998 to $583,000
for the three months ended March 31, 1999. As a percentage of net revenue,
selling, general and administrative expenses decreased from 8.6% for the three
months ended March 31, 1998 to 7.1% for the three months ended March 31, 1999.
The decrease as a percentage of net revenue was primarily due to maintaining
overhead costs at efficient levels while net revenue increased.
Other Income (Expense), Net. Other income (expense), net decreased by
approximately $6,000, or 46.2%, from approximately $13,000 for the three months
ended March 31, 1998 to $7,000 for the three months ended March 31, 1999. Other
income (expense), net as a percentage of net revenue remained relatively
consistent between periods.
Income Tax Expense. Income tax expense increased by approximately $1,000,
or 50%, from approximately $2,000 for the three months ended March 31, 1998 to
$3,000 for the three months ended March 31, 1999. As a percentage of net
revenue, income tax expense remained at less than 0.1%.
Net Income. Net income increased by approximately $135,000, or 84.4%, from
approximately $160,000 for the three months ended March 31, 1998 to $295,000
for the three months ended March 31, 1999. As a percentage of net revenue, net
income increased from 2.6% for the three months ended March 31, 1998 to 3.6%
for the three months ended March 31, 1999.
Raygal Liquidity and Capital Resources
For the three months ended March 31, 1999, cash provided by operating
activities was $1.6 million as compared to $32,000 of cash provided by
operating activities for the three months ended March 31, 1998. The primary
source of cash from operating activities during the three months ended March
31, 1999 includes net income of $295,000, a decrease in contracts receivable of
$1.5 million, and a decrease in billings in excess of costs and estimated
earnings on uncompleted contracts of $1.0 million. The primary use of cash from
operating activities for the three months ended March 31, 1999 was an increase
in costs and estimated earnings in excess of billings on uncompleted contracts
of $1.4 million.
Raygal's net cash provided by investing activities for the three months
ended March 31, 1999 was $7,000, consisting primarily of $40,000 in collections
of a note receivable, offset by capital expenditures of $33,000.
Raygal's cash used in financing activities for the three months ended March
31, 1999 and 1998 was $525,000 and $180,000, respectively, which represented
amounts distributed to owners.
Raygal Results for 1998 Compared to 1997
Net Revenue. Net revenue decreased $640,000 or 1.9%, from $33.7 million in
1997 to $33.0 million in 1998. This decrease in net revenue was primarily due
to timing of completion of several projects.
28
<PAGE>
Gross Profit. Gross profit increased $190,000, or 4.7%, from $4.1 million
in 1997 to $4.2 million in 1998. As a percentage of net revenue, gross profit
increased from 12.0% in 1997 to 12.8% in 1998. The increase as a percentage of
net revenue was the result of negotiating more favorable terms from vendors and
suppliers.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $318,000, or 14.4%, from $2.2 million in 1997
to $2.5 million in 1998. As a percentage of net revenue, selling, general and
administrative expenses increased from 6.5% in 1997 to 7.6% in 1998. The
increase as a percentage of net revenue was primarily due to an increase in
employees and a corresponding increase in payroll cost to support plans for
growth.
Other Income (Expense), Net. Other income (expense), net, increased
$34,000, or 72.3%, from $47,000 in 1997 to $81,000 in 1998. As a percentage of
net revenue, other income (expense), net, increased from 0.1% in 1997 to 0.2%
in 1998.
Income Tax Expense. Income tax expense as a percentage of net revenue
remained the same between 1997 and 1998. Raygal has elected to be taxed as a
Subchapter S Corporation for federal income tax purposes. Raygal's income
(whether distributed or not) has been taxed for federal income tax purposes as
part of the individual shareholder's tax returns. Therefore, no provision for
federal income tax has been made in Raygal's financial statements.
Net Income. Net income decreased $93,000 or 4.9%, from $1.9 million in 1997
to $1.8 million in 1998. As a percentage of net revenue, net income decreased
from 5.6% in 1997 to 5.4% in 1998.
Raygal Results for 1997 Compared to 1996
Net Revenue. Net revenue increased $11.5 million, or 51.6%, from $22.2
million in 1996 to $33.7 million in 1997. This increase in net revenue was
primarily due to Raygal's focus on securing larger projects and increased
customer demand.
Gross Profit. Gross profit increased $1.1 million, or 35.9%, from
$3.0 million in 1996 to $4.1 million in 1997. As a percentage of net revenue,
gross profit decreased from 13.4% in 1996 to 12.0% in 1997. The decrease as a
percentage of net revenue was the result of lower margins on larger projects.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased $225,000, or 9.3%, from $2.4 million in 1996
to $2.2 million in 1997. As a percentage of net revenue, selling, general and
administrative expenses decreased from 10.9% in 1996 to 6.5% in 1997. The
decrease as a percentage of net revenue was primarily due to the decrease in
payroll costs as the revenue mix of larger jobs requires less supervision.
Other Income (Expense), Net. Other income (expense), net, decreased
$49,000, or 51.0%, from $96,000 in 1996 to $47,000 in 1997. As a percentage of
net revenue, other income (expense), net, decreased from 0.4% in 1996 to 0.1%
in 1997. The decrease as a percentage of net revenue was primarily due to lower
interest income and a small loss on sale of assets.
Income Tax Expense. Income tax expense as a percentage of net revenue
remained the same between 1996 and 1997.
Net Income. Net income increased $1.2 million, or 194.5%, from $639,000 in
1996 to $1.9 million in 1997. As a percentage of net revenue, net income
increased from 2.9% in 1996 to 5.6% in 1997.
29
<PAGE>
Raygal Liquidity and Capital Resources
Raygal's liquidity requirements consist primarily of working capital needs
to fund its growth, capital expenditures, and distributions to its
stockholders. Working capital decreased from $3.2 million as of December 31,
1997 to $2.9 million as of December 31, 1998.
Cash requirements were provided primarily from internally generated funds
and, to a lesser extent, availability under Raygal's credit facilities.
For the year ended December 31, 1998, cash provided by operating activities
was $2.2 million as compared to $452,000 of cash used in operating activities
for the year ended December 31, 1997. The primary sources of cash from
operating activities during 1998 included net income of $1.8 million, non-cash
charges of $108,000 for depreciation and amortization, and an increase of $1.4
million in accounts payable, partially offset by an increase in contracts
receivables and accrued liabilities.
Raygal's net cash used in investing activities in 1998 was $101,000,
consisting primarily of $85,000 in capital expenditures and $117,000 for the
issuance of a note receivable, partially offset by the net proceeds from
maturities and sales of investments available for sale.
Raygal's net cash used in financing activities in 1998 and in 1997 was $2.1
million and $700,000, which represents amounts distributed to owners.
Raygal Year 2000 Compliance
Overview
Raygal has developed a program for Year 2000 issues that consists of the
following: (i) assessment of its corporate systems and operations that could be
affected by the Year 2000 issue; and (ii) repair or replacement of non-
compliant systems and components, if any, and testing of systems and components
following repair or replacement. Raygal has focused its Year 2000 compliance
assessment program on three principal areas: (a) Raygal's internal information
technology systems; (b) internal non-information technology systems; and
(c) Year 2000 compliance by third parties with which Raygal has a significant
relationship.
Information Technology Systems
Raygal has completed an inventory and risk assessment of its own
information technology systems that it believes could be adversely affected by
the Year 2000 issue. Raygal is currently in the process of working with its
outside consultant to ensure compliance and believes that it will be compliant
by November 1999. Raygal's costs associated with this process have been minimal
and Raygal expects future costs will be minimal.
Non-Information Technology Systems
Raygal has completed its assessment of all non-information technology
systems, which include its telephone, gas, electricity, interior and exterior
lighting and alarm systems. Raygal believes that, based on information
currently available, the non-information technology systems are Year 2000
compliant.
Third-Party Vendors/Suppliers and Customers
Raygal has significant relationships with various service, equipment and
energy vendors and suppliers and some of its customers. Raygal intends to send
correspondence to its significant vendors, suppliers and customers requesting
their progress as it relates to year 2000 readiness and to seek responses in
May 1999. The failure of any of Raygal's significant vendors, suppliers or
customers to achieve Year 2000 readiness could have a material effect on our
business, results of operations or financial conditions. Raygal expects the
costs associated with this process will be minimal.
30
<PAGE>
If Raygal is not successful in addressing the year 2000 readiness of
significant vendors, suppliers and customers, the associated risks have been
identified as follows:
. equipment from vendors may malfunction due to the product being non-year
2000 compliant
. vendors/suppliers may be unable to provide required equipment and
services due to non-compliant hardware or software used in their
individual companies
. payments from customers may be delayed due to non-compliant hardware or
software used in their individual companies
Contingency Plans
Raygal, as part of its year 2000 readiness plan, will be developing
contingency plans to minimize the above identified risks associated with non-
year 2000 readiness by any of its significant vendors/suppliers or customers as
follows:
. identifying alternate suppliers that are year 2000 compliant
. closely monitoring all accounts receivable agings
. being prepared to supply needed proof of delivery or duplicate copies of
invoices for customers
Completion of these plans is targeted for the third quarter 1999.
We cannot assure you that Raygal will not be materially adversely affected
by year 2000 readiness issues. However, Raygal management is not currently
aware of any year 2000 issues that would materially affect Raygal's business,
results of operations or financial condition.
Additionally, we cannot assure you that Raygal will not be the subject of
lawsuits regarding the failure of equipment sold by Raygal in the event the
equipment is not year 2000 compliant. Any year 2000 related suit could have a
material effect on Raygal's business, results of operations or financial
condition, if the suit is determined adversely to Raygal.
East Bay Results of Operations
East Bay's primary business is the sale and distribution of equipment and
supplies to food service providers such as restaurants and hotels. East Bay
also performs services for food service providers. East Bay has two facilities
in Oakland, California and a sales office in Las Vegas, Nevada.
The following tables set forth selected statement of operations data, and
such data as a percentage of net revenue, for the periods indicated.
<TABLE>
<CAPTION>
Years Ended September 30, Six Months Ended March 31,
---------------------------------------------- --------------------------
1996 1997 1998 1998 1999
-------------- -------------- -------------- -------------- --------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenue............. $20,368 100.0% $23,681 100.0% $29,916 100.0% $12,284 100.0% $15,550 100.0%
Cost of revenue......... 16,256 79.8 18,655 78.8 23,964 80.1 9,711 79.1 12,119 77.9
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Gross profit............ 4,112 20.2 5,026 21.2 5,952 19.9 2,573 20.9 3,431 22.1
Selling, general, and
administrative
expenses............... 3,959 19.4 4,705 19.8 5,388 18.0 2,463 20.0 3,061 19.7
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Income from operations
(loss)................. 153 0.8 321 1.4 564 1.9 110 0.9 370 2.4
Other income (expense),
net.................... (72) (0.4) (69) (0.3) (55) (0.2) (41) (0.3) (14) (0.1)
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Income before income
taxes.................. 81 0.4 252 1.1 509 1.7 69 0.6 356 2.3
Income tax expense...... 35 0.2 116 0.5 225 0.8 31 0.3 164 1.1
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Net income (loss)....... $ 46 0.2% $ 136 0.6% $ 284 0.9% $ 38 0.3% $ 192 1.2%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
</TABLE>
31
<PAGE>
East Bay Results for the Six Months Ended March 31, 1999 Compared to the Six
Months Ended March 31, 1998 (unaudited)
Net Revenue. Net revenue increased $3.3 million, or 26.6%, from $12.3
million in 1998 to $15.6 million in 1999. The increase in net revenue was
primarily due to aggressive sales and marketing and the hiring of three
additional salespeople in the Las Vegas area, which resulted in additional
installation and design sales.
Gross Profit. Gross profit increased $858,000 or 33.3%, from $2.6 million
in 1998 to $3.4 million in 1999. As a percentage of net revenue, gross profit
increased from 20.9% in 1998 to 22.1% in 1999. The increase as a percentage of
net revenue was primarily the result of a more favorable product sales mix in
the first half of fiscal 1999.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $598,000 or 24.3%, from $2.5 million in 1998
to $3.1 million in 1999. As a percentage of net revenue, selling, general and
administrative expenses decreased from 20.0% in 1998 to 19.7% in 1999. The
decrease as a percent of net revenue was primarily due to the increase in
revenues over the prior year period partially offset by additional lease costs
associated with the addition of a new warehouse in Oakland, and the addition of
three additional salespeople in the Las Vegas area.
Other Income (Expense), Net. Other income (expense), net decreased $27,000
or 65.9% from $(41,000) in 1998 to $(14,000) in 1999. As a percentage of net
revenue, other income (expense), net decreased from 0.3% in 1998 to 0.1% in
1999. Other income (expense), net consists primarily of interest expense netted
with interest income.
Income Tax Expense. Income tax expense increased $133,000, from $31,000 in
1998 to $164 ,000 in 1999. As a percentage of net revenues, income tax expense
increased from 0.3% in 1998 to 1.1% in 1999. As a percentage of income before
income taxes, the effective income tax rate increased from 44.9% in 1998 to
46.1% in 1999. This increase was due to an increase in permanent items not
deductible for tax return purposes.
Net Income. Net income increased $154,000, from $38,000 in 1998 to $192,000
in 1999. As a percentage of net revenue, net income increased from 0.3% in 1998
to 1.2% in 1999.
East Bay Liquidity and Capital Resources
East Bay's financing needs are primarily to fund increases in accounts
receivable and inventories, resulting from its growth. East Bay's primary
sources of capital are a revolving line of credit and various stockholder
notes. Cash provided by operating activities was $500,000 and $124,000,
respectively, for the six months ended March 31, 1999 and 1998. The increase in
cash provided by operating activities was primarily due to increased
collections of accounts receivable. Cash used in investing activities was
$122,000 for the six months ended March 31, 1999 and $37,000 in the prior year
six month period. Cash used in financing activities was $634,000 for the six
months ended March 31, 1999 representing the repayment of loans from
stockholders offset by borrowings under the line of credit. For the six months
ended March 31, 1998, cash provided by financing activities was $222,000,
principally from borrowings under the line of credit. At March 31, 1999,
outstanding borrowings under East Bay's line of credit totaled $370,000.
East Bay Results for 1998 Compared to 1997
Net Revenue. Net revenue increased $6.2 million, or 26.3%, from $23.7
million in 1997 to $29.9 million in 1998. The increase in revenue was primarily
due to aggressive sales and marketing and the addition of new installation and
design customers. Higher installation and design sales volume was partially
offset by discounts East Bay gave to customers to generate additional business.
Cash and carry sales increased as a result of advertising aimed at increasing
the general public's awareness of East Bay's retail store among retail shoppers
at large, in addition to commercial food service customers.
32
<PAGE>
Gross Profit. Gross profit increased $926,000, or 18.4%, from $5.0 million
in 1997 to $6.0 million in 1998. As a percentage of net revenue, gross profit
decreased from 21.2% in 1997 to 19.9% in 1998. The decrease as a percentage of
net revenue was the result of negotiated discounts to high volume customers.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $683,000, or 14.5%, from $4.7 million in 1997
to $5.4 million in 1998. As a percentage of net revenue, selling, general and
administrative expenses decreased from 19.8% in 1997 to 18.0% in 1998. East Bay
increased its advertising efforts by producing a greater number of product
catalogues and increasing its newspaper and magazine advertising during the
year. The overall increase in selling, general and administrative expenses was
also a result of the hiring of three additional out of state salespersons,
which lead to increased travel and delivery costs.
Other Income (Expense), Net. Other income (expense), net, decreased
$14,000, or 20.3%, from $(69,000) in 1997 to $(55,000) in 1998. As a percentage
of revenue, other income (expense), net, decreased from 0.3% in 1997 to 0.2% in
1998. Other income (expense), net consisted primarily of interest expense
netted with interest income.
Income Tax Expense. Income tax expense increased $109,000, or 94.0%, from
$116,000 in 1997 to $225,000 in 1998. The effective income tax rate decreased
from 46.0% in 1997 to 44.2% in 1998. This decrease was due primarily to a
decrease in items not deductible for tax return purposes.
Net Income. Net income increased $148,000, or 108.8%, from $136,000 in 1997
to $284,000 in 1998. As a percentage of net revenue, net income increased from
0.6% in 1997 to 0.9% in 1998.
East Bay Results for 1997 Compared to 1996
Net Revenue. Net revenue increased $3.3 million, or 16.3%, from $20.4
million in 1996 to $23.7 million in 1997. The increase in revenue was primarily
due to aggressive sales and marketing efforts as East Bay was able to capture
additional market share in both its installation and design and its cash and
carry sales. East Bay also increased out of state sales as a result of its
efforts to broaden both its client and geographical base.
Gross Profit. Gross profit increased $914,000 or 22.2%, from $4.1 million
in 1996 to $5.0 million in 1997. As a percentage of net revenue, gross profit
increased from 20.2% in 1996 to 21.2% in 1997. The increase as a percentage of
net revenue was primarily the result of pricing increases and a slightly
different product mix.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $746,000, or 18.8%, from $4.0 million in 1996
to $4.7 million in 1997. As a percentage of net revenue, selling, general and
administrative expenses increased from 19.4% in 1996 to 19.8% in 1997. The
increases were primarily due to aggressive advertising and marketing. An
increase in out of state contracts also lead to increased travel and delivery
expenses. Additionally, East Bay provided for several accounts receivable which
were deemed to be uncollectable.
Other Income (Expense), Net. Other income (expense), net, decreased $3,000,
or 4.2%, from $(72,000) in 1996 to $(69,000) in 1997. As a percentage of net
revenue, other income (expense), net, decreased from 0.4% in 1996 to 0.3% in
1997. Other expense consists primarily of interest expense netted with interest
income.
Income Tax Expense. Income tax expense increased $81,000, or 231.4%, from
$35,000 in 1996 to $116,000 in 1997. The effective income tax rate increased
from 43.2% in 1996 to 46.0% in 1997. This increase was due to an increase in
permanent items not deductible for tax return purposes.
Net Income. Net income increased $90,000, or 195.7%, from $46,000 in 1996
to $136,000 in 1997. As a percentage of net revenue, net income increased from
0.2% in 1996 to 0.6% in 1997.
33
<PAGE>
East Bay Liquidity and Capital Resources
East Bay's financing needs are primarily to fund increases in accounts
receivable and inventories, resulting from its growth. Since September 30,
1995, East Bay's primary sources of capital have been a revolving line of
credit and various stockholder notes. Cash provided by operating activities was
$94,000 for the year ended September 30, 1998 versus cash provided of $203,000
for the year ended September 30, 1997. Cash used in investing activities was
$74,000 for the year ended September 30, 1998 and $22,000 for the year ended
September 30, 1997 for purchases of equipment. For the year ended September 30,
1998, cash provided by financing activities was $188,000 representing loans
from shareholders net of payments on borrowings under the line of credit.
Working capital at September 30, 1998 was $1.3 million compared to $1.1 million
at September 30, 1997.
East Bay Year 2000 Compliance
Internal Hardware and Software
East Bay has four critical systems: its financial package (Telesoft
Distribution Control System), telephone system (Nortel Northstar), desktop PC
applications (Office 97 and Eudora), and its design system (AutoCAD Release 14
Network Version). No significant year 2000 issue has been identified in
relation to any of these systems. Year 2000 readiness as it relates to each
system is as follows:
. The financial package provider has stated to East Bay that the
application software, firmware, and hardware is year 2000 compliant.
Currently, the vendor is sending its customers an update for each module
it has repaired and tested for year 2000 compliance.
. East Bay has received information from its telephone and voicemail
system provider stating that East Bay's systems are year 2000 compliant.
Furthermore, the provider's product web site states that the systems are
year 2000 compliant.
. Various desktop applications are important tools for financial
reporting, quotations, and analysis work. According to East Bay's
vendors, its desktop applications are either compliant or compliant with
minor non-compliance issues. East Bay's e-mail package is also year 2000
compliant.
. The provider of the design tool software package indicated that the
product has been tested and is compliant with minor non-compliance
issues. However, these issues will not prevent East Bay from using the
product after January 1, 2000.
East Bay has also inquired into the year 2000 readiness of its payroll
processing provider. According to information from this provider, its critical
systems will be year 2000 compliant by the end of April 1999.
Other systems East Bay has researched and found to be year 2000 compliant
are the Company's mail meter, shipping function and security system.
Third Party Vendors and Suppliers and Customers
East Bay has significant relationships with various service, equipment and
energy vendors and suppliers and some of its customers. East Bay has contacted
its ten most critical vendors and suppliers. East Bay is in the process of
contacting other suppliers, vendors and customers to determine year 2000
readiness. The vendors who have responded have indicated that their individual
systems either are or will be year 2000 compliant by the middle of 1999.
Additionally, many of East Bay's major customers have contacted East Bay
inquiring of year 2000 readiness. East Bay believes this shows the commitment
of these customers to year 2000 readiness.
34
<PAGE>
East Bay has identified the following risks related to the year 2000
readiness of significant vendors, suppliers and customers:
. vendors/suppliers may be unable to provide required products and/or
services due to non-compliant hardware or software used in their
individual companies
. payments from customers may be delayed due to non-compliant hardware or
software used in their individual companies
. products from vendors may malfunction due to the product not being year
2000 compliant
East Bay management has reviewed the risks associated with year 2000
readiness and believes it has reasonable alternatives should it encounter
adverse effects of year 2000 readiness. However, we cannot assure you that East
Bay will not be materially adversely affected by year 2000 readiness issues.
However, East Bay management is not currently aware of any such conditions that
would materially affect East Bay's business, results of operations or financial
condition.
Additionally, we cannot assure you that East Bay will not be the subject of
lawsuits if it or its vendors/ suppliers or customers are not year 2000
compliant. Any year 2000 related suit could have a material effect on East
Bay's business, results of operations or financial condition, if the suit is
determined adversely to East Bay.
Contingency Plans
Although East Bay is still preparing a defined contingency plan, in the
event of a year 2000 issue, East Bay believes that it can rely upon manual
processes until a remedy is identified and implemented without a significant
business disruption.
Effecting year 2000 compliance has not resulted in material investments by
East Bay, nor does East Bay expect that the year 2000 will have material
adverse effects on its business operations or financial performance.
Economy Results of Operations
Economy's primary business is the sale and distribution of equipment and
supplies to food service providers, such as restaurants and hotels, primarily
through cash and carry sales. Economy also performs services for food service
providers. Economy has two facilities located in San Francisco, California and
one in Sacramento, California.
The following table sets forth selected statement of operations data, and
that same data as a percentage of net revenue, for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended
Year Ended December 31, March 31,
---------------------------- -----------------------------
1997 1998 1998 1999
------------- ------------- ------------- -------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenue............. $19,884 100.0% $22,703 100.0% $4,530 100.0% $4,945 100.0%
Cost of revenue......... 14,082 70.8 15,976 70.4 3,352 74.0 3,611 73.0
------- ----- ------- ----- ------ ----- ------ -----
Gross profit............ 5,802 29.1 6,727 29.6 1,178 26.0 1,334 27.0
Selling, general, and
administrative
expenses.............. 5,114 25.7 5,811 25.6 1,288 28.4 1,351 27.3
------- ----- ------- ----- ------ ----- ------ -----
Income from operations.. 688 3.5 916 4.0 (110) (2.4) (17) (0.3)
Other income (expense),
net................... 24 0.1 75 0.3 -- 0.0 -- 0.0
------- ----- ------- ----- ------ ----- ------ -----
Income before income
taxes................. 712 3.6 991 4.4 (110) (2.4) (17) (0.3)
Income tax expense...... 10 0.1 17 0.1 (4) (0.1) 5 0.1
------- ----- ------- ----- ------ ----- ------ -----
Net income.............. $ 702 3.5% $ 974 4.3% (106) (2.3)% (22) (0.4)%
======= ===== ======= ===== ====== ===== ====== =====
</TABLE>
35
<PAGE>
Economy Results for the Three Months Ended March 31, 1999 Compared to the Three
Months Ended March 31, 1998 (unaudited)
Net Revenue. Net revenue increased $415,000, or 9.2%, from $4.5 million in
the three months ended March 31, 1998 to $4.9 million in the three months ended
March 31, 1999, primarily due to increased demand as a result of favorable
economic conditions.
Gross Profit. Gross profit increased $156,000, or 13.2%, from $1.2 million
in the three months ended March 31, 1998 to $1.3 million in three months ended
March 31, 1999. As a percentage of net revenue, gross profit increased from
26.0% in the three months ended March 31, 1998 to 27.0% in the three months
ended March 31, 1999, primarily as a result of product mix.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $63,000, or 4.9%, from $1.3 million in the
three months ended March 31, 1998 to $1.4 million in the three months ended
March 31, 1999 primarily due to an increase in employees and a corresponding
increase in payroll costs. As a percentage of net revenue, selling general and
administrative expenses decreased from 28.4% in the three months ended March
31, 1998 to 27.3% in the three months ended March 31, 1999, primarily as a
result of fixed costs remaining consistent over a larger revenue base.
Income Tax Expense. Income tax expense increased $9,000, from a benefit of
$4,000 in the three months ended March 31, 1998 to expense of $5,000 in the
three months ended March 31, 1999.
Economy Liquidity and Capital Resources
Economy's primary sources of capital have been from cash provided by
operating activities and, to a lesser extent, availability under its credit
facilities.
During the three months ended March 31, 1999, cash used in operating
activities was $118,000. Cash was used to pay for increased inventories and was
partially offset by a decrease in accounts receivable and increased deposits
from customers. Cash generated from financing activities was $17,000 resulting
from additional borrowings on the line of credit of $95,000, partially offset
by a distribution to shareholders of $78,000.
Economy Results for 1998 Compared to 1997
Net Revenue. Net revenue increased $2.8 million, or 14.2%, from $19.9
million in 1997 to $22.7 million in 1998, primarily due to increased demand as
a result of increased advertising and customer awareness and the introduction
of a direct sales program.
Gross Profit. Gross profit increased $925,000, or 15.9%, from $5.8 million
in 1997 to $6.7 million in 1998. As a percentage of net revenue, gross profit
increased from 29.1% in 1997 to 29.6% in 1998, primarily as a result of
enhanced purchasing efficiency and mix of products sold.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $697,000, or 13.6%, from $5.1 million in 1997
to $5.8 million in 1998, primarily due to an increase in employees and a
corresponding increase in payroll costs. As a percentage of net revenue,
selling, general and administrative expenses decreased slightly from 25.7% in
1997 to 25.6% in 1998.
Other Income (Expense), Net. Other income (expense), net, increased from
income of $24,000 in 1997 to income of $75,000 in 1998. Other income (expense),
net, increased primarily because of increased interest income resulting from
higher average cash balances throughout the year.
Income Tax Expense. Income tax expense increased $7,000 from $10,000 in
1997 to $17,000 in 1998, primarily as a result of increased net income. Economy
has elected to be taxed as a Subchapter S Corporation
36
<PAGE>
for federal income tax purposes. Prior to the completion of our purchase of
Economy, Economy's income (whether distributed or not) will be taxed for
federal income tax purposes as part of the individual shareholder's tax
returns. Therefore, no provision for federal income tax has been made in
Economy's financial statements.
Net Income. Net income increased $272,000 from $702,000 in 1997 to $974,000
in 1998. As a percentage of net revenue, net income increased from 3.5% in 1997
to 4.3% in 1998.
Economy Liquidity and Capital Resources
Economy's primary sources of capital have been from cash provided by
operating activities and, to a lesser extent, availability under its credit
facilities.
During the year ended December 31, 1998, cash provided by operating
activities was $1.4 million. The cash was generated from Economy's earnings and
increases in trade payables offset by increases in accounts receivable and
inventories. Cash used in investing activities was $22,000, which Economy used
for property and equipment additions. Cash used in financing activities was
$1.3 million, which Economy primarily used for distributions to stockholders
and financing activities.
Economy Year 2000 Compliance
Overview
Economy has analyzed the year 2000 issue and its potential impact on its
operations. Economy's key focus has been on its internal hardware and software,
operating systems and supplier/vendor relationships. Economy is in the process
of upgrading some of its systems in order to ensure year 2000 readiness. The
final stage of Economy's process will be the development of a contingency plan
should unforeseen problems arise.
Internal Hardware and Software
Economy uses a Unix operating system on a PC platform for its key operating
and financial systems, including point-of-sales, inventory, accounts
receivable, general ledger and accounts payable. Based on discussions with its
vendor, Economy believes that its hardware is year 2000 compliant. Economy uses
packaged software for its operating and accounting systems. Economy is in the
process of upgrading its operating and accounting systems to compliant versions
of the software. Economy anticipates completing the operating system upgrade by
May 1999 and the accounting system by June 1999. If the upgrades are not
completed by that time, Economy will consider other alternatives, which may
include installing other software products. Economy believes that the cost of
the upgrades will not be material.
Economy has also determined that its alarm and phone systems are year 2000
compliant. There are no other systems that Economy is aware of that are
affected by year 2000 issues.
Third Party Suppliers/Vendors
Economy utilizes over 700 suppliers and vendors and does not have any
single customer whose sales represent a significant portion of annual sales.
Economy does not plan to individually review the year 2000 readiness of its
suppliers and vendors. Although the failure of suppliers or vendors to achieve
year 2000 readiness could have a material effect on Economy's business, Economy
believes that adequate purchasing alternatives are available to Economy should
specific vendors have a year 2000 problem.
Economy has discussed year 2000 readiness with its bank and its payroll
processor. Both entities represented that their systems are year 2000
compliant.
37
<PAGE>
Economy has identified the following risks related to the year 2000
readiness of significant vendors and suppliers and customers:
. vendors/suppliers may be unable to provide required products and/or
services due to non-compliant hardware or software used in their
individual companies
. payments from customers may be delayed due to non-compliant hardware or
software used in their individual companies
. products from vendors may malfunction due to the product not being year
2000 compliant
Economy management has reviewed the risks associated with year 2000
readiness and believes it has reasonable alternatives should it encounter
adverse effects of year 2000 readiness. However, we cannot assure you that
Economy will not be materially adversely affected by year 2000 readiness
issues. Economy's management is not currently aware of any year 2000 readiness
conditions that would materially affect Economy's business, results of
operations or financial condition.
Additionally, we cannot assure you that Economy will not be the subject of
lawsuits if it or its vendors/ suppliers or customers are not year 2000
compliant. Any year 2000 related suit could have a material effect on Economy's
business, results of operations or financial condition, if the suit is
determined adversely to Economy.
Contingency Plans
Although Economy is still preparing its year 2000 contingency plan, in the
event of a year 2000 problem, Economy believes that it can rely upon manual
processes until a remedy is identified and implemented without a significant
business disruption.
Economy does not believe that year 2000 compliance will result in material
investments by it, nor does Economy anticipate the year 2000 issue will have
material adverse effects on its business operations or financial performance.
We cannot assure you, however, that the year 2000 issue will not adversely
effect Economy and its business.
Curtis Results of Operations
Curtis's primary business is the sale and distribution of equipment and
supplies to food service providers such as restaurants and hotels. Curtis has
two facilities located in Springfield, Oregon and Medford, Oregon.
The following table sets forth selected statement of operations data, and
that same data as a percentage of net revenue, for the periods indicated:
<TABLE>
<CAPTION>
Year Ended Three Months Ended
December 31, March 31,
------------------------------ ----------------------------
1997 1998 1998 1999
-------------- -------------- ------------- -------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenue............. $19,933 100.0% $20,279 100.0% $4,268 100.0% $4,305 100.0%
Cost of revenue......... 16,434 82.4 16,526 81.5 3,455 81.0 3,486 81.0
------- ----- ------- ----- ------ ----- ------ -----
Gross profit............ 3,499 17.6 3,753 18.5 813 19.0 819 19.0
Selling, general, and
administrative
expenses.............. 3,335 16.7 3,103 15.3 710 16.6 739 17.1
------- ----- ------- ----- ------ ----- ------ -----
Income from operations.. 164 0.9 650 3.2 103 2.4 80 1.9
Other income (expense),
net................... (133) (0.7) (94) (0.4) (28) (0.7) (39) (0.9)
------- ----- ------- ----- ------ ----- ------ -----
Income before income
taxes................. 31 0.2 556 2.8 75 1.7 41 1.0
Income tax expense...... 12 0.1 218 1.1 31 0.7 17 0.4
------- ----- ------- ----- ------ ----- ------ -----
Net income.............. $ 19 0.1% $ 338 1.7% $ 44 1.0% $ 24 0.6%
======= ===== ======= ===== ====== ===== ====== =====
</TABLE>
38
<PAGE>
Curtis Results for the Three Months Ended March 31, 1999 Compared to the Three
Months Ended March 31, 1998 (unaudited)
Net Revenue. Net revenue was consistent from the three months ended March
31, 1998 to the three months ended March 31, 1999.
Gross Profit. Gross profit increased $6,000, or 0.7%, from $813,000 in the
three months ended March 31, 1998 to $819,000 in the three months ended March
31, 1999. As a percentage of net revenue, gross profit remained consistent from
1998 to 1999.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $29,000, or 4.1%, from $710,000 in the three
months ended March 31, 1998 to $739,000 in the three months ended March 31,
1999. As a percentage of net revenue, selling, general and administrative
expenses increased from 16.6% in 1998 to 17.1% in 1999. The increase was
primarily due to an increase in promotion and rent expenses.
Other Income (Expense), Net. Other income (expense), net, increased
$11,000, or 39.3% from $(28,000) in the three months ended March 31, 1998 to
$(39,000) in the three months ended March 31, 1999. As a percentage of net
revenue, other income (expense), net increased from 0.7% in 1998 to 0.9% in
1999. The increase was due primarily to an increase in interest expense.
Income Tax Expense. Income tax expense decreased $14,000 from $31,000 in
the three months ended March 31, 1998 to $17,000 in the three months ended
March 31, 1999 due to lower pretax income. The effective income tax rate
remained consistent at 41.3% in 1998 and 41.5% in 1999.
Net Income. Net income decreased $20,000 from $44,000 in the three months
ended March 31, 1998 to $24,000 in the three months ended March 31, 1999. As a
percentage of net revenue, net income decreased from 1.0% in 1998 to 0.6% in
1999.
Curtis Liquidity and Capital Resources
Curtis's primary sources of capital have been from cash provided by
operating activities and from bank borrowings.
During the three months ended March 31, 1999, cash provided by operating
activities was $994,000, primarily from the collection of accounts receivable.
In the three months ended March 31, 1998, cash provided by operating activities
was $584,000, primarily from the collection of accounts receivable and the
increase in deferred revenue, offset by a decrease in accrued liabilities. No
significant cash was used in investing activities in either quarter. Cash used
in financing activities for the three months ended March 31, 1999 was $1.0
million, exclusively consisting of reducing bank borrowings. Cash used in
financing activities for the three months ended March 31, 1998 consisted
primarily of a $396,000 net reduction of bank borrowings.
Curtis Results for 1998 Compared to 1997
Net Revenue. Net revenue increased $346,000, or 1.7%, from $20.0 million in
1997 to $20.3 million in 1998.
Gross Profit. Gross profit increased $254,000, or 7.3%, from $3.5 million
in 1997 to $3.8 million in 1998. As a percentage of net revenue, gross profit
increased from 17.6% in 1997 to 18.5% in 1998. The increase in gross profit was
primarily the result of increased purchasing efficiency in 1998.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased $232,000, or 7.0%, from $3.3 million in 1997
to $3.1 million in 1998. As a percentage of net revenue, selling, general and
administrative expenses decreased from 16.7% in 1997 to 15.3% in 1998. The
decrease was primarily due to a reduction in accounts receivable write-offs in
1998.
39
<PAGE>
Other Income (Expense), Net. Other income (expense), net, decreased
$39,000, or 29.3%, from $(133,000) in 1997 to $(94,000) in 1998. As a
percentage of net revenue, other income (expense), net, decreased from 0.7% in
1997 to 0.5% in 1998. The decrease was due primarily to a decrease in interest
expense.
Income Tax Expense. Income tax expense increased $206,000 from $12,000 in
1997 to $218,000 in 1998 due to higher pretax income. The effective income tax
rate increased from 38.7% in 1997 to 39.2% in 1998.
Net Income. Net income increased $319,000, from $19,000 in 1997 to $338,000
in 1998. As a percentage of net revenue, net income increased from 0.1% in 1997
to 1.7% in 1998.
Curtis Liquidity and Capital Resources
Curtis's primary sources of capital have been from cash provided by
operating activities and, particularly in 1998, from bank borrowings.
During the year ended December 31, 1998, cash used in operating activities
was $1.0 million. Cash flow from earnings was offset by increases in accounts
receivable of $1.6 million. No significant cash was used in investing
activities in 1998. Cash flow from financing activities was $945,000,
consisting primarily of bank borrowing and collection of an outstanding note
receivable.
Curtis Year 2000 Compliance
Internal Hardware and Software
Curtis has analyzed its internal hardware and software systems for
year 2000 readiness. Curtis's operations are not heavily reliant on
computerized technology. However, Curtis utilizes information systems and
software applications, such as financial and administrative systems. Curtis
uses the most current versions of these packages, which Curtis believes are
compliant. Curtis expects that future expenditures, if any, related to
year 2000 readiness will be minimal. Curtis believes that it is not materially
dependent on software or microprocessors contained in any of its non-
information technology systems that are subject to year 2000 readiness issues.
Third-party Vendors/Suppliers and Customers
Curtis also recognizes that the year 2000 readiness of significant
vendors/suppliers and customers could significantly impact the ability of these
parties to operate. Curtis has significant relationships with various
equipment, service and energy vendors/suppliers and some of its customers. The
failure of any of these parties to achieve year 2000 readiness could have a
material effect on Curtis's business, results of operations or financial
condition. Curtis will continue to monitor for indications of year 2000
readiness problems with key third parties throughout 1999. Curtis expects that
costs associated with this monitoring will be minimal.
Curtis has identified the following risks related to the year 2000
readiness of significant vendors/suppliers and customers:
. vendors/suppliers may be unable to provide required products and/or
services due to non-compliant hardware or software used in their
individual companies
. payments from customers may be delayed due to non-compliant hardware or
software used in their individual companies
. products from vendors may malfunction due to the product not being year
2000 compliant
Curtis management has reviewed the risks associated with year 2000
readiness and believes it has reasonable alternatives should it encounter
adverse effects of year 2000 readiness.
40
<PAGE>
Contingency Plans
Although Curtis is still preparing a defined contingency plan, in the event
of a year 2000 issue, Curtis believes that it can rely on manual processes
until a remedy is identified and implemented without a significant business
disruption. However, we cannot assure you that Curtis will not be materially
adversely affected by year 2000 readiness issues. Management is not currently
aware of any year 2000 issues that would materially affect Curtis' business,
results of operations or financial condition.
Additionally, we cannot assure you that Curtis will not be the subject of
lawsuits if it or its vendors/ suppliers or customers are not year 2000
compliant. Any year 2000 related suit could have a material effect on Curtis'
business, results of operations or financial condition, if the suit is
determined adversely to Curtis.
Bintz Results of Operations
Bintz's primary business is the sale of restaurant equipment and supplies
to food service providers, such as restaurants and hotels. Bintz has one
facility located in Salt Lake City, Utah.
The following table sets forth selected statement of operations data, and
that same data as a percentage of net revenue, for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended March
Year Ended December 31, 31,
------------------------------ ----------------------------
1997 1998 1998 1999
-------------- -------------- ------------- -------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenue............. $13,097 100.0% $17,835 100.0% $4,733 100.0% $4,358 100.0%
Cost of revenue......... 10,719 81.8 14,647 82.1 3,936 83.2 3,538 81.2
------- ----- ------- ----- ------ ----- ------ -----
Gross profit............ 2,378 18.2 3,188 17.9 797 16.8 820 18.8
Selling, general, and
administrative
expenses.............. 2,071 15.8 2,448 13.7 594 12.6 535 12.3
------- ----- ------- ----- ------ ----- ------ -----
Income from operations.. 307 2.3 740 4.1 203 4.2 285 6.5
Other income (expense),
net................... (138) 1.1 (124) 0.7 (30) (0.5) (29) (0.6)
------- ----- ------- ----- ------ ----- ------ -----
Income before income
taxes................. 169 1.3 616 3.5 173 3.7 256 5.9
Income tax expense...... 0.0 0.0 0.0 0.0 -- 0.0 -- 0.0
------- ----- ------- ----- ------ ----- ------ -----
Net income.............. $ 169 1.3% $ 616 3.5% $ 173 3.7% $ 256 5.9%
======= ===== ======= ===== ====== ===== ====== =====
</TABLE>
Bintz Results of Operations for the Three Months Ended March 31, 1999 Compared
to the Three Months Ended March 31, 1998 (unaudited)
Net Revenue. Net revenue decreased $375,000, or 7.9%, from $4.7 million in
the three months ended March 31, 1998 to $4.4 million in the three months ended
March 31, 1999. The decrease is primarily attributable to increased revenue
from a large project in the public segment of the market in the first quarter
of 1998.
Gross Profit. Gross profit increased by $23,000, or 2.9%, in the three
months ended March 31, 1999 from the three months ended March 31, 1998. As a
percentage of net revenue, gross profit increased from 16.8% in the three
months ended March 31, 1998 to 18.8% in the three months ended March 31, 1999.
The increase is primarily because a significant portion of 1998 first quarter
revenue was derived from a large public segment project, which was a lower
margin project.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased approximately $59,000, or 9.9%, from $594,000
in the three months ended March 31, 1998 to $535,000 in the three months ended
March 31, 1999. As a percentage of net revenue, these expenses decreased from
12.6% in 1998 to 12.3% in 1999. The decrease was primarily attributable to
decreased officer salaries.
41
<PAGE>
Other Income (Expense), Net. Other income (expense), net, consists
primarily of interest expense. Interest expense was fairly consistent from
quarter to quarter.
Income Taxes. Bintz has elected to be treated for federal income tax
purposes as an S corporation. Bintz is therefore not subject to income taxation
for federal purposes. Under the Internal Revenue Code provisions applicable to
S corporations and similar provisions of the state tax code for the states in
which Bintz operates, the stockholders report Bintz's taxable earnings or
losses in their personal federal and state income tax returns. Therefore, no
provision for federal and state income taxes has been reflected in the
financial statements.
Net Income. Net income increased $83,000, or 48.0%, from $173,000 in the
three months ended March 31, 1998 to $256,000 in the three months ended March
31, 1999. As a percentage of net revenue, net income increased from 3.7% in the
three months ended March 31, 1998 to 5.9% in the three months ended March 31,
1999.
Bintz Liquidity and Capital Resources. During the three months ended March
31, 1999, Bintz generated $388,000 in cash from operating activities. The
primary components were decreases in inventory and rebates receivable offset by
increased trade accounts receivable and decreased accounts payable. Cash used
in investing activities for the three months ended March 31, 1999 consisted of
$26,000 of capital expenditures. Cash used in financing activities for the
three months ended March 31, 1999 was $362,000, consisting primarily of
distributions to stockholders and payments on notes payable.
Bintz Results for 1998 Compared to 1997
Net Revenue. Net revenue increased $4.7 million, or 36.2%, from $13.1
million in 1997 to $17.8 million in 1998. The increase is primarily attributed
to an overall growth in the foodservice equipment and supply industry.
Additionally, during 1998, there was an increase in sales to the general
public.
Gross Profit. Gross profit increased $810,000 or 34.1%, from $2.4 million
in 1997 to $3.2 million in 1998. As a percentage of net revenue, gross profit
decreased from 18.2% in 1997 to 17.9% in 1998. The decrease was attributed to
the increase in sales to the general public. This retail market is highly
competitive resulting in lower gross profit percentages.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased approximately $377,000, or 18.2%, from $2.1
million in 1997 to $2.4 million in 1998. The increase was attributed to an
increase in sales commissions. As a percentage of net revenue, selling, general
and administrative expenses decreased from 15.8% in 1997 to 13.7% in 1998,
primarily as a result of spreading fixed costs over a larger revenue base.
Other Income (Expense), Net. Other income (expense), net, consists
primarily of interest expense. Interest expense decreased $14,000, or 10.1%,
from $(138,000) in 1997 to $(124,000) in 1998. The decrease was attributed to
decreases in the prime lending rate, which is used to determine Bintz's
borrowing rate on its line of credit, and an overall lower outstanding balance
on Bintz's line of credit during the year.
Income Taxes. Bintz has elected to be treated for federal income tax
purposes as an S corporation. Bintz is therefore not subject to income taxation
for federal purposes. Under the Internal Revenue Code provisions applicable to
S corporations and similar provisions of the state tax code for the states in
which Bintz operates, the stockholders report Bintz's taxable earnings or
losses in their personal federal and state income tax returns. Therefore, no
provision for federal and state income taxes has been reflected in the
financial statements.
Net Income. Net income increased $447,000 or 264.5%, from $169,000 in 1997
to $616,000 in 1998. As a percentage of net revenue, net income increased from
1.3% in 1997 to 3.5% in 1998.
42
<PAGE>
Bintz Liquidity and Capital Resources
During 1998, Bintz generated $250,000 in cash from operating activities.
The primary components were decreases in inventory and prepaid expenses and
increases in accounts payable, offset by increased trade accounts receivable
and rebates receivable and decreases in customer deposits. Cash used in
investing activities was $41,000 in 1998 consisting of purchases of equipment.
Cash used in financing activities was $209,000 in 1998 consisting primarily of
distributions to shareholders and payments on its line of credit. At December
31, 1998, Bintz had working capital of $1.4 million.
The cash provided by operating activities was offset mainly by purchases of
property and equipment, payments on its line of credit and distributions to
stockholders.
Bintz Year 2000 Compliance
Internal Hardware and Software
Bintz uses a UNIX Server and software packages for internal operating and
financial systems. Bintz has analyzed these internal hardware and software
systems for year 2000 readiness. To date, Bintz has tested all of these
critical hardware and software systems and they appear to be year 2000
compliant except for one issue, for which a solution is being designed. Costs
associated with this analysis have been minimal because most of these costs
were absorbed by the original vendor of the hardware and software. Bintz does
not believe that its operations are subject to material risks from year 2000
issues in software or microprocessors contained in any of its non-information
technology systems.
Third-party Vendors/Suppliers and Customers
The second issue Bintz is addressing is the year 2000 readiness of its
significant vendors/suppliers and customers, as it relates to products Bintz
sells, as well as computer systems used by these parties for accounting,
inventory, manufacturing, purchasing and sales. Bintz has significant
relationships with various equipment, service and energy vendors/suppliers and
some of its customers. The failure of any of these parties to achieve year 2000
readiness could have a material effect on Bintz's business, results of
operations or financial condition. Analysis related to these parties is being
conducted via compliance letters. To date, Bintz has received approximately 20
responses to its initial mailing of approximately 70 letters. Most of its major
vendors are included in the responses Bintz has received. All of the responses
received indicate that the respective companies are or will be year 2000
compliant before December 31, 1999. This analysis will continue throughout the
first half of 1999. Customer analysis will be conducted during the third
quarter of 1999. Bintz expects that costs associated with this analysis will be
minimal.
Should Bintz be unsuccessful in addressing the year 2000 readiness of
significant vendors/suppliers and customers, the risks the company has
identified are as follows:
. products from vendors may malfunction due to the product not being year
2000 compliant
. vendors/suppliers may be unable to provide required products and/or
services due to non-compliant hardware or software used in their
individual companies
. payments from customers may be delayed due to non-compliant hardware or
software used in their individual companies
Contingency Plans
Bintz, as part of its year 2000 readiness plan, is developing contingency
plans to minimize the above identified risks associated with the failure by any
of its significant vendors/suppliers or customers to achieve year 2000
readiness. Those contingency plans include:
. identifying alternate suppliers that are year 2000 compliant
43
<PAGE>
. identifying alternate products that are year 2000 compliant
. closely monitoring all accounts receivable agings
. being prepared to supply needed proof of delivery and duplicate copies
of invoices for customers
Completion of these plans is targeted for the third quarter of 1999.
We cannot assure you that Bintz will not be materially adversely affected
by year 2000 readiness issues. However, management is not currently aware of
any year 2000 issues that would materially affect Bintz's business, results of
operations or financial condition.
Additionally, we cannot assure you that Bintz will not be the subject of
lawsuits regarding the failure of products it sells in the event they are not
year 2000 compliant. Any year 2000 related suit could have a material affect on
Bintz's business, results of operations or financial condition, if the suit is
determined adversely to Bintz.
Castino Results of Operations
Castino's primary business is the sale and distribution of equipment and
supplies to foodservice providers, such as restaurants and hotels, primarily
through cash and carry sales. Castino has two facilities located in Rohnert
Park, California.
The following table sets forth selected statement of operations data, and
that same data as a percentage of net revenue, for the periods indicated.
Castino has a fiscal year end of March 31. The twelve month period ended
December 31, 1998 includes the audited results of operations for the nine
months ended December 31, 1998 and the unaudited results of operations for the
three months ended March 31, 1998, which are included in the fiscal year ended
March 31, 1998.
<TABLE>
<CAPTION>
Year Ended Year Ended Three Months Three Months
March 31, December 31, Ended Ended
1998 1998 March 31, 1998 March 31, 1999
------------ ------------ ---------------- ----------------
(Unaudited)
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenue............. $5,921 100.0% $5,929 100,0% $ 1,312 100.0% $ 1,114 100.0%
Cost of revenue......... 4,342 73.3 4,386 74.0 978 74.5 824 74.0
------ ----- ------ ----- ------- ------ ------- ------
Gross profit............ 1,579 26.7 1,543 26.0 334 25.5 290 26.0
Selling, general, and
administrative
expenses.............. 1,470 24.8 1,526 25.7 365 27.9 383 34.4
------ ----- ------ ----- ------- ------ ------- ------
Income from operations.. 109 1.8 17 0.3 (31) (2.4) (93) (8.4)
Other income (expense),
net................... 1 0.0 6 0.1 17 1.3 23 2.1
------ ----- ------ ----- ------- ------ ------- ------
Income before income
taxes................. 110 1.9 23 0.4 (14) (1.1) (70) (6.3)
Income tax expense...... 40 0.7 7 0.1 (5) (0.4) (19) (1.7)
------ ----- ------ ----- ------- ------ ------- ------
Net income.............. $ 70 1.2% $ 16 0.3% (9) (0.7)% $ (51) (4.6)%
====== ===== ====== ===== ======= ====== ======= ======
</TABLE>
Castino Results for the Three Months Ended March 31, 1999 Compared to the Three
Months Ended March 31, 1998 (unaudited)
Net Revenue. Net revenue decreased approximately $198,000, or 15.1%, from
the three months ended March 31, 1998 to the three months ended March 31, 1999,
primarily due to the deferral of various equipment installation projects.
Gross Profit. Gross profit decreased $44,000, or 13.2%, as a result of
lower revenues. As a percentage of net revenue, gross profit increased from
25.5% in the three months ended March 31, 1998 to 26.0% in the three months
ended March 31, 1999. The percentage increase was primarily due to product mix.
44
<PAGE>
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $18,000, or 4.9%, from $ 365,000 in the three
months ended March 31, 1998 to $383,000 in the three months ended March 31,
1999. As a percentage of net revenue, selling, general and administrative
expenses increased from 27.9% in the three months ended March 31, 1998 to 34.4%
in the three months ended March 31, 1999. The increase was primarily due to
increased legal and accounting fees and advertising expenses.
Other Income (Expense), Net. Other income (expense), net increased $6,000
from $17,000 in the three months ended March 31, 1998 to $23,000 in the three
months ended March 31, 1999. The increase was mainly from a gain from the sale
of assets.
Income Tax Benefit. Income tax benefit increased $14,000, from $5,000 in
the three months ended March 31, 1998 to $19,000 in three months ended March
31, 1999. The effective tax rate decreased primarily as a result of permanent
items and graduated tax rates.
Castino Liquidity and Capital Resources
Castino's cash needs are primarily to fund its growth and purchases of
property and equipment, and distributions to its stockholder. Castino's primary
sources of capital have been from cash provided by operating activities and, to
a lesser extent, availability under its credit facilities.
During the three months ended March 31, 1999, cash used by operating
activities was $54,000. This was primarily due to the company's operating loss
and decrease in accrued liabilities partially offset by increased accounts
payable and decreased inventories. Cash provided by investing activities was
$5,000, which consisted of $33,000 of property and equipment sales, offset by
$28,000 of capital expenditures. Cash provided by financing activities was
$49,000, which consisted of a $104,000 bank overdraft, offset by $55,000 in
payments on lines of credit.
During the three months ended March 31, 1998, cash provided by operating
activities was $156,000. The cash was primarily generated from a decrease in
accounts receivable and increases in accounts payable and accrued liabilities,
offset by increases in inventories and prepaid expenses and other working
capital. Cash used in investing activities was $55,000, which was used for
property and equipment additions. Cash used in financing activities was
$108,000, which was primarily used for repayment of long-term debt.
Castino Results for the Year Ended December 31, 1998 (unaudited) Compared to
the Year Ended March 31, 1998
Net Revenue. Net revenue was essentially unchanged for the periods
presented.
Gross Profit. Gross profit decreased $36,000, or 2.3%, from $1.6 million in
fiscal 1998 to $1.5 million in calendar 1998. As a percentage of net revenue,
gross profit decreased from 26.7% in fiscal 1998 to 26.0% in calendar 1998. The
decrease as a percentage of net revenue was primarily the result of an increase
in product costs.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $56,000. As a percentage of net revenue,
selling, general and administrative expenses increased from 24.8% in fiscal
1998 to 25.7% in calendar 1998. The increase was primarily due to the increase
in bonus and profit sharing expenses.
Other Income (Expense), Net. Other income (expense), net, increased $5,000
from $1,000 in fiscal 1998 to $6,000 in calendar 1998.
Income Tax Expense. Income tax expense decreased $33,000 from $40,000 in
fiscal 1998 to $7,000 in calendar 1998. The effective tax rate has decreased
primarily due to a decrease in items not deductible for tax return purposes and
graduated tax rates.
45
<PAGE>
Net Income. Net income decreased $54,000 from $70,000 in 1997 to $16,000 in
1998. As a percentage of net revenue, net income decreased from 1.2% in 1997 to
0.3% in 1998.
Castino Liquidity and Capital Resources
Castino's cash needs are primarily to fund its growth and purchases of
property and equipment, and distributions to its stockholder. Castino's primary
sources of capital have been from cash provided by operating activities and, to
a lesser extent, availability under its credit facilities.
During the nine months ended December 31, 1998, cash provided by operating
activities was $122,000. The cash was generated primarily from Castino's
earnings and decreases in inventories offset by increases in accounts payable
and other working capital. Cash used in investing activities was $90,000, which
was primarily used for property and equipment additions. Cash flows used in
financing activities were $31,000, which was primarily used for repayment of
long-term debt.
Castino Year 2000 Compliance
Overview
Castino has analyzed its exposure to year 2000 problems relating to its
internal hardware and software, including non-information technology systems.
Castino has also started to assess potential third party vendor and supplier
issues. Finally, Castino is considering the development of a formal contingency
plan to mitigate its exposures to potential business issues should they arise.
Internal Hardware and Software
The focus of Castino's efforts to date have been on its internal hardware
and software and non-information technology systems. Castino owns computer
hardware and utilizes third party software to run its core financial systems,
which includes its accounting, purchasing, receivables, and point-of-sale
systems. Based upon discussions with its vendors and consultants, a portion of
Castino's hardware will need to be replaced in order for it to be year 2000
compliant. Castino is in the process of scheduling upgrades of its third party
operating system and accounting software and is reviewing its hardware
requirements. Castino plans to complete this process before September 30, 1999.
After the upgrade, Castino believes that all of its accounting software will be
year 2000 compliant. Castino also maintains a phone system with software that
is not year 2000 compliant. Castino will upgrade its phone system before
September 30, 1999. Based upon discussions with its vendors, Castino believes
that the cost of its repairs and replacements will be less than $50,000.
Castino has not identified any other critical information technology or
non-information technology systems that could have a year 2000 problem.
Third-party Suppliers and Customers
Castino utilizes a number of suppliers and does not have any single
customer whose sales represent a significant portion of annual sales. Castino
plans to discuss year 2000 readiness of its third party suppliers in connection
with various trade association activities through June 30, 1999. Castino may
also send specific requests to individual suppliers asking about their year
2000 readiness.
The failure of Castino's customers or suppliers to achieve year 2000
readiness could have a material effect on Castino's business. Castino
management has reviewed the risks associated with year 2000 readiness and
believes it has reasonable alternatives should it encounter adverse effects of
year 2000 readiness. However, we cannot assure you that Castino will not be
materially adversely affected by year 2000 readiness issues. However,
management is not currently aware of any year 2000 issues that would materially
affect Castino's business, results of operations or financial condition.
46
<PAGE>
Additionally, we cannot assure you that Castino will not be the subject of
lawsuits if it or its vendors/suppliers or customers are not year 2000
compliant. Any year 2000 related suit could have a material effect on Castino's
business, results of operations or financial condition, if the suit is
determined adversely to Castino.
Contingency Plans
Castino has not prepared a defined contingency plan. Castino expects to
have a contingency plan completed in the second half of the year. However, in
the event of a year 2000 issue, Castino believes that it can rely upon manual
processes until a remedy is identified and implemented without a significant
business disruption.
Presently, Castino does not believe that year 2000 compliance will result
in material investments by it, nor does Castino expect the year 2000 issue will
have material adverse effects on its business operations or financial
performance. We cannot assure you, however, that the year 2000 issue will not
adversely effect Castino and its business.
47
<PAGE>
BUSINESS
DirectChef, Inc.
We are a full-service national distributor of foodservice equipment and
supplies. Upon completion of this offering and the acquisitions of our
companies, we will be one of the largest foodservice equipment and supply
companies in the United States. Our companies have been in business for periods
ranging from 18 to 108 years. In 1998, our pro forma combined net revenues were
$129.7 million.
Our goal is to become the largest national single-source provider of
foodservice equipment and supplies in the United States. We sell over 10,000
products. We serve more than 25,000 customers, through a network of eleven
facilities located in four states and our catalogs, as well as on the Internet.
We offer a wide range of products and services to customers in the foodservice
industry, including equipment and supply sales and related services. We serve
the entire spectrum of businesses that sell food and beverages. Our customers
include regional and national restaurant chains, independent restaurants,
hotels, businesses, schools, health care facilities, casinos, stadiums and
prisons.
We intend to offer our larger regional and national customers improved
service and an enhanced array of value-added products, services and resources,
while still maintaining a focus on local customers. We currently serve our
customers through direct sales, cash and carry stores and catalogs. We have
also established, and intend to develop sales through, our directchef.com
Internet website. We intend to expand each of these sales channels with
particular emphasis on the Internet. We believe the Internet will provide us
with a cost effective distribution channel, an easy to use reorder option for
our commercial customers and broader access to retail customers.
Our products include heavy equipment, such as ranges and refrigeration
units, as well as smaller disposable items, such as china, glass and
silverware. We also offer a full range of related services for restaurants and
foodservice facilities. A significant portion of our revenues in 1998 came from
our customers' replacement of existing equipment and supplies. We believe our
replacement business is less cyclical and generates higher margins than other
parts of our business.
Industry Overview
We compete in the foodservice equipment and supply industry, which was
comprised of over 12,000 companies and generated approximately $13 billion in
revenues in 1998. Participants in the distribution of foodservice equipment and
supplies offer one or more of the following products and services:
. foodservice equipment and supplies
. design, installation and construction of commercial kitchens and
restaurant and hotel interiors
. service and maintenance of foodservice equipment
. sales of used foodservice equipment
. rental of foodservice equipment
According to Foodservice Equipment & Supplies magazine, industry revenues have
grown at an average annual rate of 5% over the last seven years. An important
characteristic of the foodservice equipment and supply industry is that more
than 40% of sales are replacements of existing equipment and supplies.
The foodservice equipment and supply industry serves the foodservice
industry. Participants in the foodservice industry include chain and
independent restaurants, hotels, businesses, schools, health care facilities,
casinos, stadiums and prisons. The foodservice industry generated over $351
billion in revenue in 1998, or approximately 4% of the United States Gross
Domestic Product.
48
<PAGE>
Sales of equipment and supplies account for the majority of revenue in the
foodservice equipment and supply industry. Foodservice equipment and supply
distributors sell through a number of channels, including direct sales, cash
and carry stores, catalogs and the Internet. Distributors typically carry large
volumes of inventory because their customers often buy based on immediate need.
As a result, a typical distributor maintains thousands of products to meet
customer needs.
Foodservice equipment and supply companies often provide related services
in conjunction with product sales. An equipment and supply company providing
services for a foodservice facility will typically create the blueprints and
other construction documents for the facility. It will also select, supply and
install the equipment and supplies for the facility and will supervise
construction of the facility or provide construction support.
While the foodservice equipment and supply industry has not traditionally
been heavily involved in electronic commerce, we believe that the Internet
represents a significant opportunity for growth and increased efficiency. The
Internet and Internet-related technologies are revolutionizing the way
businesses and consumers communicate, share information and conduct business.
As the number of Internet users and the sophistication of products for
accessing and using the Internet have increased, the Internet's usefulness has
expanded from a medium primarily for publishing information to a medium for
conducting complex business-to-business and business-to-consumer communications
and commerce.
At the same time, businesses across many industries are faced with
increasing competitive pressures to lower costs, decrease inventories, and
improve sales and marketing productivity and time-to-market. To address these
challenges, businesses are increasingly replacing paper-based transactions with
electronic commerce transactions that provide enhanced accuracy and secure
exchange of time-sensitive business information. Forrester Research, Inc.
estimates that the business-to-business electronic commerce market will grow
from $43 billion in 1998 to $1.3 trillion by 2003, representing a compound
annual growth rate of over 98%.
Strategy
Our mission is to provide a broad array of high quality foodservice
equipment and supply services to meet the needs of foodservice providers
locally, regionally and nationwide. We believe that the experience and
reputation of our management team and our comprehensive distribution platform
will enable us to implement our strategies effectively. We also believe
implementation of our internal growth, operating and acquisition strategies
will give us a competitive advantage over other foodservice equipment and
supply companies.
Capitalize on Management Team
Our management team includes executives with significant experience
implementing acquisition programs and effectively managing acquired businesses.
Roger M. Laverty, one of our founders and our President and Chief Executive
Officer, served as the Chief Executive Officer of Smart and Final, Inc., a New
York Stock Exchange listed distributor of restaurant supplies, from 1994 to
1998. During his 19-year tenure at Smart and Final, Smart and Final's annual
revenues increased from $200 million to $1.6 billion and Mr. Laverty oversaw
the acquisition and integration of companies with combined revenues totaling
approximately $600 million.
John M. Richman, Chairman of our Board of Directors, served as Chairman and
Chief Executive Officer of Kraft, Inc. from 1979 to 1980 and from 1986 to 1989.
He served as Chairman and Chief Executive Officer of Dart & Kraft, Inc., a
company formed by the 1980 merger of Kraft, Inc. and Dart Industries, Inc.,
from 1980 to 1986. While at Dart & Kraft, Mr. Richman oversaw the acquisition
of Hobart, a leading foodservice equipment manufacturer and distributor. He was
also instrumental in the founding of Kraft Foodservice, a multibillion dollar
division of Kraft, Inc. that sold food and foodservice equipment to multi-unit
restaurant operators throughout the United States. When Kraft was acquired by
Philip Morris in 1989, Mr. Richman was named Vice Chairman of Philip Morris and
was responsible for integrating the food operations of Kraft, Inc. with those
of General Foods, Inc., which had been previously acquired by Philip Morris.
49
<PAGE>
James Castleberry, our Chief Financial Officer, has over 25 years
experience in financial management. Mr. Castleberry served in various executive
positions for Wickes Companies, Inc., a multi-billion dollar diversified
company, from 1982 to 1992, and most recently served as the company's Vice
President and Comptroller. While at Wickes, he was involved in the acquisition
and integration of numerous companies. Mr. Castleberry most recently served as
Chief Operating Officer and Chief Financial Officer for BDK Holdings, Inc., a
producer and distributor of kitchen and bath textile products.
We will also attempt to capitalize on the reputation of our companies
within the foodservice equipment and supply industry, as well as the extensive
network of relationships that the former owners of our companies have formed
within the industry. Chuck Rothkopf, the President of Economy, and
John Breznikar, the President of East Bay, both of whom will be on our board of
directors, will be involved in helping us identify potential companies to
acquire.
Acquisition Strategies
Expand Within Existing Markets. We intend to establish a strong regional
presence in the western United States, where our companies are located. We
intend to strengthen our presence in this market by acquiring or opening
additional facilities. Our expansion within this market will be driven by:
. expanding our customer base
. expanding product and service offerings
. improving operating efficiencies through the consolidation of multiple
local operations
Enter New Geographic Markets. We will seek to enter new geographic markets
by acquiring established local firms with strong management teams and customer
relationships that can help us to grow further in those markets. We believe our
presence in a number of markets will enhance our ability to attract and serve
customers throughout the United States.
Internal Growth Strategies
Become a National Single Source Provider. Currently, most of the
approximately 12,000 companies in the foodservice equipment and supply industry
are small, owner-operated businesses with limited access to the capital
required to offer a broad range of products and services. We offer our
customers a broad range of competitively priced foodservice equipment and
supplies as well as related services. In this highly fragmented industry, we
believe our ability to provide our customers with a single source for all of
their equipment and supply needs is a key competitive advantage over our
competitors. Our broad range of products and services also positions us to take
advantage of our relationships with local, regional and national foodservice
operators.
Pursue Business-to-Business Electronic Commerce Opportunities. We believe
that significant opportunities exist for the use of electronic commerce in the
foodservice equipment and supply industry. The industry traditionally has not
been serviced to a meaningful extent via the Internet. We believe we will thus
have a significant first to market advantage, including the opportunity to
establish directchef.com as a national brand name and to utilize our website to
highlight our other advantages. We also expect that because the use of the
Internet can significantly ease the selection and ordering process, multi-unit
operators will be particularly interested in a national supplier with
electronic commerce capabilities.
Cross-Sell to Expanded Customer Base. We believe there are significant
opportunities for a national, full-line foodservice equipment and supply
company to generate greater revenue and profitability by providing a wider
range of services and serving a broader customer base than traditional industry
participants. By integrating extensive equipment and supply distribution
operations with broad contract capabilities, we expect to capitalize on cross-
selling opportunities. For example, Raygal currently sells only heavy
equipment, such as ranges and refrigeration units, to its customers. As part of
our company, Raygal will have access to the expertise of our other companies
focused on selling smallwares, such as glassware, utensils and china. Those of
our companies without a sophisticated design capability will be able to offer
potential customers the design expertise of Raygal or East Bay.
50
<PAGE>
Expand Complementary Products and Services. We believe there are a number
of opportunities to offer new products and services that will complement our
core business and help increase profitability. In particular, we intend to
expand our equipment maintenance and repair services and to provide customized
stainless steel fabrication and millwork services directly, rather than through
subcontractors. We also intend to pursue the development of DirectChef brand
products.
Open New Cash and Carry Stores. We have extensive experience operating cash
and carry stores. Cash and carry stores focus on the replacement and restocking
needs of local customers. As a result, cash and carry customers tend to be less
concerned about price. We will seek to capitalize on our cash and carry
expertise by opening new locations and expanding our presence in markets served
by our existing stores as well as adjacent markets. Each new store will be run
by a management team that is already established in that market or an adjacent
market.
Expand Alternative Sales Channels. We intend to expand alternative sales
channels, particularly Internet and catalog sales. We plan to promote our
directchef.com website to increase brand name recognition and to establish a
retail presence on the Internet. Our companies also mailed over 200,000
catalogs in 1998. We intend to consolidate our companies' customer lists and
develop a company-wide catalog. We believe these sales channels will provide a
significant opportunity to increase our sales, particularly to retail
consumers.
Operating Strategies and Efficiencies
Utilizing Volume Purchasing to Reduce Product Cost. We intend to use our
scale to secure volume price reductions and enhance national account and
private label packaging opportunities. Our purchasing strategy will focus on
obtaining the lowest possible cost of goods for each item purchased. Initially,
information sharing among our companies will help us identify immediate
opportunities for cost reductions.
Improve Supply Chain. We believe that the Internet provides an easy and
cost-effective means for customers to select and order products. The Internet
also helps us to provide efficient order fulfillment and ensure customer
satisfaction. We intend to continue to expand our use of the Internet as a
means to optimize our supply chain management and to enhance customer service
to single and multi-unit operators.
Improve Management of Inventory. We intend to implement a company-wide
inventory management system that will allow us to reduce lead time, increase
inventory turns and reduce inventory levels. Major components of our inventory
management strategy include:
. refining our ability to forecast and analyze product movement to allow
more accurate determinations of ordering lead times, inventory level
requirements and appropriate service levels
. using space allocation techniques to manage product display space and
maintain merchandising consistency
. forming strategic partnerships with key suppliers to create lower cost
distribution alternatives while maintaining existing service levels to
customers
. consolidating existing warehouse facilities
. establishing centralized distribution centers within each region we
serve
Provide Strong Incentives to Management. Each of our companies as well as
the companies we subsequently acquire typically will be operated by the former
management team of that company. We intend to motivate these managers and align
their interests with ours by providing that a portion of the consideration paid
to managers in connection with the acquisition of their company will be in the
form of common stock, and that a portion of the compensation paid to those
managers as our employees will be in the form of options to purchase our common
stock. See "Management--1998 Stock Option Plan."
51
<PAGE>
Maintain Day-to-Day Local Management Responsibility. Our organizational
structure is designed to create regional and local operating units, each of
which will be responsible for its performance results. Our headquarters team
will remain small and focus on identifying and furthering our larger strategic
objectives as well as administering overall financial and operating controls.
This team will administer key functions, such as financial planning and
reporting, treasury and risk management, to ensure consistency and reduce
costs. We believe that the overhead associated with our headquarters operations
will be offset by a corresponding reduction in costs at the operations level.
Over time, the headquarters team will assume responsibility for additional
functions such as purchasing, human resources, information systems, and legal.
Adopt Best Practices, Policies and Procedures. We intend to evaluate the
operating policies and procedures of each of our companies to identify the
practices they use that will best serve us and our customers. Each of our
companies will adopt these "best practices." For example, we intend to identify
the most effective merchandising and store design formats among our companies
and implement those formats at each of our stores. We believe this company-wide
adoption of best practices will help us successfully integrate our companies.
To further enhance integration, we intend to establish an executive committee,
comprised of a representative from each of our companies, that will evaluate
best practices and industry trends and opportunities.
Products and Services
To accommodate the diverse needs of our customers, we offer a wide range of
products and services. We maintain over 10,000 products, including heavy
equipment, such as ranges and refrigeration units, as well as smaller
disposable items, such as china, glass and silverware. We also resell used
equipment. We generally take such equipment in trade from customers who are
purchasing new equipment, or sell the equipment for such customers on a
consignment basis. We believe that additional expansion opportunities exist in
developing DirectChef brand products.
We offer a full range of services to support our product sales. The types
of services we typically provide for a foodservice facility, either directly or
through subcontractors, include:
. creating the blueprints and other construction documents for the
facility using state-of-the-art design and drafting equipment
. supplying and installing the equipment and supplies for the facility
. providing custom stainless steel items and millwork for the facility
. storing all of the equipment and supplies for the facility in one of our
warehouses prior to construction and installation
. supervising construction of the facility or providing construction
support
Customers
In 1998, we provided foodservice equipment and supply services to more than
25,000 customers, with no one customer accounting for more than 10% of our
total revenues.
We generally do not enter into long-term purchase and supply contracts with
our customers. We intend to continue our emphasis on developing and maintaining
successful long-term relationships with our customers by providing superior,
high quality service in a professional manner.
Sales and Marketing
We use a variety of means to market and sell our products and services. We
currently have a sales force of approximately 75 persons. All of our companies
utilize local advertising and marketing programs. In addition, our companies
mailed over 200,000 catalogs in 1998. We intend to focus on further developing
these sales channels.
52
<PAGE>
We intend to promote our directchef.com website and brand name and
establish a national presence on the Internet. Although our Internet sales to
date have not been significant, we are pioneering the use of the Internet for
sales of foodservice equipment and supplies on a national basis and we intend
to aggressively pursue electronic commerce as a significant distribution
channel for the future.
We expect to continue to market our products and services to a broad array
of potential customers, with an emphasis on large regional and national
customers. While each of our operating units will be responsible for its own
sales and marketing efforts, the headquarters team will help coordinate those
efforts. We believe that our commitment to consistent quality and service will
enable us to develop and maintain long-term relationships with our existing
customers.
Suppliers
We purchase foodservice equipment and supplies from over one thousand
different manufacturers and suppliers located throughout the world. We purchase
equipment and supplies directly from manufacturers and, to a lesser extent,
from authorized distributors. In deciding whether to purchase equipment and
supplies from a particular source, our purchasing employees evaluate product
specifications, quality, reliability of delivery, production lead times and
price. We believe that we are not materially dependent on any single supplier
and that our relationships with our suppliers are good.
Although the foodservice equipment and supply manufacturing industry, in
which our suppliers are participants, is consolidating, it remains highly
fragmented. Following the acquisitions of our companies, we believe there will
be fewer than a half dozen manufacturers larger than us. We intend to review
our supplier base and explore the extent to which our volume of purchases will
provide us with leverage to obtain more favorable prices and service.
Many foodservice equipment and supply companies have formed cooperative
buying groups. These groups combine the purchases of their members and attempt
to use this larger volume to negotiate more favorable terms, such as price
reductions and rebates, from suppliers. Our companies are currently members of
these groups.
We believe that being one of the largest distributors of foodservice
equipment and supplies in the country, we will have the opportunity to enter
into strategic partnerships directly with suppliers. We expect that these
partnerships will allow us to negotiate directly with some of our most
important suppliers and further enhance our ability to receive the most
favorable terms possible on the products we buy. We have not yet entered into
any strategic partnerships.
Competition
The foodservice equipment and supply industry is intensely competitive.
Competition in the industry is based primarily on service, selection, location
and price. We compete with a large number of equipment and supply businesses on
a regional and local basis, some of which may have greater financial resources
than we do and some of which are divisions of large public companies. We may
also face competition for acquisition candidates from those competitors, some
of which have acquired foodservice equipment and supply companies during the
past decade.
We believe that our strategy of becoming the leading national foodservice
equipment and supply distributor will enhance our competitive position. We also
believe that the implementation of a company-wide management information system
and standardized operating procedures will provide us with additional
competitive advantages.
53
<PAGE>
Technology and Management Information Systems
Each of our companies operates a limited management information system that
is used to purchase, monitor and allocate inventory throughout its facilities.
Most of these systems include computerized order entry, sales analysis,
inventory status, invoicing and payment, and bar code tracking functions. All
of these systems are designed to improve productivity for our companies and
their respective customers.
In developing internal company-wide systems following this offering, we
expect to draw upon the best features of the existing systems currently in use.
We plan to integrate the systems of our companies to operate over a wide area
network and to integrate intranet and Internet capabilities. This integrated
system will be designed to allow each warehouse and sales center to share
information regarding sales activities, credit approval, inventory level, stock
balance, vendor returns, order fulfillment and other performance measures. Each
of our companies will continue to use its existing system until the integrated
system is completed.
Employees
As of December 31, 1998, our companies had 310 employees, 75 of whom were
employed in sales and marketing, and the remainder of whom were employed in
design, support and administrative positions. Ten employees of East Bay are
represented by unions that have entered into collective bargaining agreements
with East Bay. The collective bargaining agreements expire in October 2002. We
believe that relations between each of our companies and their respective
employees are good.
Properties
Our principal executive and administrative offices are located in Culver
City, California. We operate five distribution and sales facilities and two
warehouses in California, two distribution facilities in Oregon, one
distribution facility in Utah and one sales office in Nevada. These facilities
range in size from 1,500 square feet to 66,000 square feet. All of these
facilities are leased. The leases expire at various times between 1999 and
2009. When these leases expire, we believe that suitable replacement space will
be available as required. Additional detail regarding some of our leases is
contained herein under "Certain Transactions--Transactions Involving Certain
Directors and Principal Shareholders." We believe that our current facilities
are adequate for our expected needs over the next several years. However, we
may add new facilities as a result of acquisitions or due to expansions into
new markets.
54
<PAGE>
MANAGEMENT
Directors and Executive Officers
The following table sets forth information concerning our directors and
executive officers upon completion of this offering:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <S> <C>
John M. Richman.................. 71 Chairman of the Board*
Roger M. Laverty................. 51 President, Chief Executive Officer and Director
James Castleberry................ 56 Executive Vice President and Chief Financial Officer
Donald S. Perkins................ 72 Director*
Cyrus F. Freidheim, Jr........... 63 Director*
Ross Berner...................... 33 Director
John Breznikar................... 49 Director*
Mark Levy........................ 52 Director*
Mark McKinney.................... 32 Director
Jerry K. Pearlman................ 60 Director*
Chuck Rothkopf................... 58 Director*
Kenneth W. Slutsky............... 45 Director*
</TABLE>
- --------
* To be elected to the board effective upon the completion of this offering.
John M. Richman will become Chairman of our board of directors upon
completion of this offering. Mr. Richman is the former Chairman and Chief
Executive Officer of Kraft, Inc. and has been Counsel to the law firm of
Wachtell, Lipton, Rosen & Katz since January 1990. He is a director of USX
Corporation and a trustee of Archstone Communities. Mr. Richman received his
B.A. from Yale University and his L.L.B. from Harvard Law School.
Roger M. Laverty, one of our founders, has served as our President and
Chief Executive Officer and as a member of the board of directors since
February 1999. Prior to joining our company, Mr. Laverty served as the
President and Chief Executive Officer of Smart and Final, a distributor of
foodservice equipment and supplies, from January 1994 to May 1998. He received
his B.A. from Stanford University and his J.D. from Stanford Law School.
James Castleberry has served as our Executive Vice President and Chief
Financial Officer since November 1998. From April 1992 to November 1998, Mr.
Castleberry served as Senior Vice President and Chief Financial Officer of BDK
Holdings, Inc., a producer and distributor of kitchen and bath textile
products. He also served as Chief Operating Officer of BDK from January 1998 to
November 1998. Mr. Castleberry is a Certified Public Accountant. He received
his B.S. from San Diego State University.
Donald S. Perkins will become a member of the board of directors upon
completion of this offering. Mr. Perkins served as Chairman and Chief Executive
Officer of Jewel Companies, Inc., a diversified retail chain, from 1970 until
his retirement in 1983. He is a director of AON Corporation, La Salle Hotel
Properties, Lucent Technologies Inc. and Nanophase Technologies Corporation.
Mr. Perkins received his B.A. from Yale University and his M.B.A. from Harvard
Business School.
Cyrus F. Freidheim, Jr. will become a member of the board of directors upon
completion of this offering. Mr. Freidheim has served as Vice-Chairman for
Booz-Allen & Hamilton, a strategic consulting firm, since 1966. He is a
director of Household International, Inc. and MicroAge, Inc. He is also a
member of the compensation committee of MicroAge. Mr. Friedheim received his
B.S. from the University of Notre Dame and his M.S. from Carnegie Mellon
University.
Ross Berner, one of our founders, has served as a member of the board of
directors since our inception. Mr. Berner was the co-founder of United Road
Services, Inc., a motor vehicle and equipment towing and
55
<PAGE>
transport company. Mr. Berner served as United Road's Co-Chief Acquisition
Officer from July 1997 to May 1998. From November 1993 to December 1997, he
served as Vice President, Equity Sales and Trading, for Salomon Brothers, Inc.
Mr. Berner received his B.A. from Northwestern University and his M.B.A. from
Columbia University.
John Breznikar will become a member of the board of directors upon
completion of this offering. Mr. Breznikar has been the President of East Bay
Restaurant Supply, Inc. since 1985. He received his B.A. from Santa Clara
University.
Mark Levy will become a member of the board of directors upon completion of
this offering. Since June 1998, Mr. Levy has been Managing Partner of Alexander
Capital Group, a private equity investment fund. Mr. Levy was a co-founder of
Levy Restaurants, a foodservice organization, and from 1978 to June 1998,
served as its Vice-Chairman. Levy Restaurants includes a network of
restaurants, an organization that provides food service operations at sports
and entertainment facilities, and a consulting and advisory services group. He
currently serves as a director of Dave & Buster's, Inc. Mr. Levy received his
B.A. from the University of Missouri and his M.B.A. from Washington University.
Mark McKinney, one of our founders, has served as a member of the board of
directors since our inception. Mr. McKinney was the co-founder of United Road
Services, Inc., a motor vehicle and equipment towing and transport company. Mr.
McKinney served as United Road's Co-Chief Acquisition Officer from July 1997 to
May 1998. From December 1996 to September 1997, he served as a portfolio
manager for Berger Associates, a mutual fund company. From April 1992 to
December 1996, Mr. McKinney served as a portfolio manager for Farmers Group, an
insurance company. Mr. McKinney received his B.A. from UCLA and his M.B.A. from
the University of Southern California.
Jerry K. Pearlman will become a member of the board of directors upon
completion of this offering. Mr. Pearlman served as Chairman and Chief
Executive Officer of Zenith Electronics Corporation, an electronics
manufacturer, from 1984 until his retirement in 1995. He is a director of
Smurfit-Stone Container Corporation and Ryerson Tull, Inc. and serves on the
compensation committee of both of those entities. He received his A.B. from
Princeton University and his M.B.A. from Harvard Business School.
Chuck Rothkopf will become a member of the board of directors upon
completion of this offering. Mr. Rothkopf is the President of Economy
Restaurant Fixtures, Inc. and has been with that company since 1976. Mr.
Rothkopf received his B.A. from Hofstra University.
Kenneth W. Slutsky will become a member of the board of directors upon
completion of this offering. Since 1993, Mr. Slutsky has served as Vice-
Chairman of Candle Corporation, a provider of systems management software. He
received his B.A. from Bowdoin College and his J.D. from the Emory University
School of Law.
Committees of the Board of Directors
The board of directors intends to establish an audit and finance committee
and a compensation and governance committee after this offering. The audit and
finance committee will:
. make recommendations to the board concerning the independent auditors
that conduct annual examinations of our accounts
. review the scope of our annual audit and meet periodically with the
independent auditors to review their findings and recommendations
. approve significant accounting policies or changes to existing policies
. periodically review our principal internal financial controls
. review our annual budget
56
<PAGE>
The compensation and governance committee will review the compensation of
our executive officers and make recommendations regarding compensation. The
committee will also make recommendations regarding the election of officers and
director nominations to the board of directors.
Compensation of Directors
Upon completion of this offering, we expect to grant each director who is
not an officer, employee or consultant an option to purchase 20,000 shares of
common stock at 90% of the initial public offering price. All directors are
reimbursed for expenses incurred in attending meetings of the Board or
committees thereof. We have also granted Mr. Richman options to purchase
107,500 common shares at an exercise price of $4.25 per share.
Executive Compensation; Employment Agreements
We have not conducted any operations other than activities related to the
acquisitions of our companies and this offering. Our chief executive officer
during 1998 did not receive any compensation. Further, no executive officer
received compensation in 1998 in excess of $100,000. We entered into employment
agreements with Mr. Laverty and Mr. Castleberry, dated July 20, 1998 and
November 16, 1998, respectively. Each executive will receive a base salary and
will receive an annual performance bonus if and as determined by the board of
directors. Mr. Laverty's base salary is $200,000 and Mr. Castleberry's is
$175,000. The initial term of each employment agreement is three years, but it
may be terminated by either party prior to the end of the term. If either Mr.
Laverty or Mr. Castleberry is terminated without cause, he will be paid a
severance amount payable in accordance with our regular pay schedule equal to
his base salary for the following periods: Mr. Laverty--for the remainder of
the term of his employment agreement; Mr. Castleberry--for one year.
1998 Stock Option Plan
Our 1998 Stock Option Plan is intended to provide our directors, officers,
employees and consultants with an opportunity to invest in our company. We
expect the stock option plan to advance our interests and the interests of our
stockholders by enabling us to attract and retain qualified personnel. The
stock option plan provides for the grant of incentive stock options within the
meaning of Section 422 of the Internal Revenue Code of 1986 and nonqualified
stock options. Prior to the completion of this offering, we will amend the
stock option plan to amend the maximum number of shares of common stock that
may be subject to options granted under the stock option plan to an aggregate
of 2,000,000 shares. Shares of common stock that are attributable to options
that have expired or been terminated, cancelled or forfeited shall be available
for issuance in connection with future grants. The compensation and governance
committee will administer the stock option plan. The committee will select the
individuals who will receive options and establish the terms and conditions of
those options.
Upon completion of this offering, 847,487 shares of common stock will be
subject to options granted under the stock option plan. This includes
325,995 shares (assuming an initial public offering price of $11.00 per share)
at an exercise price equal to 90% of the initial offering price that we will
grant to employees of our companies upon completion of this offering. Upon
completion of this offering, we also expect to grant an aggregate of 100,000
shares to five of our directors at an exercise price equal to 90% of the
initial public offering price. These options generally will vest over three
years and will expire five years from the date of grant. We have granted
options to purchase a total of 472,500 shares of common stock to officers,
directors, consultants and persons who have agreed to serve as directors. See
"Certain Transactions."
57
<PAGE>
CERTAIN TRANSACTIONS
Organization of DirectChef
In July 1998, in connection with our formation, we issued and sold shares
of our common stock to directors, persons who have agreed to serve as
directors, officers and members of their immediate families. We sold common
stock in the following amounts:
. 107,500 shares to Mr. Richman for cash consideration of $500
. 430,000 shares to Mr. Laverty for cash consideration of $2,000
. 537,500 shares to Mr. Berner for cash consideration of $2,500
. 537,500 shares to Mr. McKinney for cash consideration of $2,500
. 21,500 shares to Scott Freidheim, the son of Cyrus F. Freidheim, Jr.,
for cash consideration of $100
One-half of the shares purchased by Mr. Laverty may be repurchased by us if Mr.
Laverty voluntarily terminates his employment with us or is terminated for
cause during the 18 months after the completion of this offering.
In September 1998 and January 1999, we issued and sold an aggregate of
97,649 shares of our Series A Preferred Stock to persons who have agreed to
serve as directors and members of their immediate families and to members of
the immediate family of an officer.
Between July 1998 and November 1998, we granted the following options to
purchase shares of our common stock to directors, persons who have agreed to
serve as directors and officers:
. option to purchase 107,500 shares to Mr. Richman at an exercise price
of $4.25 per share
. option to purchase 215,000 shares to Mr. Laverty at an exercise price
of $0.01 per share
. option to purchase 130,000 shares to Mr. Castleberry at an exercise
price of $4.25 per share
All of the shares underlying Mr. Richman's option vested on the date the option
was granted. One hundred seven thousand five hundred of the shares underlying
Mr. Laverty's option will vest as of the filing of this registration statement
with the Securities and Exchange Commission, and the remaining 107,500 shares
will vest in January 2001. Sixty-five thousand of the shares underlying
Mr. Castleberry's option will vest upon completion of this offering, and the
remaining 65,000 shares will vest in May 2000.
At the same time as we complete this offering, each of our companies will
merge with or be acquired by us or one of our subsidiaries. We will pay an
aggregate of $41,413,157 in cash and 1,269,070 shares of common stock. We will
also assume approximately $3.3 million in outstanding indebtedness of our
companies.
The completion of each acquisition is subject to customary conditions.
These conditions include, among other things:
. the continuing accuracy on the closing date of the acquisitions of our
representations and warranties and the representations and warranties
of each of our companies and their principal shareholders
. the performance by each of the companies, their shareholders and us of
all covenants included in the agreements relating to the acquisitions
of our companies
. the non-existence of a material adverse change in the business,
financial condition or results of operations of each of our companies
There can be no assurance that the conditions to closing of the acquisitions of
our companies will be satisfied or waived or that the acquisitions of our
companies will be consummated.
58
<PAGE>
The following table sets forth the consideration we will pay for each of
our companies and the total debt that we would have assumed as of March 31,
1999:
<TABLE>
<CAPTION>
Shares of Total
Name Common Stock Cash Debt
---- ------------ ------- ------
(In thousands)
<S> <C> <C> <C>
Raygal.......................................... 116,667 $12,600 $ 0
East Bay........................................ 263,021 9,469 455
Economy......................................... 343,678 10,826 227
Curtis.......................................... 270,833 3,250 936
Bintz........................................... 191,538 4,268 1,379
Castino......................................... 83,333 1,000 349
--------- ------- ------
Total......................................... 1,269,070 $41,413 $3,346
========= ======= ======
</TABLE>
In connection with the acquisitions and as consideration for their
interests in our companies, the following executive officers, persons who have
agreed to serve as directors, and holders of more than 5% of the outstanding
shares of our common stock upon completion of the acquisitions of companies
will receive cash and shares of common stock:
<TABLE>
<CAPTION>
Shares of
Name Common Stock Cash
---- ------------ --------------
(In thousands)
<S> <C> <C>
John Breznikar................................... 93,750 $3,375
Chuck Rothkopf................................... 171,839 5,413
Mike Weinstock................................... 171,839 5,413
</TABLE>
In addition, payments will be made by or to us pursuant to the acquisition
agreements. Within 90 days after completion of the acquisitions, we will pay
the shareholders of Economy, Messrs. Rothkopf and Weinstock, an amount equal to
the net income of Economy for the period January 1, 1999 through the completion
date. This amount will be reduced by the amount of rebate income of Economy
earned during that same period that is included in its net income. On May 31,
2000, we will pay Messrs. Rothkopf and Weinstock the amount of rebates earned
during the period from January 1, 1999 through the completion date. We are
required to pay to a shareholder of Raygal within 90 days after completion of
the acquisitions the amount by which Raygal's adjusted working capital balance
exceeds a specified amount. Within the same 90-day period, we are required to
pay the stockholders of East Bay, including Mr. Breznikar, an amount equal to
the net income of East Bay, after taxes, for the period from October 1, 1998 to
the completion of the acquisitions. Based on the March 31, 1999 financial
statements of the companies entitled to these payments, the estimated aggregate
amount payable pursuant to these provisions of the acquisition agreements is
approximately $2.0 million.
On or before March 31, 2000, the shareholders of Curtis are required to
repay us an amount, not to exceed $650,000, if the pre-tax earnings
attributable to the Curtis operations for 1999 are less than $850,000. We will
hold back approximately $325,000 from the aggregate consideration payable to
the shareholder of Castino, a proportionate amount of which will be paid to the
Castino shareholder to the extent that pre-tax earnings goals of $50,000
attributable to the Castino operations for the months March 1999 through May
1999 are satisfied.
Pursuant to the agreements entered into in connection with the acquisitions
of our companies, the shareholders of our companies have agreed not to compete
with us in certain defined businesses for a period of four years from the date
of completion of this offering.
Some of the stockholders of our companies, including the stockholders who
will become directors or five percent stockholders following the acquisitions,
have personally guaranteed debt that we are assuming. We are required to obtain
the release of these guaranties in connection with the acquisitions.
59
<PAGE>
Transactions Involving Certain Directors and Principal Shareholders
Economy's operating results for 1998 included approximately $450,000 of
rebates on products sold. Economy expects to receive those rebates in 1999 and
pay them out to its shareholders as received. Economy will issue a note
payable to its shareholders in respect of any such accrued rebates that are
not received prior to the closing. We are required to pay out any of these
rebates received after the completion of the acquisitions. Economy had notes
payable from its shareholders of $119,000 at December 31, 1997, and in 1998
distributed these notes, then having an aggregate balance of $115,000, to its
shareholders.
Mr. Breznikar, through entities in which he is a partner or member, as the
case may be, leases two facilities to East Bay in Oakland, California. One of
the facilities is comprised of two separate parcels of property. In addition,
a partnership in which Mr. Breznikar is a partner leases equipment to East
Bay. In fiscal 1998, 1997 and 1996, East Bay made lease payments in the
aggregate amounts of $224,000, $193,000 and $193,000, respectively, with
respect to these real and personal property leases. We will lease the two
facilities from those entities by entering into two leases effective as of the
closing. The leases provide for initial annual lease payments in the aggregate
of approximately $358,000. In addition, we will lease the equipment East Bay
currently leases by entering into a new lease with Mr. Breznikar's partnership
providing for initial annual lease payments of $85,000.
In February 1999, East Bay paid the outstanding balance of $175,000 on
notes payable to Mr. Breznikar.
We are entering into employment agreements with Messrs. Breznikar and
Weinstock, and a consulting agreement with Mr. Rothkopf, in connection with
the acquisitions of their companies. We will also enter into a consulting
agreement with Mr. Berner. The consulting agreements with Messrs. Rothkopf and
Berner require them to provide consulting services in connection with future
acquisitions. Messrs. Rothkopf and Berner will receive a consulting fee equal
to one percent of the purchase price of any acquisition resulting from their
services with a maximum fee of $100,000 for any single acquisition. They will
also receive reimbursement of their expenses.
Company Policy
We anticipate that there will be a minimal amount of future transactions
between us and any of our directors, officers, employees or affiliates. These
transactions will be approved in advance by a majority of disinterested
members of the board of directors. We further expect that these transactions
would be on terms comparable to those available from independent entities.
60
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of common stock. The information set forth assumes the issuance of
shares of our common stock in connection with the acquisitions of our companies
and the conversion of all shares of Series A Preferred Stock upon completion of
this offering for (1) each person who is known by us to beneficially own more
than five percent (5%) of our outstanding shares of common stock, (2) each of
our directors and persons who have agreed to serve as directors, (3) each of
our executive officers and (4) all directors, persons who have agreed to serve
as directors and executive officers as a group. Included within the stated
number of shares owned are shares that may be obtained under presently
exercisable options in the amount of 107,500 shares for each of Messrs. Laverty
and Richman and 65,000 shares for Mr. Castleberry. Unless we tell you
otherwise, we believe that the beneficial owners of the securities listed
below, based on information provided to us by them, have sole investment and
voting power with respect to the common stock shown below as being beneficially
owned by them, subject to community property laws where applicable.
<TABLE>
<CAPTION>
Percent
-----------------
Number of Before After
Name of Beneficial Owner Shares Offering Offering
- ------------------------ --------- -------- --------
<S> <C> <C> <C>
Roger M. Laverty................................... 537,500 16.1% 5.6%
Ross Berner........................................ 533,500 16.5 5.6
Mark McKinney(1)................................... 523,400 16.2 5.5
John M. Richman.................................... 215,000 6.5 2.2
Chuck Rothkopf(2).................................. 171,839 5.3 1.8
Mike Weinstock..................................... 171,839 5.3 1.8
John Breznikar..................................... 134,927 4.2 1.4
James Castleberry.................................. 65,000 2.0 *
Donald S. Perkins.................................. 23,530 * *
Cyrus F. Freidheim, Jr............................. 11,765 * *
Mark Levy.......................................... 0 * *
Jerry K. Pearlman.................................. 0 * *
Kenneth W. Slutsky................................. 0 * *
All directors, persons who have agreed to serve as
directors and executive officers as a group
(12 persons)..................................... 2,216,461 63.2 22.7
</TABLE>
- --------
* Indicates beneficial ownership of less than one percent.
(1) Includes 4,700 shares held by Mr. McKinney's daughter.
(2) These shares are held by The Rothkopf Revocable Trust, of which
Mr. Rothkopf is a trustee.
61
<PAGE>
DESCRIPTION OF CAPITAL STOCK
General
Our authorized capital stock consists of 45,000,000 shares of capital
stock, including 40,000,000 shares of common stock, $0.001 par value, and
5,000,000 shares of preferred stock, $0.001 par value. Upon completion of the
acquisitions of our companies and this offering, there will be 9,474,919 shares
of common stock and no shares of preferred stock outstanding. Our Amended and
Restated Certificate of Incorporation and Amended and Restated Bylaws are
included as exhibits to the registration statement of which this prospectus is
a part. Each of these documents contain more specific information regarding
stockholder rights. The following discussion sets forth the material features
of our capital stock.
Common Stock
The holders of common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of stockholders. The holders of
common stock are entitled to receive ratably such dividends, if any, as may be
declared from time to time by the board of directors out of funds legally
available therefor. This entitlement to dividends is subject to preferences
that may be applicable to any outstanding shares of preferred stock that may be
issued. See "Dividend Policy." In the event of our liquidation, dissolution or
winding up, the holders of common stock are entitled to share ratably in all
assets remaining after payment of liabilities and liquidation preferences of
any outstanding shares of preferred stock. Holders of common stock have no
preemptive rights or rights to convert their common stock into any other
securities. There are no redemption or sinking fund provisions applicable to
the common stock. All outstanding shares of common stock are fully paid and
non-assessable, and the shares of common stock to be issued upon completion of
this offering will be fully paid and non-assessable.
Preferred Stock
Our board of directors has the authority, without action by the
stockholders, to designate and issue up to 5,000,000 shares of preferred stock
in one or more series. Our board also has the authority to designate the
dividend rate, voting rights and other rights, preferences and restrictions of
each series, any or all of which may exceed those of the common stock. We have
no present plans to issue any shares of preferred stock.
One of the effects of undesignated preferred stock may be to enable the
board to discourage an attempt to obtain control of us via a tender offer,
proxy contest, merger or other means. Another effect is to protect the
continuity of our management. The issuance of shares of preferred stock may
adversely affect the rights of holders of common stock. For example, preferred
stock we issue may rank prior to the common stock as to dividend rights,
liquidation preference or both. The preferred stock also may have full or
limited voting rights and may be convertible into shares of common stock.
Accordingly, the issuance of shares of preferred stock may discourage bids for
the common stock or may otherwise adversely affect the market price of the
common stock.
Classified Board of Directors; Filling Vacancies
Our Amended and Restated Certificate of Incorporation provides that the
board shall be divided into three classes. The certificate also provides that
the number of directors in each class shall be as nearly equal as is possible
based upon the number of directors constituting the entire board. The
certificate effectively provides that:
. the term of office of the first class will expire at the first annual
meeting of stockholders following the date of this prospectus
. the term of office of the second class will expire at the second annual
meeting of stockholders following the date of the prospectus
. the term of office of the third class will expire at the third annual
meeting of stockholders following the date of this prospectus
62
<PAGE>
At each annual meeting of stockholders, successors to directors of the class
whose term expires at that meeting will be elected to serve for three-year
terms or until their successors are duly elected and qualified.
The classification of directors has the effect of making it more difficult
for stockholders to change the composition of the board. At least two annual
meetings of stockholders, instead of one, will generally be required to effect
a change in a majority of the board. This delay may help to provide the board
with sufficient time to analyze an unsolicited proxy contest, a tender or
exchange offer or any other extraordinary corporate transaction.
Under Delaware law, unless otherwise provided in a company's certificate of
incorporation, directors serving on a classified board may only be removed by
the stockholders for cause. Our Amended and Restated Certificate of
Incorporation does not provide otherwise. However, vacancies may occur on the
board due to newly created directorships resulting from an increase in the
authorized number of directors or due to the death, resignation, retirement,
disqualification or removal of directors or any other cause. Unless there are
no directors in office, these vacancies may be filled only by the board, not by
the stockholders, subject to any rights granted holders of preferred stock. The
board may fill these vacancies provided that a quorum is then in office and
present or, if less than a quorum is then in office, by a majority of the
directors then in office. If only one director remains in office then the
vacancies may be filled by the sole remaining director. As a result, the board
could prevent any stockholder from enlarging the board and filling the new
directorships with such stockholder's own nominees.
The provisions of our certificate described above may have the effect of
discouraging a third party from initiating a proxy contest, making a tender or
exchange offer or otherwise attempting to gain control of us, even though these
attempts might be beneficial to us or to our stockholders. These provisions
also may have the effect of discouraging a third party from attempting to
change the composition or policies of the board. These provisions of the
certificate could thus increase the likelihood that incumbent directors will
retain their positions.
Stockholder Meeting Provisions
The Amended and Restated Certificate of Incorporation and Bylaws provide
that, subject to the rights of any holders of preferred stock, only a majority
of the board or the Chief Executive Officer will be able to call a special
meeting of stockholders. Following this offering, stockholder action may be
taken only at a duly called and convened annual or special meeting of
stockholders and may not be taken by written consent. These provisions, taken
together, prevent stockholders from forcing consideration by the stockholders
of stockholder proposals over the opposition of the board, except at an annual
meeting.
The bylaws establish an advance notice procedure for stockholders to make
nominations of candidates for election as director or to bring other business
before an annual meeting of stockholders. The notice procedure provides that,
subject to the rights of any holders of preferred stock, only persons who are
properly nominated will be eligible for election as director. To be properly
nominated, a person must be nominated by or at the direction of the board, any
committee appointed by the board or by a stockholder who has given timely
written notice of such nomination to our secretary prior to the meeting at
which directors are to be elected. The notice procedure also provides that at
an annual meeting only such business may be conducted as properly has been
brought before the meeting. This can be done by, or at the direction of, the
board, any committee appointed by the board, or by a stockholder who has given
timely written notice to our secretary of his intention to bring such business
before the meeting. Under the notice procedure, notice of stockholder
nominations or proposals to be made at an annual or special meeting must be
received by us not less than 75 days nor more than 90 days prior to the
scheduled date of the meeting. If less than 70 days' notice or prior public
disclosure of the date of the meeting is given, then the notice must be given
no later than the 15th day following the earlier of the day the notice was
mailed or the day the public disclosure was made. These notices must contain
specified information as described in the bylaws.
63
<PAGE>
The notice procedure affords the board an opportunity to consider the
qualifications of proposed director nominees or the merit of stockholder
proposals and, to the extent deemed appropriate by the board, to inform
stockholders about those matters. The notice procedure also provides a more
orderly process for conducting annual meetings of stockholders.
The Bylaws do not give the board any power to approve or disapprove
stockholder nominations for the election of directors or proposals for action.
Nevertheless, the foregoing provisions may have the effect of precluding a
contest for the election of directors or the consideration of stockholder
proposals. These provisions also may have the effect of discouraging or
deterring a third party from conducting a solicitation of proxies to elect its
own slate of directors or to approve its own proposal. The provisions may have
these effects regardless of whether consideration of such nominees or proposals
might be harmful or beneficial to us and our stockholders.
Delaware Law
We are a Delaware corporation and subject to Section 203 of the Delaware
General Corporation Law, an anti-takeover law. In general, Section 203 prevents
an "interested stockholder," which is defined generally as a person owning 15%
or more of a corporation's outstanding voting stock, from engaging in a
"business combination" with a Delaware corporation for three years following
the date on which the person became an interested stockholder. This prohibition
is subject to exceptions, such as the approval of the business combination by
the board of directors and the holders of at least two-thirds of the
outstanding shares of voting stock not owned by the interested stockholder. The
existence of Section 203 would be expected to have an anti-takeover effect. For
example, its existence would possibly inhibit takeover attempts that might
result in a premium over the market price being paid for the shares of common
stock held by stockholders.
Limitation of Liability and Indemnification Matters
Pursuant to the provisions of the Delaware General Corporation Law, we have
adopted provisions in our Amended and Restated Certificate of Incorporation
that provide that our directors shall not be personally liable for monetary
damages to us or our stockholders for a breach of fiduciary duty as a director,
except for liability as a result of:
. a breach of the director's duty of loyalty to us or our stockholders
. acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law
. an act related to an unlawful stock repurchase or payment of a dividend
under Section 174 of the Delaware General Corporation Law
. transactions from which the director derived an improper personal
benefit.
This limitation of liability does not affect the availability of equitable
remedies such as injunctive relief or rescission. Nevertheless, this charter
provision may have the effect of reducing the likelihood of derivative
litigation being instituted against members of the board. Furthermore, it may
discourage or deter our stockholders or management from bringing a lawsuit
against board members for breaches of fiduciary duty, even though such an
action, if successful, might benefit us and our stockholders.
Our Bylaws require us to indemnify our officers and directors and permit us
to indemnify our other agents, by agreement or otherwise, to the fullest extent
permitted under Delaware law. We intend to enter into separate indemnification
agreements with our directors and officers that may be broader than the
specific indemnification provisions contained in the Delaware General
Corporation Law. The indemnification agreements may require us, among other
things, to indemnify the officers and directors against liabilities, other than
liabilities arising from willful misconduct of a culpable nature, that may
arise by reason of their status or service as directors or officers. These
agreements also may require us to advance the expenses incurred by the
64
<PAGE>
officers and directors as a result of any proceeding against them as to which
they could be indemnified, and to obtain directors' and officers' insurance if
available on reasonable terms.
Transfer Agent
Our transfer agent and registrar for our common stock is American Stock
Transfer & Trust Company, New York, New York.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the acquisitions of our companies and this offering,
9,474,919 shares of common stock will be outstanding. The 6,250,000 shares of
common stock we are offering, other than shares purchased by our affiliates,
will be freely tradeable without restriction or further registration under the
Securities Act. The remaining shares may not be resold except in transactions
registered under the Securities Act, or pursuant to an available exemption from
registration. We and each of our officers, directors, persons who have agreed
to serve as directors and stockholders have agreed not to offer, pledge, sell,
contract to sell, or otherwise transfer or dispose of, directly or indirectly,
any shares of common stock or any securities convertible into or exercisable or
exchangeable for common stock for a period of six months after the date of this
prospectus without the prior written consent of BancBoston Robertson Stephens.
In addition, the stockholders of our companies have agreed not to offer,
pledge, sell, contract to sell, or otherwise transfer or dispose of, directly
or indirectly, the shares they acquire in connection with the acquisitions of
our companies for a period of one year after the date of this prospectus.
During the lock-up period, we will be permitted to grant options to purchase
shares of common stock pursuant to our stock option plan, issue shares of
common stock upon the exercise of options granted pursuant to our stock option
plan, and issue shares of common stock to finance acquisitions.
During the lock-up period, we have agreed not to file any registration
statement with respect to any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock without
BancBoston Robertson Stephens's prior written consent, except for the
registration of shares of common stock to be issued upon the exercise of stock
options under our stock option plan. After completion of this offering, options
to purchase 847,487 shares of common stock will be outstanding and an
additional 1,152,513 shares of common stock will be reserved for issuance
pursuant to our stock option plan. We intend to register under the Securities
Act all of the shares of common stock underlying such options.
We have provided registration rights to some of our stockholders, which
means that those stockholders may sell their shares as part of our registered
public offerings. Those stockholders may also require that we register their
shares for a public offering. No stockholder has the right to include shares in
this initial public offering.
We cannot predict the effect, if any, that future sales of shares of common
stock, or the availability of shares for future sale, will have on the market
price of the common stock prevailing from time to time. Sales of substantial
amounts of common stock in the market after this offering could adversely
affect prevailing market prices for the common stock and could adversely affect
the trading price of our common stock and our ability to raise additional
capital in the future.
65
<PAGE>
UNDERWRITING
The underwriters named below, acting through their representatives,
BancBoston Robertson Stephens Inc., The Robinson-Humphrey Company, LLC and
Thomas Weisel Partners LLC, have severally agreed with us, subject to the terms
and conditions set forth in the underwriting agreement, to purchase from us the
number of shares of common stock set forth opposite their names below. The
underwriters are committed to purchase and pay for all such shares if any are
purchased.
<TABLE>
<CAPTION>
Number
Underwriter of Shares
----------- ---------
<S> <C>
BancBoston Robertson Stephens Inc.................................
The Robinson-Humphrey Company, LLC................................
Thomas Weisel Partners LLC........................................
---------
Total........................................................... 6,250,000
=========
</TABLE>
The representatives have advised us that the underwriters propose initially
to offer the shares of common stock to the public on the terms set forth on the
cover page of this prospectus. The underwriters may allow selected dealers a
concession of not more than $0.XX per share; and the underwriters may allow,
and the dealers may reallow, a concession of not more than $0.XX per share to
other dealers. After this offering, the initial public offering price and other
selling terms may be changed by the representatives. The common stock is
offered subject to receipt and acceptance by the underwriters, and to other
conditions, including the right to reject orders in whole or in part.
Over-allotment Option. We have granted to the underwriters an option,
exercisable for the 30-day period immediately following the date of this
prospectus, to purchase up to a maximum of 937,500 additional shares of common
stock to cover over-allotments, if any, at the same price per share as the
initial shares to be purchased by the underwriters. To the extent that the
underwriters exercise this over-allotment option, they will be committed,
subject to closing conditions, to purchase such additional shares in
approximately the same proportion as set forth in the above table. The
underwriters may purchase these shares only to cover over-allotments made in
connection with this offering.
Indemnity. The underwriting agreement contains covenants of indemnity among
the underwriters and us against civil liabilities, including liabilities under
the Securities Act and liabilities arising from breaches of representations and
warranties contained in the underwriting agreement.
Lock-up Agreements. We and each of our officers, directors, persons who
have agreed to serve as directors and stockholders have agreed not to offer,
pledge, sell, contract to sell, or otherwise transfer or dispose of, directly
or indirectly, any shares of common stock or any securities convertible into or
exercisable or exchangeable for common stock for a period of 180 days after the
date of this prospectus without the prior written consent of BancBoston
Robertson Stephens Inc. The restrictions described in the previous paragraph do
not apply to:
. the sale to the underwriters of the shares of common stock under the
underwriting agreement
. the grant by us of options to purchase shares of common stock pursuant
to our stock option plan or the exercise of an option or a warrant or
the conversion of a security outstanding on the date of this prospectus
which is described in the prospectus
. the issuance by us of shares of common stock to finance acquisitions
In addition, the former stockholders of our companies have agreed with us
not to offer, pledge, sell, contract to sell, or otherwise transfer or dispose
of, directly or indirectly, any of the shares they acquire in connection with
the acquisitions of our companies for a period of one year after the date of
this prospectus.
66
<PAGE>
The underwriters have informed us that they do not intend to confirm sales
to any accounts over which they exercise discretionary authority.
Stabilization. The Representatives have advised us that, pursuant to
Regulation M under the Securities Act, some persons participating in this
offering may engage in transactions, including stabilizing bids, syndicate
covering transactions or the imposition of penalty bids, that may have the
effect of stabilizing or maintaining the market price of the common stock at a
level above that which might otherwise prevail in the open market. A
"stabilizing bid" is a bid for or the purchase of the common stock on behalf of
the underwriters for the purpose of fixing or maintaining the price of the
common stock. A "syndicate covering transaction" is the bid for or the purchase
of the common stock on behalf of the underwriters to reduce a short position
incurred by the underwriters in connection with this offering. A "penalty bid"
is an arrangement permitting the Representatives to reclaim the selling
concession otherwise accruing to an underwriter or syndicate member in
connection with this offering if the common stock originally sold by that
underwriter or syndicate member is purchased by the Representatives in a
syndicate covering transaction and has therefore not been effectively placed by
that underwriter or syndicate member. The Representatives have advised us that
these transactions may be effected on the Nasdaq National Market or otherwise,
and, if commenced, may be discontinued at any time.
No Prior Public Market. Prior to this offering, there has been no public
market for our common stock. Consequently, the initial public offering price
for the common stock offered hereby will be determined through negotiations
between us and the Representatives. Among the factors to be considered in the
negotiations are prevailing market conditions, our financial information,
market valuations of other companies that we and the Representatives believe to
be comparable to us, estimates of our business potential, the present state of
our development and other factors deemed relevant.
New Underwriter. Thomas Weisel Partners LLC, one of the representatives of
the underwriters, was organized and registered as a broker-dealer in December
1998. Since December 1998, Thomas Weisel Partners has been named as a lead or
co-manager on 20 filed public offerings of equity securities, of which seven
have been completed, and has acted as a syndicate member in an additional ten
public offerings of equity securities. Thomas Weisel Partners does not have any
material relationship with us or any of our officers, directors or other
controlling persons, except with respect to its contractual relationship with
us pursuant to the underwriting agreement entered into in connection with this
offering.
LEGAL MATTERS
The legality of the common stock we are offering will be passed on by
Howard, Rice, Nemerovski, Canady, Falk & Rabkin, A Professional Corporation,
Palo Alto, California. A partnership of directors of Howard, Rice own in the
aggregate 8,236 shares of our Series A Preferred Stock. The legality of the
common stock will be passed on for the underwriters by Brobeck, Phleger &
Harrison LLP, Palo Alto, California.
EXPERTS
Our financial statements and those of each of our companies included in
this prospectus and elsewhere in this registration statement, to the extent and
for the periods indicated in their reports, have been audited by Arthur
Andersen LLP, independent public accountants, as indicated in their reports
with respect thereto, and are included herein in reliance upon Arthur
Andersen's authority as an expert in accounting and auditing in giving said
reports.
67
<PAGE>
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act, with respect to the common
stock we are offering for sale. While the prospectus, which forms a part of the
registration statement, contains the information that is material relative to
this offering, it does not contain all of the information set forth in the
registration statement. For further information with respect to us and the
common stock, reference is made to the registration statement. Statements
contained in this prospectus as to the contents of any contract or other
document are not necessarily complete, and, in each instance, reference is made
to the copy of the contract or document filed as an exhibit to the registration
statement. Copies of the registration statement may be examined without charge
at the Public Reference Section of the Securities and Exchange Commission, 450
Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and the Commission's
Regional Offices located at Seven World Trade Center, 13th Floor, New York, New
York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of all or any portion of the registration statement can
be obtained from the Public Reference Section of the Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549, upon payment of fees prescribed by the
Commission. The Commission maintains a World Wide Web site that contains
registration statements, reports, proxy and information statements and other
information regarding registrants (including us) that file electronically with
the Commission. The address of such World Wide Web site is http://www.sec.gov.
68
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
DIRECTCHEF, INC. AND FOUNDING COMPANIES
Unaudited Pro Forma Combined Financial Statements--Basis of
Presentation......................................................... F-3
Unaudited Pro Forma Combined Balance Sheets............................ F-4
Unaudited Pro Forma Combined Statements of Operations.................. F-5
Notes to Unaudited Pro Forma Combined Financial Statements............. F-7
DIRECTCHEF, INC.
Report of Independent Public Accountants............................... F-9
Balance Sheet.......................................................... F-10
Statement of Operations................................................ F-11
Statements of Stockholders' Equity..................................... F-12
Statement of Cash Flows................................................ F-13
Notes to Financial Statements.......................................... F-14
Balance Sheets......................................................... F-18
Statement of Operations................................................ F-19
Statement of Stockholders' Equity...................................... F-20
Statement of Cash Flows................................................ F-21
Notes to Condensed Financial Statements................................ F-22
FOUNDING COMPANIES
RAYGAL, INC.
Report of Independent Public Accountants............................... F-23
Balance Sheets......................................................... F-24
Statements of Income................................................... F-25
Statements of Stockholders' Equity..................................... F-26
Statements of Cash Flows............................................... F-27
Notes to Financial Statements.......................................... F-28
Balance Sheets......................................................... F-33
Statements of Income................................................... F-34
Statement of Stockholders' Equity...................................... F-35
Statements of Cash Flows............................................... F-36
Notes to Financial Statements.......................................... F-37
EAST BAY RESTAURANT SUPPLY, INC.
Report of Independent Public Accountants............................... F-39
Balance Sheets as of September 30, 1998 and 1997....................... F-40
Statements of Income for the Years Ended September 30, 1998, 1997 and
1996................................................................. F-41
Statements of Stockholders' Equity for the Years Ended September 30,
1998, 1997 and 1996.................................................. F-42
Statements of Cash Flows for the Years Ended September 30, 1998, 1997
and 1996............................................................. F-43
Notes to Financial Statements.......................................... F-44
Balance Sheets as of March 31, 1999 and September 30, 1998............. F-49
Statements of Income for the Six Months Ended March 31, 1999 and 1998.. F-50
Statement of Stockholders' Equity for the Six Months Ended March 31,
1999................................................................. F-51
Statements of Cash Flows for the Six Months Ended March 31, 1999 and
1998................................................................. F-52
Notes to Condensed Financial Statements................................ F-53
</TABLE>
F-1
<PAGE>
INDEX TO FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Page
-----
<S> <C>
ECONOMY RESTAURANT FIXTURES, INC.
Report of Independent Public Accountants............................... F-54
Balance Sheets......................................................... F-55
Statements of Income................................................... F-56
Statements of Stockholders' Equity..................................... F-57
Statements of Cash Flows............................................... F-58
Notes to Financial Statements.......................................... F-59
Balance Sheets......................................................... F-64
Statements of Income................................................... F-65
Statement of Stockholders' Equity...................................... F-66
Statements of Cash Flows............................................... F-67
Notes to Condensed Financial Statements................................ F-68
CURTIS RESTAURANT EQUIPMENT, INC.
Report of Independent Public Accountants............................... F-69
Balance Sheets......................................................... F-70
Statements of Income................................................... F-71
Statements of Stockholders' Equity..................................... F-72
Statements of Cash Flows............................................... F-73
Notes to Financial Statements.......................................... F-74
Balance Sheets......................................................... F-81
Statements of Income................................................... F-82
Statement of Stockholders' Equity...................................... F-83
Statements of Cash Flows............................................... F-84
Notes to Condensed Financial Statements................................ F-85
BINTZ DISTRIBUTING CO.
Report of Independent Public Accountants............................... F-86
Balance Sheets......................................................... F-87
Statements of Operations............................................... F-88
Statements of Stockholders' Equity..................................... F-89
Statements of Cash Flows............................................... F-90
Notes to Financial Statements.......................................... F-92
Balance Sheets......................................................... F-98
Statements of Operations............................................... F-99
Statement of Stockholders' Equity...................................... F-100
Statements of Cash Flows............................................... F-101
Notes to Financial Statements.......................................... F-102
CASTINO RESTAURANT EQUIPMENT AND SUPPLY, INC.
Report of Independent Public Accountants............................... F-103
Balance Sheets......................................................... F-104
Statements of Income................................................... F-105
Statements of Stockholder's Equity..................................... F-106
Statements of Cash Flows............................................... F-107
Notes to Financial Statements.......................................... F-108
Balance Sheets......................................................... F-114
Statements of Income................................................... F-115
Statement of Stockholders' Equity...................................... F-116
Statements of Cash Flows............................................... F-117
Notes to Condensed Financial Statements................................ F-118
</TABLE>
F-2
<PAGE>
DIRECTCHEF, INC. AND FOUNDING COMPANIES
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
DirectChef will consummate the acquisitions of the founding companies
simultaneously with consummation of this offering. All of the acquisitions will
be accounted for using the purchase method of accounting. DirectChef has been
identified as the accounting acquirer, in accordance with Staff Accounting
Bulletin ("SAB") 97 for financial statement presentation purposes since its
former common stockholders will have the largest portion of the voting rights
of the combined corporation.
The unaudited pro forma combined statement of operations gives effect to
the acquisitions of the founding companies and consummation of this offering as
if these events occurred at the beginning of each period presented. The
unaudited pro forma combined balance sheet gives effect to these transactions
as if they occurred on March 31, 1999.
To the extent the owners of the founding companies have contractually
agreed to reductions in salary, bonuses and benefits and rent, these reductions
have been reflected in the unaudited pro forma combined statements of
operations. With respect to other potential cost savings, DirectChef has not
and cannot quantify these savings until completion of the acquisitions. It is
anticipated that these savings will be offset in part by costs related to
DirectChef's new corporate management and by the costs associated with being a
public company. However, because these costs cannot be quantified at this time,
they have not been included in the unaudited pro forma combined financial
statements of the Company.
The pro forma adjustments are based on estimates, available information and
certain assumptions, and may be revised, as additional information becomes
available. The pro forma financial information does not purport to represent
what DirectChef's financial position or results of operations would actually
have been had such transactions occurred on these dates and are not necessarily
representative of DirectChef's financial position or results of operations for
any future period. Since the founding companies were not under common control
or management during the periods presented, historical combined results may not
be comparable to, or indicative of, future performance. See "Risk Factors"
included elsewhere herein. The unaudited pro forma combined financial
statements should be read in conjunction with the other financial statements
and notes thereto included elsewhere in this Prospectus.
F-3
<PAGE>
DIRECTCHEF, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEETS
March 31, 1999
(In thousands)
<TABLE>
<CAPTION>
Pro Forma Pro
Acquisition Forma
DirectChef Raygal EastBay Economy Curtis Bintz Castino Adjustments Combined
---------- ------ ------- ------- ------ ------ ------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and cash
equivalents............ $ 214 $1,247 $ 2 $ 310 $ -- $ -- $ 5 $20,774 (a)(b)(c) $22,552
Accounts receivable,
net.................... -- -- 3,313 2,197 3,591 2,797 638 -- 12,536
Contracts receivable.... -- 4,799 -- -- -- -- -- -- 4,799
Related party notes
receivable............. -- 77 -- -- -- -- -- (77)(c) --
Costs and estimated
earnings in excess of
billings............... -- 1,859 -- -- -- -- -- -- 1,859
Inventories............. -- -- 2,415 3,422 1,078 1,027 637 593 (b) 9,172
Deferred tax asset...... -- -- 195 -- -- -- 14 -- 209
Prepaid expenses and
other current assets... 1,651 595 170 90 82 17 36 (1,651)(a) 990
------ ------ ------ ------ ------ ------ ------ ------- -------
Total Current Assets.. 1,865 8,577 6,095 6,019 4,751 3,841 1,330 19,639 52,117
Property, plant and
equipment, net......... -- 279 360 194 229 339 158 -- 1,559
Related party notes
receivable............. -- -- -- -- -- -- 89 (89)(c) --
Goodwill, net........... -- -- -- -- -- -- -- 44,665 (b)(d) 44,665
Deferred tax asset...... -- -- -- -- -- -- 37 -- 37
Other assets............ -- 81 247 44 159 8 -- 539
------ ------ ------ ------ ------ ------ ------ ------- -------
Total Assets............ $1,865 $8,937 $6,702 $6,257 $5,139 $4,180 $1,622 $64,215 $98,917
====== ====== ====== ====== ====== ====== ====== ======= =======
LIABILITIES AND
STOCKHOLDERS' EQUITY
Short term borrowings... $ -- $ -- $ 370 $ -- $ 900 $1,364 $ 210 $ -- $ 2,844
Accounts payable........ -- 3,925 2,568 2,416 1,324 857 545 -- 11,635
Accrued liabilities..... 856 314 1,426 342 140 193 164 (856)(a) 2,579
Customer deposits....... -- -- 224 827 -- 118 191 -- 1,360
Deferred tax liability.. -- -- 3 -- 200 -- -- -- 203
Billings in excess of
costs and estimated
earnings............... -- 1,550 -- -- -- -- -- -- 1,550
Current portion of
related party notes
payable................ -- -- 21 -- -- -- -- (21)(c) --
Current portion of notes
payable................ -- -- 28 206 16 8 50 -- 308
Current portion of
obligations under
capital leases......... -- -- -- -- 46 7 -- -- 53
Other................... -- 134 -- -- 261 -- -- 2,440 (d) 2,835
------ ------ ------ ------ ------ ------ ------ ------- -------
Total Current
Liabilities.......... 856 5,923 4,640 3,791 2,887 2,547 1,160 1,563 23,367
Related party notes
payable................ -- -- -- -- -- -- -- -- --
Notes payable, excluding
current portion........ -- -- 57 21 20 7 89 -- 194
Obligations under
capital leases,
excluding current
portion................ -- -- -- -- 35 1 -- -- 36
------ ------ ------ ------ ------ ------ ------ ------- -------
Total Liabilities....... 856 5,923 4,697 3,812 2,942 2,555 1,249 1,563 23,597
Stockholders' Equity
Preferred stock........ -- -- -- -- -- -- -- -- --
Common stock........... 2 10 90 5 58 350 4 (510)(a)(b) 9
Additional paid-in-
capital............... 1,313 -- -- -- -- -- -- 74,304 (a)(b) 75,617
Retained earnings
(accumulated
deficit).............. (306) 3,004 1,915 2,440 2,139 1,275 369 (11,142)(a) (306)
------ ------ ------ ------ ------ ------ ------ ------- -------
Total Stockholders'
Equity............... 1,009 3,014 2,005 2,445 2,197 1,625 373 62,652 75,320
------ ------ ------ ------ ------ ------ ------ ------- -------
Total Liabilities and
Stockholders' Equity... $1,865 $8,937 $6,702 $6,257 $5,139 $4,180 $1,622 $64,215 $98,917
====== ====== ====== ====== ====== ====== ====== ======= =======
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
combined balance sheets.
F-4
<PAGE>
DIRECTCHEF, INC.
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
Year Ended December 31, 1998
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Pro Forma
East Acquisition Pro Forma
DirectChef Raygal Bay Economy Curtis Bintz Castino Adjustments Combined
---------- ------- ------- ------- ------- ------- ------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenue............. $ -- $33,038 $29,916 $22,703 $20,279 $17,835 $5,929 $ -- $ 129,700
Cost of revenue......... -- 28,793 23,964 15,976 16,526 14,647 4,386 593 (a) 104,885
----- ------- ------- ------- ------- ------- ------ ------- ---------
Gross profit.......... -- 4,245 5,952 6,727 3,753 3,188 1,543 (593) 24,815
Selling, general and
administrative
expenses............... 52 2,520 5,388 5,811 3,103 2,448 1,526 (731)(b) 20,117
Goodwill amortization... -- -- -- -- -- -- -- 1,107 (d) 1,107
----- ------- ------- ------- ------- ------- ------ ------- ---------
Income (loss) from
operations............. (52) 1,725 564 916 650 740 17 (969) 3,591
Other income (expense)
Interest, net......... -- 42 (53) 29 (109) (125) (23) -- (239)
Other................. -- 39 (2) 46 15 1 29 -- 128
----- ------- ------- ------- ------- ------- ------ ------- ---------
Income (loss) before
income taxes........... (52) 1,806 509 991 556 616 23 (969) 3,480
Income taxes............ -- 17 225 17 218 -- 7 1,121 (e) 1,605
----- ------- ------- ------- ------- ------- ------ ------- ---------
Net income (loss)....... $ (52) $ 1,789 $ 284 $ 974 $ 338 $ 616 $ 16 $(2,090) $ 1,875
===== ======= ======= ======= ======= ======= ====== ======= =========
Basic earnings per
share.................. $ 0.20
=========
Diluted earnings per
share.................. $ 0.19
=========
Basic weighted average
shares outstanding..... 9,474,919(f)
=========
Diluted weighted average
shares outstanding..... 9,856,042(f)
=========
</TABLE>
The accompanying notes are integral part of these unaudited pro forma combined
financial statements
F-5
<PAGE>
DIRECTCHEF, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
For the Three Months Ended March 31, 1999
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Pro Forma
Acquisition Pro Forma
DirectChef Raygal East Bay Economy Curtis Bintz Castino Adjustments Combined
---------- ------ -------- ------- ------ ------ ------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenue............. $ -- $8,198 $7,466 $4,945 $4,305 $4,358 $1,114 $ -- $ 30,386
Cost of revenue......... -- 7,324 5,731 3,611 3,486 3,538 824 148 (a) 24,662
----- ------ ------ ------ ------ ------ ------ ----- ---------
Gross profit.......... -- 874 1,735 1,334 819 820 290 (148) 5,724
Selling, general and
administrative
expenses............... 56 583 1,626 1,351 739 535 383 (200)(b) 5,073
Other costs............. 198 -- -- -- -- -- -- (198)(c) --
Goodwill amortization... -- -- -- -- -- -- -- 279 (d) 279
----- ------ ------ ------ ------ ------ ------ ----- ---------
Income (loss) from
operations........... (254) 291 109 (17) 80 285 (93) (29) 372
Other income (expense)
Interest, net......... -- 4 (6) -- (46) (29) (4) -- (81)
Other................. -- 3 -- -- 7 -- 27 -- 37
----- ------ ------ ------ ------ ------ ------ ----- ---------
Income (loss) before
income taxes........... (254) 298 103 (17) 41 256 (70) (29) 328
Income taxes............ -- 3 57 5 17 -- (19) 124 (e) 187
----- ------ ------ ------ ------ ------ ------ ----- ---------
Net income (loss)....... $(254) $ 295 $ 46 $ (22) $ 24 $ 256 $ (51) $(153) $ 141
===== ====== ====== ====== ====== ====== ====== ===== =========
Basic earnings per
share.................. $ 0.01
=========
Diluted earnings per
share.................. $ 0.01
=========
Basic weighted average
shares outstanding..... 9,474,919(f)
=========
Diluted weighted average
shares outstanding..... 9,856,042(f)
=========
</TABLE>
The accompanying notes are integral part of these unaudited pro forma combined
financial statements
F-6
<PAGE>
DIRECTCHEF, INC. AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
1. General
DirectChef, Inc. (the "Company") was founded to become a single-source
provider of foodservice equipment and supplies to local, regional and national
customers in the hospitality industry. DirectChef has conducted no operations
to date and will acquire the founding companies simultaneously with and as a
condition to the consummation of this offering.
The historical financial statements reflect the financial position and
results of operations of the founding companies and were derived from the
respective financial statements of the founding companies included elsewhere
herein. The information included in these financial statements for the
individual founding companies is as of March 31, 1999 and for the three months
ended March 31, 1999 and for the year ended December 31, 1998 with the
exception of East Bay for which the information is for the fiscal year ended
September 30, 1998. Results of operations for Castino, whose fiscal year ends
March 31, are for the twelve months ended December 31, 1998.
2. Acquisitions of Founding Companies
Simultaneously with and as a condition to consummation of this offering,
DirectChef will acquire all of the founding companies. All of the acquisitions
will be accounted for using the purchase method of accounting with DirectChef
being treated, in accordance with SAB 97, as the accounting acquirer since its
former common shareholders will have the largest portion of the voting rights
of the combined corporation.
The following table sets forth the consideration to be paid in cash and in
shares of Common Stock to the stockholders of each of the founding companies
(without giving effect to any indebtedness of the founding companies that may
be assumed by the Company). For purposes of computing the estimated purchase
price for accounting purposes, the value of shares of Common Stock was
determined using an estimated fair value of $9.90 per share (or $12.6 million),
which represents a discount of 10.0% from the assumed initial public offering
price of $11.00 per share due to restrictions on sale and transferability of
the shares issued. The total estimated purchase price of $54.5 million for the
acquisitions is based upon preliminary estimates and is subject to certain
price adjustments at and following closing of the acquisitions. The Company
believes that the final estimated purchase price will not materially differ
from the preliminary estimate.
<TABLE>
<CAPTION>
Shares of
Common Stock Cash
------------ --------------
(In thousands)
<S> <C> <C>
Raygal........................................... 116,667 $12,600
East Bay......................................... 263,021 9,469
Economy.......................................... 343,678 10,826
Curtis........................................... 270,833 3,250
Bintz............................................ 191,538 4,268
Castino.......................................... 83,333 1,000
--------- -------
1,269,070 $41,413
========= =======
</TABLE>
The consideration to be paid for Raygal includes amounts payable under
Raygal phantom stock agreements.
3. Unaudited Pro Forma Combined Balance Sheet Adjustments
(a) Reflects cash proceeds of $62.5 million from the issuance of 6,250,000
shares of DirectChef Common Stock, net of estimated offering costs of
$6.2 million payable at closing (based on the initial public offering
price of $11.00 per share) and elimination of the founding companies'
equity
F-7
<PAGE>
DIRECTCHEF, INC. AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS--(Continued)
accounts. Offering costs consist primarily of underwriting discounts
and commissions, accounting fees, legal fees and printing expenses.
Acquisition costs consist primarily of legal fees. Also reflects charge
to equity for financing costs deferred at March 31, 1999.
(b) Reflects the acquisition of the founding companies by DirectChef for a
total estimated purchase price of $54.5 million consisting of $41.9
million in cash (including $500,000 in transaction costs) and
1,269,070 shares of Common Stock valued at $9.90 per share (or
$12.6 million). The purchase price less the net assets acquired,
including an adjustment to inventories carried on a LIFO basis to fair
market value, results in excess purchase price of $44.7 million. Based
upon management's preliminary analysis, it is anticipated that the
historical value of the assets and liabilities of the acquired
companies, with the exception of the adjustments made for inventories,
will approximate fair value. Management has not identified any other
material tangible or intangible assets to which a portion of the
purchase price could be reasonably allocated. Subsequent to the
Offering, management intends to perform appraisals of all significant
tangible and intangible assets.
(c) Repayment of net balance of related party notes.
(d) Estimated payments to shareholders of certain founding companies
representing: (i) the net income for the period from the end of their
prior fiscal year through the completion date including, where
applicable, the amount of rebates earned during such period; (ii)
distribution of rebates receivable at December 31, 1998; and (iii) an
amount by which the adjusted working capital balance exceeds a
specified amount.
4. Unaudited Pro Forma Combined Statements of Operations Adjustments
(a) To reflect increased inventory value at the beginning of each period
presented.
(b) Includes a reduction, net of corporate office executive salaries, in
the compensation and benefits of the owners of the founding companies
of $647,000 and $177,000 and a net reduction in rent expense of
$84,000 and $23,000 on facilities leased from such owners, to which
such owners have contractually agreed for the year ended December 31,
1998 and the three months ended March 31, 1999, respectively.
(c) Reflects costs written off for transactions not consummated.
(d) Reflects the amortization over a 40 year estimated life of goodwill to
be recorded as a result of the acquisitions, which will be partially
deductible for tax purposes.
(e) Reflects the incremental provision for federal and state income taxes
relating to all entities being combined at an estimated rate of 40.0%
applied to estimated taxable income.
(f) The number of shares used in the calculations of basic and diluted
earnings per share have been derived as follows:
<TABLE>
<CAPTION>
Pro Forma
Combined
---------
<S> <C>
Shares issued in connection with the formation of the Company... 1,639,375
Conversion of Series A Preferred Stock:
Outstanding at December 31, 1998.............................. 182,354
Issued in January 1999........................................ 134,120
Shares issued in this offering.................................. 6,250,000
Shares issued in connection with the acquisitions............... 1,269,070
---------
Basic shares estimated to be outstanding........................ 9,474,919
Incremental effect of options on shares outstanding............. 381,123
---------
Diluted shares estimated to be outstanding...................... 9,856,042
=========
</TABLE>
F-8
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To DirectChef, Inc.:
We have audited the accompanying balance sheet of DirectChef, Inc. as of
December 31, 1998, and the related statements of operations, stockholders'
equity, and cash flows for the period from June 17, 1998 (inception) through
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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of DirectChef, Inc. as of
December 31, 1998 and the results of its operations and its cash flows for the
period from June 17, 1998 (inception) through December 31, 1998 in conformity
with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Los Angeles, California
February 20, 1999
F-9
<PAGE>
DIRECTCHEF, INC.
BALANCE SHEET
December 31, 1998
<TABLE>
<CAPTION>
(In
thousands,
except
share
and per
share
amounts)
<S> <C>
ASSETS
Current Assets:
Cash .............................................................. $ 211
Deferred offering costs............................................ 980
------
Total assets.................................................... $1,191
======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accrued liabilities................................................ $ 460
------
Total liabilities............................................... 460
------
Stockholders' Equity:
Series A Preferred Stock $0.001 par value:
Authorized--500,000 shares at December 31, 1998,
Issued--182,354 shares at December 31, 1998..................... --
Common stock, $0.001 par value:
Authorized--3,500,000 shares at December 31, 1998,
Issued--1,639,375 at December 31, 1998.......................... 2
Additional paid-in capital......................................... 781
Accumulated deficit................................................ (52)
------
Total Stockholders' Equity........................................... 731
------
Total Liabilities and Stockholders' Equity........................... $1,191
======
</TABLE>
The accompanying notes are an integral part of this balance sheet.
F-10
<PAGE>
DIRECTCHEF, INC.
STATEMENT OF OPERATIONS
For the Period from June 17, 1998 (Inception) through December 31, 1998
<TABLE>
<CAPTION>
(In thousands,
except share
and per share
amounts)
<S> <C>
Revenue.......................................................... $ --
General and administrative expenses.............................. (52)
----------
Net loss......................................................... $ (52)
==========
Basic loss per share............................................. $ (0.03)
==========
Diluted loss per share........................................... $ (0.03)
==========
Basic weighted average shares outstanding........................ 1,639,375
==========
Diluted weighted average shares outstanding...................... 1,639,375
==========
</TABLE>
The accompanying notes are an integral part of this statement.
F-11
<PAGE>
DIRECTCHEF, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
For the Period from June 17, 1998 (Inception) through December 31, 1998
<TABLE>
<CAPTION>
Series A
Common Stock Preferred Stock Additional Total
---------------- ----------------- Paid-In Accumulated Stockholders'
Shares Amount Shares Amount Capital Deficit Equity
--------- ------ --------- ------- ---------- ----------- -------------
(In thousands, except shares)
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Capitalization.. 1,639,375 $ 2 182,354 $ -- $781 $ -- $783
Net loss.............. -- -- -- -- -- (52) (52)
--------- --- --------- ------ ---- ---- ----
Balance: December 31,
1998.................. 1,639,375 $ 2 182,354 $ -- $781 $(52) $731
========= === ========= ====== ==== ==== ====
</TABLE>
The accompanying notes are an integral part of this statement.
F-12
<PAGE>
DIRECTCHEF, INC.
STATEMENT OF CASH FLOWS
For the Period from June 17, 1998 (Inception) through December 31, 1998
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
Cash Flows From Operating Activities:
Net loss....................................................... $ (52)
-----
Net cash used operating activities.......................... (52)
-----
Cash Flows From Investing Activities:
Deferred offering costs........................................ (980)
Increase in accrued liabilities................................ 460
-----
Net cash used in investing activities....................... (520)
-----
Cash Flows From Financing Activities:
Proceeds from the issuance of stock............................ 783
-----
Net cash provided by financing activities...................... 783
-----
Net Increase in Cash and Cash Equivalents........................ 211
Cash, at beginning of period..................................... --
-----
Cash, at end of period........................................... $ 211
=====
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest......................................... $ --
Cash paid for income taxes..................................... $ --
</TABLE>
The accompanying notes are an integral part of this statement.
F-13
<PAGE>
DIRECTCHEF, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
1. Business and Organization
DirectChef, Inc. (formerly Hospitality Design & Supply, Inc.), a Delaware
corporation, (the "Company") was formed in June 1998 to become a full-service
national provider of foodservice equipment, supplies and related services. The
Company is in negotiations to acquire six companies who will provide a wide
range of products and services to customers in the foodservice industry. These
acquisitions are contingent on and will occur simultaneously with the
consummation of an initial public offering (the "Offering") of its common
stock. The Company intends to continue to acquire similar companies to expand
its national operations.
All of the Company's activities to date relate to the Offering and the
acquisitions. The Company is dependent on the Offering to execute the pending
acquisitions, however there is no assurance that the pending acquisitions
discussed below will be completed or that the Company will be able to generate
future operating revenue. The Company's future success is dependent upon a
number of factors which include, among other things, the ability to integrate
operations, obtain sufficient acquisition financing, successfully manage growth
and attract and retain quality management.
2. Summary of Significant Accounting Policies
The following is a summary of significant accounting policies followed in
the preparation of these financial statements.
Use Of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash And Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Long-lived Assets
The Company reviews its long-lived assets, including goodwill, in
accordance with Statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting for the Impairment of Long-lived Assets and Long-lived Assets to be
Disposed of." SFAS No. 121 requires impairment losses to be recorded on long-
lived assets used in operations where indications of impairment are present and
the undiscounted cash flows estimated to be generated by those assets are less
than the assets' carrying amounts.
Income Taxes
Income taxes are accounted for in accordance with Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes". Under SFAS
No. 109, an asset and liability approach is required. Such approach results in
the recognition of deferred tax assets and liabilities for the expected future
tax consequences of temporary differences between the financial statement and
income tax bases of assets and liabilities. As required by SFAS No. 109, the
Company has established a full valuation allowance against any income tax
carryforward benefits, because their realization is dependent on future
earnings. Consequently, no provision or benefit for federal income taxes has
been recorded in the statement of operations.
F-14
<PAGE>
DIRECTCHEF, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Stock Based Compensation
Statement of Financial Accounting Standards No. 123, Accounting for Stock-
Based Compensation, allows the companies to choose between a new fair value-
based method of accounting for employee stock options or similar equity
instruments and the current intrinsic value-based method of accounting
prescribed in Accounting Principles Board Opinion No. 25 ("APB No. 25").
Companies electing to remain with the accounting in APB No. 25 must make pro
forma disclosure of net income and earnings per share as if the fair value
method of accounting had been applied. The Company applies the intrinsic value-
based method.
Comprehensive Income
In 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards to measure all changes in equity
that result from transactions and other economic events other than transactions
with owners. Comprehensive income is the total of net income and all other non-
owner changes in equity. Other than net loss, the Company has no comprehensive
income.
New Accounting Pronouncements
In 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which requires companies to report
financial and descriptive information about its reportable operating segments
in the interim and annual financial statements. The Company adopted SFAS No.
131 in 1998 and its adoption did not have a significant impact on the financial
statements or related footnote disclosures.
In 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits," which standardizes the disclosure
requirements for pensions and other postretirement benefits to the extent
practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis, and eliminates certain disclosures that are no longer useful. The
Company adopted SFAS No. 132 in 1998 and its adoption did not have a
significant impact on the financial statements or related footnote disclosures.
In 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 established a new accounting
model for derivative instruments and hedging activities. The Company will adopt
SFAS No. 133 in the year ending December 31, 2000. The Company believes that
adoption of SFAS No. 133 will not significantly affect the Company's financial
position, results of operations, or financial statement presentation.
3. Company Stock
a. Series A Preferred Stock:
In addition to common stock, the Company also issued 182,354 shares of
convertible Series A Preferred Stock (the "convertible preferred stock") at a
price of $4.25 per share (par value of $0.001 per share). 11,765 shares of the
above convertible preferred stock were issued to related parties. The holders
of the convertible preferred stock are entitled to receive, when, as and if
declared by the Board of Directors, non cumulative cash dividends at a rate of
$0.425 per annum. Each share of convertible preferred stock may be converted
into one share of common stock of the Company at the option of the holder. The
convertible preferred stock will automatically be converted into one share of
common stock of the Company upon the Offering.
F-15
<PAGE>
DIRECTCHEF, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
b. Common Stock:
In connection with the organization and initial capitalization of
DirectChef, Inc., the Company issued 762,500 shares of common stock, ($0.001
par value) for a price of $0.01 per share to directors, officers, consultants,
other related parties and future directors of the Company. On September 4,
1998, the stockholders approved a 2.15 for one stock split and at December 31,
1998, total common shares of the Company outstanding were 1,639,375 after
adjustment for the stock split.
c. Restricted Stock:
Included in the above common stock issued are 200,000 pre-split and 430,000
post-split shares of restricted stock acquired by the Chief Executive Officer
of the Company. These shares were purchased for $0.01 per share and have a par
value of $0.001 per share. The restricted shares vest fifty percent at the
Offering and fifty percent upon the completion of eighteen months of service
with the Company.
d. Loss per Share:
Loss per share was computed by dividing the net loss by the weighted
average number of shares outstanding, after giving effect to the stock-split
referred to above. The weighted average basic number of shares used in the
computation was 1,639,375.
4. Stock Option Plans
During 1998, the directors and shareholders of the Company approved the
DirectChef, Inc. 1998 Stock Option Plan (the "Plan"). The purpose of the Plan
is to attract and retain qualified directors, officers, employees, independent
contractors, consultants and advisors by providing them with an opportunity to
invest in the Company. The Plan currently provides for the grant of options on
a maximum of 500,000 shares of common stock of the Company and the options have
a term of 10 years.
As of December 31, 1998, 472,500 options had been granted to officers and
consultants of the Company. Vesting of options under the Plan is generally over
a three year period beginning on the date of the grant with certain exceptions
as follows. The 107,500 options granted to the Chairman of the Board during
1998 vested immediately. In addition, 345,000 options were granted to two of
the Company's officers, with 172,500 of these options vesting upon consummation
of the Offering. The remaining options for one of the officers vest at
18 months after consummation of the Offering and for the other officer at 18
months after the employment date.
Pursuant to the disclosure requirements of SFAS No. 123, the weighted
average fair value per share of options granted during the period from June 17,
1998 (inception) to December 31, 1998 was $0.64 as estimated using the Black-
Scholes option pricing model.
The following summarizes additional information regarding stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------- --------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
--------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.01................. 215,000 9.7 $0.01 -- $0.01
$4.25................. 257,500 9.7 4.25 107,500 4.25
------- --- ----- ------- -----
472,500 9.7 $2.32 107,500 $4.25
======= === ===== ======= =====
</TABLE>
F-16
<PAGE>
DIRECTCHEF, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Pro forma net earnings and earnings per share information, as required by
SFAS No. 123, has been determined as if the Company had accounted for employee
stock options under the fair value method prescribed under SFAS No. 123. The
fair value of these options was estimated at grant date using the Black-
Scholes option pricing model with the following assumptions for fiscal 1998:
risk-free interest rates of 5.5 percent; dividend yield of 0 percent; and
expected option life of 6.0 years. There was no expected volatility
incorporated into the assumptions as the Company was privately held at
December 31, 1998.
For the purpose of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the vesting period of the options. The
Company's pro forma net loss for the period from June 17, 1998 (inception)
through December 31, 1998 was $179,000 and the pro forma basic and diluted
loss per sharewas $0.11.
5. Earnings Per Share
In 1998, the Company adopted Statement of Financial Accounting Standards
No. 128 (SFAS 128), "Earnings Per Share." SFAS 128 requires the disclosure of
Basic and Diluted Earnings per Share (EPS). Basic EPS is calculated using
income available to common shareholders divided by the weighted average of
common shares outstanding during the year. Diluted EPS is similar to basic EPS
except that the weighted average of common shares outstanding is increased to
include the number of additional common shares that would have been
outstanding if the dilutive potential common shares, such as options and
convertible preferred stock, had been issued. The treasury stock method is
used to calculate dilutive shares which reduces the gross number of dilutive
shares by the number of shares purchasable from the proceeds of the options
assumed to be exercised. The computation of earnings per share in the
accompanying statement of operations has excluded 299,151 shares of
convertible preferred stock and stock options because they are antidilutive.
6. Subsequent Events (Unaudited)
Subsequent to December 31, 1998, the Company entered into a definitive
agreement to acquire the common stock of six companies (the "founding
companies") to be contingent on and effective simultaneously with the initial
public offering of the common stock of the Company. The acquisitions will be
effected through a combination of cash and common stock of the Company. The
Companies to be acquired are:
. Bintz Distributing Co.
. Castino Restaurant Equipment and Supply, Inc.
. Curtis Restaurant Equipment, Inc.
. East Bay Restaurant Supply, Inc.
. Economy Restaurant Fixtures, Inc.
. Raygal, Inc.
The aggregate consideration to acquire the founding companies is
approximately $41,413,000 in cash and 1,269,070 in shares of common stock.
During January 1999, the Company issued 134,120 shares of Series A
preferred stock at $4.25 per share.
The Company has initiated discussions with banks regarding establishment
of a credit facility, enabling the Company to borrow between $50.0 million and
$75.0 million on a revolving basis upon the consummation of the initial public
offering. The credit facility will be used for acquisitions, capital
expenditures, refinancing of existing debt of the founding companies and
general corporate purposes.
F-17
<PAGE>
DIRECTCHEF, INC.
BALANCE SHEETS
March 31, 1999 and December 31, 1998
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
----------- ------------
(In thousands, except
share and per share
amounts)
(unaudited)
ASSETS
------
<S> <C> <C>
Current Assets:
Cash..................................................... $ 214 $ 211
Deferred offering costs.................................. 1,651 980
------ ------
Total assets.......................................... $1,865 $1,191
====== ======
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current Liabilities:
Accrued liabilities...................................... 856 460
------ ------
Total liabilities..................................... 856 460
------ ------
Stockholders' Equity:
Series A Preferred Stock, $0.001 par value:
Authorized--500,000 shares at March 31, 1999 and
December 31, 1998 Issued--316,474 shares at March 31,
1999 and 182,354 shares at December 31, 1998........... -- --
Common stock, $0.001 par value:
Authorized--3,500,000 shares at March 31, 1999 and
December 31, 1998
Issued--1,639,375 at March 31, 1999 and December 31,
1998................................................... 2 2
Additional paid-in capital................................. 1,313 781
Accumulated deficit........................................ (306) (52)
------ ------
Total Stockholders' Equity................................. 1,009 731
------ ------
Total Liabilities and Stockholders' Equity................. $1,865 $1,191
====== ======
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-18
<PAGE>
DIRECTCHEF, INC
STATEMENT OF OPERATIONS
For the Three Months Ended March 31, 1999
<TABLE>
<CAPTION>
(In
thousands,
except
share and
per share
amounts)
(Unaudited)
<S> <C>
Revenue............................................................ $ --
General and administrative expenses.............................. (56)
Other costs...................................................... (198)
---------
Net loss...................................................... $ (254)
=========
Basic loss per share............................................. $ (0.16)
Diluted loss per share........................................... $ (0.16)
Basic weighted average shares outstanding........................ 1,639,375
Diluted weighted average shares outstanding...................... 1,639,375
</TABLE>
The accompanying notes are an integral part of this statement.
F-19
<PAGE>
DIRECTCHEF, INC
STATEMENT OF STOCKHOLDERS' EQUITY
For the Three Months Ended March 31, 1999
<TABLE>
<CAPTION>
Series A
Common Stock Preferred Stock Additional Total
---------------- ----------------- Paid-In Accumulated Stockholders'
Shares Amount Shares Amount Capital Deficit Equity
--------- ------ --------- ------- ---------- ----------- -------------
(In thousands, except shares)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31,
1998.................. 1,639,375 $ 2 182,354 $ -- $ 781 $ (52) $ 731
Issuance of Series A
Preferred Stock
(unaudited)........... -- -- 134,120 -- 532 -- 532
Net loss (unaudited).... -- -- -- -- -- (254) (254)
--------- --- --------- ------ ------ ----- ------
BALANCE, March 31, 1999
(unaudited)........... 1,639,375 $ 2 316,474 $ -- $1,313 $(306) $1,009
========= === ========= ====== ====== ===== ======
</TABLE>
The accompanying notes are an integral part of this statement.
F-20
<PAGE>
DIRECTCHEF, INC.
STATEMENT OF CASH FLOWS
For the Three Months Ended March 31, 1999
<TABLE>
<CAPTION>
(In thousands)
(Unaudited)
<S> <C>
Cash Flows From Operating Activities:
Net loss...................................................... $(254)
Adjustment to reconcile net loss to net cash used in
operating activities:
Other costs.................................................. 198
-----
Net cash used in operating activities...................... (56)
-----
Cash Flows From Investing Activities:
Deferred offering costs....................................... (869)
Increase in accrued liabilities............................... 396
-----
Net cash used in investing activities...................... (473)
-----
Cash Flows From Financing Activities:
Proceeds from the issuance of Series A Preferred Stock........ 532
-----
Net cash provided by financing activities.................. 532
-----
Net Increase In Cash............................................ 3
Cash, at beginning of period.................................... 211
-----
Cash, at end of period.......................................... $ 214
=====
Supplmental Disclosures of Cash Flow Information:
Cash paid for interest........................................ $ --
Cash paid for income taxes.................................... $ --
</TABLE>
The accompanying notes are an integral part of this statement.
F-21
<PAGE>
DIRECTCHEF, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
March 31, 1999
(Unaudited)
1. Basis of Presentation
The financial statements for the interim period included herein are
unaudited; however, they contain all adjustments which, in the opinion of
management, are necessary to present fairly the financial position of
DirectChef, Inc. (the Company) at March 31, 1999, and the statements of income,
cash flows and stockholders' equity for the three-month period ended March 31,
1999. All such adjustments are of a normal recurring nature. Accounting
measurements at interim dates inherently involve greater reliance on estimates
than at year end, thus the results of operations for the period presented are
not necessarily indicative of the results to be expected for the full year. The
accompanying financial statements do not include footnotes and certain
financial presentations normally required under generally accepted accounting
principles and, therefore, should be read in conjunction with the audited
financial statements for the period from June 17, 1998 (inception) through
December 31, 1998.
2. Loss Per Share
The Company computed its loss per share under the requirements of Statement
of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share". For the
three months ended March 31, 1999, potentially dilutive stock options and
convertible preferred stock were excluded from the weighted average dilutive
shares outstanding computation because they were antidilutive.
3. Agreements to Purchase Companies
In the first quarter of 1999, the Company entered into definitive
agreements to acquire the common stock of six companies (the "Founding
Companies"), contingent on and effective simultaneously with the Offering. The
acquisitions will be effected through a combination of cash and common stock of
the Company. The Companies to be acquired are:
. Bintz Distributing Co.
. Castino Restaurant Equipment and Supply, Inc.
. Curtis Restaurant Equipment, Inc.
. East Bay Restaurant Supply, Inc.
. Economy Restaurant Fixtures, Inc.
. Raygal, Inc.
The aggregate consideration to acquire the Founding Companies is
approximately $41,413,000 in cash and 1,269,070 in shares of common stock.
In connection with the acquisition of the Founding Companies and the
Offering, the Company has recorded $1,651,000 and $980,000 of Deferred offering
costs as of March 31, 1999 and December 31, 1998, respectively. In the three-
month period ended March 31, 1999, $198,000 of these costs were written off for
transactions that would not be consummated, and are recorded as Other costs in
the accompanying Statement of Operations. These costs were unrelated to the
acquisitions of the Founding Companies.
4. Credit Facility
The Company has entered into a commitment letter with a bank regarding
revolving a credit facility between $50.0 million and $75.0 million. The credit
facility is subject to completion of loan documentation and other conditions.
The credit facility will be used for acquisitions, capital expenditures,
refinancing of existing debt and general corporate purposes.
F-22
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of Raygal, Inc.:
We have audited the accompanying balance sheets of Raygal, Inc. (the
"Company") as of December 31, 1998 and 1997, and the related statements of
income, stockholders' equity, and cash flows for 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 financial statements referred to above present fairly,
in all material respects, the financial position of Raygal, Inc. as of December
31, 1998 and 1997, and the results of its operations and cash flows for the
three years in the period ended December 31, 1998 in conformity with generally
accepted accounting principles.
/s/ Arthur Andersen LLP
Orange County, California
February 12, 1999
F-23
<PAGE>
RAYGAL, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------ ------------
(In thousands,
except share amounts)
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents.......................... $ 208 $ 211
Investments, available-for-sale.................... -- 102
Contracts receivable............................... 6,296 5,323
Note receivable.................................... 117 --
Costs and estimated earnings in excess of billings
on uncompleted contracts......................... 505 1,156
Prepaid expenses and other current assets.......... 544 648
------ ------
Total current assets............................ 7,670 7,440
------ ------
Property, Plant and Equipment:
Automobiles........................................ 71 127
Leasehold improvements............................. 479 420
Fixtures and equipment............................. 624 610
Less--Accumulated depreciation and amortization.... (912) (875)
------ ------
Net property, plant and equipment.................. 262 282
Other Assets......................................... 81 117
------ ------
Total Assets......................................... $8,013 $7,839
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable................................... $3,407 $1,994
Accrued liabilities................................ 614 1,636
Billings in excess of costs and estimated earnings
on uncompleted contracts......................... 507 613
Other current liabilities.......................... 241 27
------ ------
Total current liabilities....................... 4,769 4,270
------ ------
Commitments (Note 10)
Stockholders' Equity:
Common stock, $50 par value........................ 10 10
Authorized--2,000 shares at December 31, 1998 and
1997
Issued and outstanding--204 shares at December
31, 1998 and 1997
Retained earnings.................................. 3,234 3,558
Unrealized gain on investments available-for-
sale............................................. -- 1
------ ------
Total Stockholders' Equity........................... 3,244 3,569
------ ------
Total Liabilities and Stockholders' Equity........... $8,013 $7,839
====== ======
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-24
<PAGE>
RAYGAL, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended December
31,
-----------------------
1998 1997 1996
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Net revenue............................................ $33,038 $33,678 $22,213
Cost of revenue........................................ 28,793 29,623 19,229
------- ------- -------
Gross profit......................................... 4,245 4,055 2,984
Selling, general and administrative expenses........... 2,520 2,202 2,427
------- ------- -------
Income from operations................................. 1,725 1,853 557
Other income (expense):
Interest, net........................................ 42 41 74
Other................................................ 39 6 22
------- ------- -------
Income before income taxes............................. 1,806 1,900 653
Income taxes........................................... 17 18 14
------- ------- -------
Net income............................................. $ 1,789 $ 1,882 $ 639
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-25
<PAGE>
RAYGAL, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Common Stock
-------------
Total
Retained Comprehensive Stockholders'
Shares Amount Earnings Income Equity
------ ------ -------- ------------- -------------
(In thousands, except share amounts)
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1996.. 204 $10 $ 2,515 $(2) $ 2,523
Unrealized gain on
investments
available-for-sale.... -- -- -- 2 2
Net income.............. -- -- 639 -- 639
Owner distributions..... -- -- (778) -- (778)
--- --- ------- --- -------
Balance, December 31,
1996.................... 204 10 2,376 -- 2,386
Unrealized gain on
investments
available-for-sale.... -- -- -- 1 1
Net income.............. -- -- 1,882 -- 1,882
Owner distributions..... -- -- (700) -- (700)
--- --- ------- --- -------
Balance, December 31,
1997.................... 204 10 3,558 1 3,569
Realized gain on
maturity of
investments available-
for-sale.............. -- -- -- (1) (1)
Net income.............. -- -- 1,789 -- 1,789
Owner distributions..... -- -- (2,113) -- (2,113)
--- --- ------- --- -------
Balance, December 31,
1998.................... 204 $10 $ 3,234 $-- $ 3,244
=== === ======= === =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-26
<PAGE>
RAYGAL, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December
31,
-------------------------
1998 1997 1996
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income.......................................... $ 1,789 $ 1,882 $ 639
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization.................... 108 91 58
Loss (gain) on sale of assets.................... (3) (3) 12
Changes in assets and liabilities:
Decrease (increase) in:
Contracts receivable............................... (973) (2,713) 551
Costs and estimated earnings in excess of billings
on uncompleted contracts......................... 651 (419) (339)
Prepaid expenses and other current assets.......... 104 (200) (22)
Other assets....................................... 36 (5) (26)
Increase (decrease) in:
Accounts payable................................... 1,413 598 43
Accrued liabilities................................ (1022) 700 364
Billings in excess of costs and estimated earnings
on uncompleted contracts......................... (106) (405) 598
Other current liabilities.......................... 214 22 (86)
------- ------- -------
Net cash provided by (used in) operating
activities................................... 2,211 (452) 1,792
------- ------- -------
Cash Flows from Investing Activities:
Expenditures for property, plant & equipment........ (85) (128) (108)
Issuance of note receivable......................... (117) -- (120)
Repayments on notes receivable...................... -- -- 459
Purchases of investments available-for-sale......... (498) (598) (2,075)
Proceeds from maturities and sales of investments
available-for-sale................................ 599 1,090 1,619
------- ------- -------
Net cash provided by (used in) investing
activities................................... (101) 364 (225)
------- ------- -------
Cash Flows from Financing Activities:
Owner distributions................................. (2,113) (700) (778)
------- ------- -------
Net Increase (Decrease) in Cash and Cash Equivalents.. (3) (788) 789
Cash and Cash Equivalents, at beginning of period..... 211 999 210
------- ------- -------
Cash and Cash Equivalents, at end of period........... $ 208 $ 211 $ 999
======= ======= =======
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest.............................. $ 3 $ 4 $ --
======= ======= =======
Cash paid for income taxes.......................... $ 7 $ 16 $ 3
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-27
<PAGE>
RAYGAL, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
1. Business and Organization
Raygal, Inc. (the "Company"), a California corporation, is engaged in the
business of designing and installing commercial kitchens and interiors,
generally under construction and equipment contracts. The Company provides
design and installation services in several states.
2. Summary of Significant Accounting Policies
The following is a summary of significant accounting policies followed in
the preparation of these financial statements:
Revenue Recognition and Cost Recognition
Revenues from construction contracts are recognized on the percentage-of-
completion method, measured by the percentage of costs incurred to date to
estimated total costs for each contract. Provisions for estimated losses on
uncompleted contracts are made in the period such losses become apparent.
Contract costs include all direct material, subcontractor labor costs and
those indirect costs related to contract performance, such as indirect labor.
Operating costs and unallocated equipment costs are charged to expense as
incurred. Changes in job performance, job conditions, estimated profitability,
including those arising from contract penalty provisions, and final contract
settlements may result in revisions to costs and income and are recognized in
the period in which the revisions are determined.
The current asset, "Costs and estimated earnings in excess of billings on
uncompleted contracts," represents revenues recognized in excess of amounts
billed. The current liability, "Billings in excess of costs and estimated
earnings on uncompleted contracts," represents amounts billed in excess of
revenues recognized.
Use Of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash And Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Property, Plant and Equipment
Property, plant and equipment are stated at cost and are depreciated or
amortized using the straight-line method. The estimated useful lives are as
follows:
<TABLE>
<S> <C>
Automobiles............................. 5 years
Leasehold improvements.................. Lesser of lease term or useful life
Fixtures and equipment.................. 3-7 years
</TABLE>
F-28
<PAGE>
RAYGAL, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Costs of normal maintenance and repairs and minor replacements are charged
to expense as incurred. Major replacements or betterments are capitalized. When
assets are sold or otherwise disposed of, the costs and related accumulated
depreciation and amortization are removed from the accounts and any resulting
gain or loss is included in the income statement.
Long-lived Assets
The Company reviews its long-lived assets, including goodwill, in
accordance with Statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting for the Impairment of Long-lived Assets and Long-lived Assets to be
Disposed of." SFAS No. 121 requires impairment losses to be recorded on long-
lived assets used in operations where indications of impairment are present and
the undiscounted cash flows estimated to be generated by those assets are less
than the assets' carrying amounts.
Comprehensive Income
In 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards to measure all changes in equity
that result from transactions and other economic events other than transactions
with owners. Comprehensive income is the total of net income and all other
nonowner changes in equity. Comprehensive income is reported in the
accompanying statement of stockholders' equity.
Recent Accounting Pronouncements
In 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which requires companies to report
financial and descriptive information about its reportable operating segments
in the interim and annual financial statements. The Company adopted SFAS No.
131 in 1998 and its adoption did not have a significant impact on the financial
statements or related footnote disclosures.
In 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits," which standardizes the disclosure
requirements for pensions and other postretirement benefits to the extent
practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis, and eliminates certain disclosures that are no longer useful. The
Company adopted SFAS No. 132 in 1998 and its adoption did not have a
significant impact on the financial statements or related footnote disclosures.
In 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 established a new accounting
model for derivative instruments and hedging activities. The Company will adopt
SFAS No. 133 in the year ending December 31, 1999. The Company believes that
adoption of SFAS No. 133 will not significantly affect the Company's financial
position and results of operations.
Operating Cycle
Assets and liabilities related to construction and equipment contracts are
included in current assets and current liabilities in the accompanying balance
sheets as they will be liquidated in the normal course of contract completion
which may be more than one year. At December 31, 1998, amounts to be liquidated
beyond one year were immaterial.
F-29
<PAGE>
RAYGAL, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Income Taxes
The Company has elected to be taxed under the Internal Revenue Code as an S
Corporation. Accordingly, taxable income of the Company will be allocated to
the stockholders, who are responsible for the payment of income taxes. No
provision for federal income tax is required in the financial statements.
California adopted the Federal S Corporation concept, but imposes a 1.5 percent
tax on the earnings of an S Corporation which is reflected in the provision for
state income taxes. The Company accounts for income taxes under the provisions
of SFAS No. 109.
Concentration of Credit Risk
Most of the Company's business activity is with contractors and owners
associated with restaurants, educational facilities and institutional clients.
During 1998, the Company had one customer that individually represented greater
than ten percent of sales. During 1997, the Company had two customers that
represented greater than 27 percent of sales. During 1996, the Company had two
customers that represented 25 percent and 11 percent of sales.
As of December 31, 1998, the Company had one customer who represented 32
percent of total contracts receivable. As of December 31, 1997, the Company had
two customers who represented 16 percent and 11 percent of total contracts
receivable.
3. Investments Available-for-Sale
There were no investments available-for-sale as of December 31, 1998.
Investments available-for-sale as of December 31, 1997 consisted of the
following:
<TABLE>
<CAPTION>
December 31, 1997
------------------------------------------
Yield at Gross Gross
December 31, Amortized Unrealized Unrealized Estimated
Type 1997 Cost Gains Losses Fair Value
---- ------------ --------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C>
U.S. Government
Obligations........... 5.00% $101 $ 1 $-- $102
---- --- --- ----
Total................... $101 $ 1 $-- $102
==== === === ====
</TABLE>
4. Contracts Receivable
Contracts receivable consist of billed receivables and earned amounts
retained by customers ("retention") pending satisfactory completion of the
applicable contracts. Contracts receivable consists of the following:
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------ ------------
(In thousands)
<S> <C> <C>
Contracts Receivable:
Current.......................................... $4,897 $4,221
Retention........................................ 1,399 1,102
------ ------
Total............................................. $6,296 $5,323
====== ======
</TABLE>
F-30
<PAGE>
RAYGAL, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
5. Note Receivable
In May 1998, the Company entered into a note receivable agreement with an
employee. The note was in the amount of $110,000 with interest of 9.5 percent
due October 31, 1998 which was extended through December 31, 1998. Total
receivable and interest outstanding at December 31, 1998 was $117,000. The note
was partially paid and amended on January 1, 1999 in the amount of $77,000 with
an annual interest rate of 5.5 percent. This amendment expires on December 31,
1999.
6. Costs and Estimated Earnings on Uncompleted Contracts
Costs and estimated earnings on uncompleted contracts consist of the
following:
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------ ------------
(In thousands)
<S> <C> <C>
Costs and estimated earnings on uncompleted
contracts..................................... $ 21,295 $ 21,573
Less: billings on uncompleted contracts......... (21,297) (21,030)
-------- --------
$ (2) $ 543
======== ========
</TABLE>
Included in the accompanying balance sheets under the following captions:
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------ ------------
(In thousands)
<S> <C> <C>
Costs and estimated earnings in excess of
billings on uncompleted contracts............. $ 505 $1,156
Billings in excess of costs and estimated
earnings on uncompleted contracts............. (507) (613)
----- ------
$ (2) $ 543
===== ======
</TABLE>
7. Phantom Stock Agreements
During 1995, the Company entered into Phantom Stock Agreements with certain
officers. Under the terms of each agreement, the Company is obligated to
purchase some or all of the Phantom Shares (the "Shares") for a defined
purchase price upon a change in control. The Company's obligation to purchase
the shares is also contingent upon the existence of certain conditions as set
forth in each officer's employment agreement. The sale of Raygal will cause a
payment to be made to the Phantom Shareholders because the payment is due upon
a change in control. The phantom stock payment, including common stock of the
acquiring company, will be approximately $2.5 million. Raygal did not record
this amount as a liability at December 31, 1998 because it had not been
incurred.
8. Retirement Plan
During 1997, the Company adopted the Raygal Design Associates, Inc. 401(k)
Plan (the "Plan"). The purpose of the Plan is to provide retirement benefits to
all eligible employees. All employees of the Company become eligible for
participation after one year of service. Employees may contribute up to a
maximum of $4,000 per year. The Company will contribute to the Plan an amount
of matching contributions up to a specified maximum. Pension expense under this
Plan for the year ended December 31, 1998 and 1997 was $40,850 and $25,000,
respectively.
F-31
<PAGE>
RAYGAL, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
9. Line of Credit
In April, 1997, the Company entered into a revolving line of credit
agreement (amended in November 1998) with a commercial bank to borrow up to $3
million. Interest is due monthly at the bank's reference rate (7.75%
December 31, 1998).
Borrowings under the line of credit are secured by substantially all of the
Company's assets and are guaranteed by a stockholder. The agreement expires in
April 1999 and any extensions or renewal thereof will be subject to the bank's
review and approval. There were no borrowings outstanding under this agreement
as of December 31, 1998.
10. Related-Party Transactions
The Company rents its corporate facility from a stockholder under a three-
year noncancellable lease agreement which expired on December 31, 1997. The
lease agreement has been renewed for an additional six years. Future minimum
lease payments required under this lease at December 31, 1998 are as follows
(amounts in thousands):
<TABLE>
<S> <C>
1999................................................................. $ 340
2000................................................................. 340
2001................................................................. 357
2002................................................................. 357
2003................................................................. 357
------
Total future minimum lease payments.................................. $1,751
======
</TABLE>
Rent expense on this facility for each of the three years ended December
31, 1998, 1997 and 1996 amounted to approximately $340,000, $323,000 and
$296,000, respectively.
11. Subsequent Events (Unaudited)
Subsequent to December 31, 1998, the Company's stockholders entered into a
definitive agreement to sell the Company to DirectChef, Inc. The sale
transaction, effected through a combination of cash and common stock of
DirectChef, Inc., is contingent and effective upon the initial public offering
of the common stock of DirectChef, Inc. The anticipated selling price of the
Company exceeds its net assets as of December 31, 1998.
F-32
<PAGE>
RAYGAL, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
----------- ------------
(In thousands, except
share amounts)
(unaudited)
<S> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents............................. $1,247 $ 208
Contracts receivable.................................. 4,799 6,296
Note receivable....................................... 77 117
Costs and estimated earnings in excess of billings on
uncompleted contracts............................... 1,859 505
Prepaid expenses and other current assets............. 595 544
------ ------
Total current assets................................ 8,577 7,670
------ ------
PROPERTY, PLANT AND EQUIPMENT:
Automobiles........................................... 88 71
Leasehold improvements................................ 479 479
Fixtures and equipment................................ 640 624
Less--Accumulated depreciation and amortization....... (928) (912)
------ ------
Net property, plant and equipment..................... 279 262
OTHER ASSETS.......................................... 81 81
------ ------
TOTAL ASSETS.......................................... $8,937 $8,013
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable...................................... $3,925 $3,407
Accrued liabilities................................... 314 614
Billings in excess of costs and estimated earnings on
uncompleted contracts............................... 1,550 507
Other current liabilities............................. 134 241
------ ------
Total current liabilities........................... 5,923 4,769
------ ------
COMMITMENTS
STOCKHOLDERS' EQUITY:
Common stock, $50 par value........................... 10 10
Authorized--2,000 shares at March 31, 1999 and
December 31, 1998
Issued and outstanding--204 shares at March 31, 1999
and December 31, 1998
Retained earnings..................................... 3,004 3,234
------ ------
TOTAL STOCKHOLDERS' EQUITY............................ 3,014 3,244
------ ------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............ $8,937 $8,013
====== ======
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-33
<PAGE>
RAYGAL, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------
1999 1998
----------- -----------
(In thousands)
(unaudited) (unaudited)
<S> <C> <C>
NET REVENUE............................................. $8,198 $6,267
COST OF REVENUE......................................... 7,324 5,579
------ ------
Gross Profit....................................... 874 688
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES............ 583 539
------ ------
Income from operations............................. 291 149
OTHER INCOME:
Interest, net......................................... 4 5
Other................................................. 3 8
------ ------
Income before income taxes......................... 298 162
INCOME TAXES............................................ 3 2
------ ------
Net income......................................... $ 295 $ 160
====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-34
<PAGE>
RAYGAL, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
For the Three Months Ended March 31, 1999
<TABLE>
<CAPTION>
Common Stock Total
------------- Retained Stockholders'
Shares Amount Earnings Equity
------ ------ -------- -------------
(In thousands, except share amounts)
<S> <C> <C> <C> <C>
Balance, December 31, 1998................ 204 $10 $3,234 $3,244
Net income (unaudited).................. -- -- 295 295
Owner distributions (unaudited)......... -- -- (525) (525)
--- --- ------ ------
Balance, March 31, 1999 (unaudited)....... 204 $10 $3,004 $3,014
=== === ====== ======
</TABLE>
The accompanying notes are an integral part of this statement.
F-35
<PAGE>
RAYGAL, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------
1999 1998
----------- -----------
(In thousands)
(unaudited) (unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................. $ 295 $ 160
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization........................ 16 26
Changes in assets and liabilities:
Decrease (increase) in:
Contracts receivable.............................. 1,497 (1,824)
Costs and estimated earnings in excess of billings
on uncompleted contracts........................ (1,354) (376)
Prepaid expenses and other current assets......... (51) (407)
Other assets...................................... -- (3)
Increase (decrease) in:
Accounts payable.................................. 518 622
Accrued liabilities............................... (300) (1,236)
Billings in excess of costs and estimated earnings
on uncompleted contracts........................ 1,043 3,077
Other current liabilities......................... (107) (7)
------- -------
Net cash provided by operating activities....... 1,557 32
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property, plant & equipment........... (33) (10)
Repayments on note receivable.......................... 40 --
Proceeds from maturities and sales of investments
available-for-sale................................... -- 101
------- -------
Net cash provided by investing activities....... 7 91
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Owner distributions.................................... (525) (180)
------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS... 1,039 (57)
CASH AND CASH EQUIVALENTS, at beginning of period...... 208 211
------- -------
CASH AND CASH EQUIVALENTS, at end of period............ $ 1,247 $ 154
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest................................. $ 2 $ 3
======= =======
Cash paid for income taxes............................. $ 8 $ 7
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-36
<PAGE>
RAYGAL, INC.
NOTES TO FINANCIAL STATEMENTS
March 31, 1999
(Unaudited)
1. BASIS OF PRESENTATION
The financial statements for the interim periods included herein are
unaudited; however, they contain all adjustments which, in the opinion of
management, are necessary to present fairly the financial position of RAYGAL,
INC. (the "Company") at March 31, 1999, and the statements of income, cash
flows and stockholders' equity for the three-month periods ended March 31, 1999
and 1998. All such adjustments are of a normal recurring nature. Accounting
measurements at interim dates inherently involve greater reliance on estimates
than at year end, thus the results of operations for the periods presented are
not necessarily indicative of the results to be expected for the full year. The
accompanying financial statements do not include footnotes and certain
financial presentations normally required under generally accepted accounting
principles and, therefore, should be read in conjunction with the audited
financial statements for the year ended December 31, 1998.
2. CONTRACTS RECEIVABLE
Contracts receivable consist of billed receivables and earned amounts
retained by customers ("retention") pending satisfactory completion of the
applicable contracts. Contracts receivable consisted of the following (in
thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------- ------------
<S> <C> <C>
Contracts Receivable:
Current............................................. $3,424 $4,897
Retention........................................... 1,375 1,399
------ ------
Total............................................ $4,799 $6,296
====== ======
</TABLE>
3. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Costs and estimated earnings on uncompleted contracts consisted of the
following (amounts in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------- ------------
<S> <C> <C>
Costs and estimated earnings on uncompleted
contracts........................................ $ 18,197 $ 21,295
Less: billings on uncompleted contracts............ (17,888) (21,297)
-------- --------
$ 309 $ (2)
======== ========
Included in the accompanying balance sheets under
the following captions:
Costs and estimated earnings in excess of billings
on uncompleted contracts......................... $ 1,859 $ 505
Billings in excess of costs and estimated earnings
on uncompleted contracts......................... (1,550) (507)
-------- --------
$ 309 $ (2)
======== ========
</TABLE>
F-37
<PAGE>
RAYGAL, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
4. PHANTOM STOCK AGREEMENTS
During 1995, the Company entered into Phantom Stock Agreements with certain
officers. Under the terms of each agreement, the Company is obligated to
purchase some or all of the Phantom Shares (the "Shares") for a defined
purchase price solely upon the sale or transfer of any of the Company's common
shares. The Company's obligation to purchase the shares is also contingent upon
the existence of certain conditions as set forth in each officer's employment
agreement. The sale of Raygal will cause a payment to be made to the Phantom
Shareholders because the payment is due solely upon a change in control. The
phantom stock payment, including common stock of the acquiring company, will be
approximately $2.5 million. Raygal did not record this amount as a liability at
March 31, 1999 and at December 31, 1998 because it had not been incurred.
5. AGREEMENT TO SELL COMPANY
In the first quarter of 1999, the Company's stockholders entered into a
definitive agreement to sell the Company to DirectChef, Inc. The sale
transaction, effected through a combination of cash and common stock of
DirectChef, Inc., is contingent and effective upon the initial public offering
of the common stock of DirectChef, Inc. The anticipated selling price of the
Company exceeds its net assets as of March 31, 1999.
F-38
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To East Bay Restaurant Supply, Inc.:
We have audited the accompanying balance sheets of East Bay Restaurant
Supply, Inc. as of September 30, 1998 and 1997 and the related statements of
income, stockholders' equity, and cash flows for the three years during the
period ended September 30, 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 audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of East Bay Restaurant Supply,
Inc. as of September 30, 1998 and 1997 and the results of its operations and
its cash flows for the three years during the period ended September 30, 1998
in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
San Francisco, California,
January 15, 1999
F-39
<PAGE>
EAST BAY RESTAURANT SUPPLY, INC.
BALANCE SHEETS--SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---------- ----------
(In thousands,
except share amounts)
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents............................ $ 258 $ 50
Accounts receivable, less allowance for doubtful
accounts of $225 and $114 in 1998 and 1997,
respectively....................................... 4,044 3,093
Inventories, net..................................... 2,569 2,287
Prepaid expenses and other........................... 59 124
Current deferred tax asset, net...................... 195 1
---------- ----------
Total current assets.............................. 7,125 5,555
---------- ----------
Property and Equipment:
Leasehold improvements............................... 271 271
Fixtures and equipment............................... 267 295
Vehicles............................................. 269 238
---------- ----------
807 804
Less: Accumulated depreciation...................... (539) (538)
---------- ----------
Net property and equipment........................ 268 266
---------- ----------
Other Assets:
Cash surrender value of life insurance, net of loans
of $66 in 1998 and 1997............................ 202 186
Other................................................ 45 46
---------- ----------
247 232
---------- ----------
Total assets...................................... $ 7,640 $ 6,053
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable..................................... $ 2,917 $ 2,954
Customer deposits.................................... 392 202
Accrued liabilities.................................. 1,405 446
Borrowings under revolving line of credit............ -- 600
Current portion of other notes payable............... 18 27
Subordinated notes payable to stockholders and
former stockholders................................ 1,050 267
Current deferred tax liability....................... 3 --
---------- ----------
Total current liabilities......................... 5,785 4,496
---------- ----------
Notes Payable, net of current portion.................. 42 28
---------- ----------
Commitments and Contingencies (Notes 5 and 8)
Stockholders' Equity:
Common stock, $20 par value:
Class A--10,000 shares authorized; 4,500 shares
issued and outstanding at September 30, 1998 and
1997.............................................. 90 90
Class B--2,500 shares authorized; 0 shares issued
and outstanding at September 30, 1998 and 1997.... -- --
Retained earnings.................................... 1,723 1,439
---------- ----------
Total stockholders' equity........................ 1,813 1,529
---------- ----------
Total liabilities and stockholders' equity........ $ 7,640 $ 6,053
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-40
<PAGE>
EAST BAY RESTAURANT SUPPLY, INC.
STATEMENTS OF INCOME
For the Years Ended September 30, 1998, 1997, and 1996
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Net revenue......................................... $29,916 $23,681 $20,368
Cost of revenue..................................... 23,964 18,655 16,256
------- ------- -------
Gross profit...................................... 5,952 5,026 4,112
Selling, general and administrative expenses........ 5,388 4,705 3,959
------- ------- -------
Income from operations............................ 564 321 153
------- ------- -------
Other income (expense):
Interest income..................................... 34 12 25
Interest expense.................................... (87) (81) (99)
Other............................................... (2) -- 2
------- ------- -------
Other expense..................................... (55) (69) (72)
------- ------- -------
Income before income taxes........................ 509 252 81
Income taxes........................................ 225 116 35
------- ------- -------
Net income.......................................... $ 284 $ 136 $ 46
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-41
<PAGE>
EAST BAY RESTAURANT SUPPLY, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended September 30, 1998, 1997, and 1996
<TABLE>
<CAPTION>
Common Stock Total
------------- Retained Stockholders'
Shares Amount Earnings Equity
------ ------ -------- -------------
(In thousands, except share amounts)
<S> <C> <C> <C> <C>
Balance, September 30, 1995............... 4,500 $90 $1,257 $1,347
Net income.............................. -- -- 46 46
----- --- ------ ------
Balance, September 30, 1996............... 4,500 90 1,303 1,393
Net income.............................. -- -- 136 136
----- --- ------ ------
Balance, September 30, 1997............... 4,500 90 1,439 1,529
Net income.............................. -- -- 284 284
----- --- ------ ------
Balance, September 30, 1998............... 4,500 $90 $1,723 $1,813
===== === ====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-42
<PAGE>
EAST BAY RESTAURANT SUPPLY, INC.
STATEMENTS OF CASH FLOWS
For the Years Ended September 30, 1998, 1997, and 1996
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
(In thousands)
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income............................................. $ 284 $ 136 $ 46
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation........................................ 72 67 51
Changes in assets and liabilities:
Accounts receivable............................... (951) (425) (22)
Inventories....................................... (282) 446 (869)
Prepaid expenses and other........................ 65 (65) 136
Deferred tax assets............................... (193) 12 16
Accounts payable.................................. (37) 186 348
Accrued liabilities............................... 959 217 (15)
Customer deposits................................. 190 (357) 130
Deferred tax liabilities.......................... 3 -- --
Other............................................. (16) (14) (1)
----- ----- -----
Net cash provided by (used in) operating
activities.................................... 94 203 (180)
----- ----- -----
Cash Flows from Investing Activities:
Expenditures for property and equipment................ (74) (22) (65)
----- ----- -----
Cash Flows from Financing Activities:
Net proceeds from (payments on) line of credit......... (600) (100) 253
Proceeds from (payments to) current and former
stockholders, net.................................... 784 (17) 5
Proceeds from (payments on) other notes payable........ 4 (37) 6
----- ----- -----
Net cash provided by (used in) financing
activities.................................... 188 (154) 264
----- ----- -----
Net increase in cash and cash equivalents....... 208 27 19
Cash and Cash Equivalents, at beginning of year.......... 50 23 4
----- ----- -----
Cash and Cash Equivalents, at end of year................ $ 258 $ 50 $ 23
===== ===== =====
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest................................. $ 41 $ 78 $ 99
Cash paid for income taxes............................. 92 21 16
</TABLE>
The accompanying notes are an integral part of these statements.
F-43
<PAGE>
EAST BAY RESTAURANT SUPPLY, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 1998, 1997, and 1996
1. Business and Organization
East Bay Restaurant Supply, Inc. (the "Company") was founded and
incorporated in the state of California in 1954. The Company is primarily
engaged in the sale and distribution of equipment and supplies to food service
providers, such as restaurants and hotels in the United States. The Company
also performs design services for food service providers. The Company's
headquarters and retail store are located in Oakland, California.
2. Summary of Significant Accounting Policies
The following is a summary of significant accounting policies followed in
the preparation of these financial statements.
Revenue Recognition
The Company's revenue is derived from the distribution and sale of
equipment and supplies to food service providers and from customers who request
design of their facilities. Sales revenue is recognized upon shipment. Design
revenue is recognized on a percentage-of-completion basis.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Inventories
Inventories include new and used saleable equipment and supplies, stated at
the lower of cost on a first-in, first-out basis or market. Cost includes
amounts paid for freight in, when applicable. A valuation allowance is recorded
for items that have a cost in excess of market value or when items are excess
or obsolete. The allowance was $210,000 and $137,000 in 1998 and 1997,
respectively.
Property and Equipment, at Cost
Property and equipment are stated at cost and are primarily depreciated or
amortized using accelerated methods. The estimated useful lives are as follows:
<TABLE>
<S> <C>
Leasehold improvements............. Lesser of lease term or useful life
Fixtures and equipment............. 5-7 years
Vehicles........................... 5-10 years
</TABLE>
Costs of normal maintenance and repairs and minor replacements are charged
to expense as incurred. Major replacements or betterments are capitalized. When
assets are sold or otherwise disposed of, the costs and related accumulated
depreciation and amortization are removed from the accounts, and any resulting
gain or loss is included in the income statement.
F-44
<PAGE>
EAST BAY RESTAURANT SUPPLY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Income Taxes
Using the asset and liability method of the Financial Accounting Standards
Board (FASB) Statement No. 109, "Accounting for Income Taxes," deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Valuation reserves are recorded if it is
uncertain as to the realizability of deferred tax assets.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentration
of credit risk consist primarily of trade accounts receivable. The Company
sells primarily on 30-day terms, performs credit evaluation procedures on its
customers, and generally does not require collateral on its accounts
receivable. Most of the Company's sales are in California and Nevada. The
Company maintains an allowance for potential credit losses. No single customer
represented more than 10 percent of sales or accounts receivable in any period.
Comprehensive Income
In 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards to measure all changes in equity
that result from transactions and other economic events other than transactions
with owners. Comprehensive income is the total of net income and all other
nonowner changes in equity. Other than net income, the Company has no
comprehensive income.
New Accounting Pronouncements
In 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which requires companies to report
financial and descriptive information about its reportable operating segments
in the interim and annual financial statements. The Company will adopt SFAS No.
131 in 1999 and does not expect its adoption to have a significant impact on
the financial statements or related footnote disclosures.
In 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits," which standardizes the disclosure
requirements for pensions and other postretirement benefits to the extent
practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis, and eliminates certain disclosures that are no longer useful. The
Company will adopt SFAS No. 132 in 1999 and does not expect its adoption to
have a significant impact on the financial statements or related footnote
disclosures.
In 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 established a new accounting
model for derivative instruments and hedging activities. The Company will adopt
SFAS No. 133 in 1999. The Company believes that adoption of SFAS No. 133 will
not significantly affect the Company's financial position and results of
operations.
F-45
<PAGE>
EAST BAY RESTAURANT SUPPLY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
3. Income Taxes
The provision for income taxes from continuing operations consists of the
following for the years ended September 30, 1998, 1997, and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
----- ---- ----
(In thousands)
<S> <C> <C> <C>
Current:
Federal................................................. $ 321 $ 81 $(29)
State and local......................................... 94 24 (6)
----- ---- ----
415 105 (35)
Deferred liability (asset):
Federal................................................. (143) 3 54
State and local......................................... (47) 8 16
----- ---- ----
$ 225 $116 $ 35
===== ==== ====
</TABLE>
The reconciliation of income tax from continuing operations computed at the
U.S. federal statutory tax rate to the Company's effective income tax rate is
as follows for the years ended September 30, 1998, 1997, and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Federal statutory income tax rate........................ 34.0% 34.0% 34.0%
State income tax rate, net of federal benefit............ 5.8 6.1 6.1
Permanent items: items not deductible for tax return
purposes, net.......................................... 2.2 4.8 12.3
Other, net............................................... 2.2 1.1 (9.2)
---- ---- ----
Total provision..................................... 44.2% 46.0% 43.2%
==== ==== ====
</TABLE>
At September 30, 1998, the Company had approximately $192,000 in net
deferred tax assets. These net assets primarily result from reserves deductible
in the future and differences between book and tax depreciation.
At September 30, 1997 and 1996, the Company had approximately $2,000 and
$14,000 respectively, in net deferred tax assets resulting principally from
reserves deductible in the future and differences between book and tax
depreciation.
F-46
<PAGE>
EAST BAY RESTAURANT SUPPLY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
4. Debt
Debt at September 30, 1998 and 1997, consists of the following:
<TABLE>
<CAPTION>
1998 1997
------- -----
(In
thousands)
<S> <C> <C>
Revolving line of credit in the amount of $2 million at
September 30, 1998, and $1.5 million at September 30,
1997; advances under the line accrue interest at the
prime rate plus 1.0 percent (9.5 percent at September 30,
1998 and 1997), and are secured by the Company's accounts
receivable and inventory; the line is guaranteed by
certain stockholders and expires on October 1, 1999...... $ -- $ 600
======= =====
Subordinated notes payable to former stockholders, due on
demand, with interest payable monthly at prime rate plus
1.0 percent (9.5 percent at September 30, 1998 and
1997).................................................... $ 660 $ 214
Subordinated notes payable to stockholders, due on demand,
with interest payable monthly at prime rate plus 1.0
percent (9.5 percent at September 30, 1998 and 1997)..... 390 52
Installment notes payable, with monthly payments, including
interest, through November 2002; interest rates vary from
2.9 percent to 9.3 percent; the notes are secured by the
Company's vehicles....................................... 56 37
Miscellaneous notes payable with monthly payments through
February 1999............................................ 4 19
------- -----
Total debt............................................... 1,110 322
Less: Current maturities................................... (1,068) (294)
------- -----
Long-term portion........................................ $ 42 $ 28
======= =====
</TABLE>
The following is a schedule of annual maturities of long-term debt at
September 30, 1998 (in thousands):
<TABLE>
<S> <C>
Year Ending September 30
1999.............................................................. $1,068
2000.............................................................. 20
2001.............................................................. 11
2002.............................................................. 11
------
$1,110
======
</TABLE>
Interest paid to former stockholders who are considered to be related
parties was $31,000, $18,000, and $64,000 in 1998, 1997, and 1996,
respectively.
5. Employee Benefits
The Company maintains a qualified 401 (k) profit-sharing plan. Eligible
employees may defer a portion of their salary, and the Company may make a
discretionary matching contribution equal to a percentage of each
participating employee's contribution. The matching contribution, if made, is
based on each employee's contribution up to 2.5 percent of his or her
compensation but is limited to $5,000 per year. The Company's matching
contributions for the years ended September 30, 1998, 1997, and 1996, were
$15,000, $13,000, and $12,000, respectively.
F-47
<PAGE>
EAST BAY RESTAURANT SUPPLY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The Company may also contribute additional amounts on a discretionary
basis. The Board of Directors elected to make discretionary contributions of
$100,000, $50,000, and $25,000 for the years ended September 30, 1998, 1997,
and 1996, respectively.
The Company's 401(k) profit-sharing plan trust (the "Trust") has made loans
to customers to refinance certain customer sales and installation contracts.
These transactions are reviewed for fiduciary responsibility by the plan
administrator in accordance with their requirements and provisions of the
Employee Retirement Income and Security Act (ERISA). At September 30, 1998, the
Company was contingently liable under security agreements for the unpaid
balances of those contracts in the amount of $171,000.
6. Operating Leases
The Company's facility is leased on a month-to-month basis from a former
shareholder.
The Company's computer and telephone systems are leased on a month-to-month
basis from a partnership composed of current stockholders.
Rental expense paid to related parties was $224,000, $193,000, and $193,000
for the years ended September 30, 1998, 1997, and 1996, respectively.
7. Related-party Transactions
As discussed in Notes 4 and 6, the Company has subordinated notes
outstanding to former stockholders and leases its building from a former
stockholder who is related to the current owners. Additionally, the Company
leases certain equipment from current stockholders. Several of the current
owners work at the Company and receive wages and other benefits. The amount of
wages and lease payments paid to the stockholders was approximately $616,000,
$607,000, and $527,000 in 1998, 1997, and 1996, respectively.
8. Commitments and Contingencies
Various legal claims arise against the Company during the normal course of
business. In the opinion of management, based on the nature of the claims,
underlying insurance coverage, and other defenses, liabilities, if any, arising
from the claims would not have a material effect on the financial statements.
9. Subsequent Events (Unaudited)
Subsequent to December 31, 1998, the Company's stockholders entered into a
definitive agreement to sell the Company to DirectChef, Inc. The sale
transaction, effected through a combination of cash and common stock of
DirectChef, Inc., is contingent and effective upon the initial public offering
of the common stock of DirectChef, Inc. The anticipated selling price of the
Company exceeds its net assets as of September 30, 1998.
F-48
<PAGE>
EAST BAY RESTAURANT SUPPLY INC.
BALANCE SHEETS--MARCH 31, 1999 AND SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
March 31, September 30,
1999 1998
----------- -------------
(In thousands,
except share amounts)
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.......................... $ 2 $ 258
Accounts receivable, less allowance for doubtful
accounts of $321 and $272 on March 31, 1999 and
December 31, 1998, respectively................... 3,313 4,044
Inventories, net................................... 2,415 2,569
Prepaid expenses and other......................... 170 59
Current deferred tax asset, net.................... 195 195
------ ------
Total current assets.............................. 6,095 7,125
------ ------
Property and Equipment:
Leasehold improvements............................. 318 271
Fixtures and equipment............................. 255 267
Vehicles........................................... 269 269
------ ------
842 807
Less: Accumulated depreciation..................... (482) (539)
------ ------
Net property and equipment........................ 360 268
------ ------
Other Assets:
Cash surrender value of life insurance, net of
loans of $66 in 1999 and 1998..................... 202 202
Other.............................................. 45 45
------ ------
247 247
------ ------
Total assets...................................... $6,702 $7,640
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable................................... $2,568 $2,917
Customer deposits.................................. 224 392
Accrued liabilities................................ 1,426 1,405
Borrowings under revolving line of credit.......... 370 --
Current portion of stockholder's notes payable..... 21 1,050
Current portion of other notes payable............. 28 18
------ ------
Total current liabilities......................... 4,637 5,782
------ ------
Deferred Tax Liability, Net.......................... 3 3
------ ------
Notes Payable, net of current portion................ 57 42
------ ------
Commitments And Contingencies
Stockholders' Equity
Common stock, $20 par value:
Class A--10,000 shares authorized; 4,500 shares
issued and outstanding at March 31, 1999 and
September 30, 1998................................ 90 90
Class B--2,500 shares authorized; 0 shares issued
and outstanding at March 31, 1999 and September
30, 1998.......................................... -- --
Retained earnings.................................. 1,915 1,723
------ ------
Total stockholders' equity........................ 2,005 1,813
------ ------
Total liabilities and stockholders' equity........ $6,702 $7,640
====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-49
<PAGE>
EAST BAY RESTAURANT SUPPLY, INC.
STATEMENTS OF INCOME
For the Six Months Ended March 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
----------- ----------
(In thousands)
(unaudited) (unaudited)
<S> <C> <C>
Net revenue............................................. $15,550 $12,284
Cost of revenue......................................... 12,119 9,711
------- -------
Gross profit.......................................... 3,431 2,573
Selling, general, and administrative expenses........... 3,061 2,463
------- -------
Income from operations................................ 370 110
------- -------
Other income (expense):
Interest income....................................... 33 22
Interest expense...................................... (47) (39)
Other................................................. -- (24)
------- -------
Other expense...................................... (14) (41)
------- -------
Income before income taxes......................... 356 69
Income taxes............................................ 164 31
------- -------
Net income.............................................. $ 192 $ 38
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-50
<PAGE>
EAST BAY RESTAURANT SUPPLY, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
For the Six Months Ended March 31, 1999
<TABLE>
<CAPTION>
Common Stock Total
------------- Retained Stockholders'
Shares Amount Earnings Equity
------ ------ -------- -------------
(In thousands, except share amounts)
<S> <C> <C> <C> <C>
BALANCE, SEPTEMBER 31, 1998............... 4,500 $90 $1,723 $1,813
Net income (unaudited).................. -- -- 192 192
----- --- ------ ------
BALANCE, MARCH 31, 1999 (unaudited)....... 4,500 $90 $1,915 $2,005
===== === ====== ======
</TABLE>
The accompanying notes are an integral part of this statement.
F-51
<PAGE>
EAST BAY RESTAURANT SUPPLY, INC.
STATEMENTS OF CASH FLOWS
For the Six Months Ended March 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
(In thousands)
(unaudited) (unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................ $ 192 $ 38
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation........................................ 30 40
Loss on disposition of assets....................... -- 24
Changes in assets and liabilities:
Accounts receivable.............................. 731 (66)
Inventories...................................... 154 376
Prepaid expenses and other....................... (111) 30
Deferred tax assets.............................. -- (30)
Accounts payable................................. (349) (979)
Accrued liabilities.............................. 21 (49)
Customer deposits................................ (168) 740
------- -----
Net cash provided by operating activities...... 500 124
------- -----
CASH FLOWS FROM INVESTING ACTIVITIES: Expenditures for
property and equipment.............................. (122) (37)
------- -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from line of credit...................... 370 250
Repayment of stockholder loans........................ (1,019) (43)
Proceeds from notes payable........................... 15 15
------- -----
Net cash provided by (used in) financing
activities................................... (634) 222
------- -----
Net increase (decrease) in cash and cash
equivalents.................................. (256) 309
CASH AND CASH EQUIVALENTS, at September 30, 1998 and
1997................................................ 258 50
------- -----
CASH AND CASH EQUIVALENTS, at March 31, 1999 and
1998................................................ $ 2 $ 359
======= =====
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest................................ $ 23 $ 20
Cash paid for income taxes............................ $ 107 $ 69
</TABLE>
The accompanying notes are an integral part of these statements.
F-52
<PAGE>
EAST BAY RESTAURANT SUPPLY, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The financial statements for the interim periods included herein are
unaudited; however, they contain all adjustments which, in the opinion of
management, are necessary to present fairly the financial position of East Bay
Restaurant Supply, Inc. (the "Company") at March 31, 1999, and the statements
of income, cash flows and stockholders' equity for the three-month and six-
month periods ended March 31, 1999 and 1998. All such adjustments are of a
normal recurring nature. Accounting measurements at interim dates inherently
involve greater reliance on estimates than at year end, thus the results of
operations for the periods presented are not necessarily indicative of the
results to be expected for the full year. The accompanying financial statements
do not include footnotes and certain financial presentations normally required
under generally accepted accounting principles and, therefore, should be read
in conjunction with the audited financial statements for the years ended
September 30, 1998 and 1997.
2. Inventories
Inventories include new and used salable equipment and supplies, stated at
the lower of cost on a first-in, first-out basis or market. Cost includes
amounts paid for freight-in, when applicable. A valuation allowance is recorded
for items that have a cost in excess of market value or when items are excess
or obsolete. The allowance was $290 and $210 at March 31, 1999 and September
30, 1998, respectively.
3. Agreement to Sell Company
In the first quarter of 1999, the Company's stockholders entered a
definitive agreement to sell the Company to DirectChef, Inc. The sale
transaction, effected through a combination of cash and common stock of
DirectChef, Inc., is contingent and effective upon the initial public offering
of the common stock of DirectChef, Inc. The anticipated selling price of the
Company exceeds its net assets as of March 31, 1999.
F-53
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Economy Restaurant Fixtures, Inc.:
We have audited the accompanying balance sheets of Economy Restaurant
Fixtures, Inc., a California corporation as of December 31, 1998 and 1997, and
the related statements of income, stockholders' equity, and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Economy Restaurant
Fixtures, Inc. at December 31, 1998 and 1997, and the results of its operations
and its cash flows for the years then ended in conformity with generally
accepted accounting principles.
/s/ Arthur Andersen LLP
San Francisco, California,
February 12, 1999
F-54
<PAGE>
ECONOMY RESTAURANT FIXTURES, INC.
BALANCE SHEETS--DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---------- ----------
(In thousands,
except share amounts)
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents.............................. $ 419 $ 355
Accounts receivable, less allowance for doubtful
accounts of $40 in 1998 and 1997..................... 2,380 1,948
Inventories, net....................................... 2,738 2,621
Prepaid expenses and other............................. 84 4
---------- ----------
Total current assets................................ 5,621 4,928
Property and Equipment, net.............................. 204 248
Other Assets:
Notes receivable from stockholders..................... -- 119
Other.................................................. 44 45
---------- ----------
Total assets........................................ $ 5,869 $ 5,340
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Bank overdraft......................................... $ -- $ 345
Accounts payable....................................... 2,455 1,762
Accrued liabilities.................................... 360 282
Current portion of long-term debt...................... 111 111
Customer deposits...................................... 374 316
---------- ----------
Total current liabilities........................... 3,300 2,816
---------- ----------
Long-Term Debt, net of current portion................... 24 34
---------- ----------
Commitments and Contingencies
Stockholders' Equity:
Common stock, $10 par value:
Authorized and outstanding--450 shares at December
31, 1998 and 1997................................... 5 5
Retained earnings...................................... 2,540 2,485
---------- ----------
Total stockholders' equity.......................... 2,545 2,490
---------- ----------
Total liabilities and stockholders' equity.......... $ 5,869 $ 5,340
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-55
<PAGE>
ECONOMY RESTAURANT FIXTURES, INC.
STATEMENTS OF INCOME
For the Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
------- -------
(In thousands)
<S> <C> <C>
Net revenue.................................................... $22,703 $19,884
Cost of revenue................................................ 15,976 14,082
------- -------
Gross profit.............................................. 6,727 5,802
Selling, general, and administrative expenses.................. 5,811 5,114
------- -------
Income from operations.................................... 916 688
Other income (expense):
Interest, net................................................ 29 19
Other........................................................ 46 5
------- -------
Income before income taxes................................ 991 712
Income taxes................................................... 17 10
------- -------
Net income..................................................... $ 974 $ 702
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-56
<PAGE>
ECONOMY RESTAURANT FIXTURES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
Common Stock Total
------------- Retained Stockholders'
Shares Amount Earnings Equity
------ ------ -------- -------------
(In thousands, except share amounts)
<S> <C> <C> <C> <C>
Balance, December 31, 1996................ 450 $5 $2,252 $2,257
Net income.............................. -- -- 702 702
Distributions........................... -- -- (469) (469)
--- --- ------ ------
Balance, December 31, 1997................ 450 5 2,485 2,490
Net income.............................. -- -- 974 974
Distributions........................... -- -- (919) (919)
--- --- ------ ------
Balance, December 31, 1998................ 450 $5 $2,540 $2,545
=== === ====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-57
<PAGE>
ECONOMY RESTAURANT FIXTURES, INC.
STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
-------- -------
(In thousands)
<S> <C> <C>
Cash Flows from Operating Activities:
Net income................................................. $ 974 $ 702
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation............................................ 60 59
Changes in assets and liabilities:
Accounts receivable..................................... (432) (791)
Inventories............................................. (117) (169)
Prepaid expenses and other.............................. (80) 29
Accounts payable........................................ 693 375
Accrued liabilities..................................... 78 19
Other................................................... 185 (47)
-------- ------
Net cash provided by operating activities............. 1,361 177
-------- ------
Cash Flows from Investing Activities:
Expenditures for property and equipment.................... (22) (134)
-------- ------
Cash Flows from Financing Activities:
Bank overdraft............................................. (345) 345
Proceeds from debt......................................... -- 145
Repayment of debt.......................................... (11) --
Distributions to stockholders.............................. (919) (469)
-------- ------
Net cash provided by (used in) financing activities... (1,275) 21
-------- ------
Net Increase in Cash and Cash Equivalents.................... 64 64
Cash and Cash Equivalents, beginning of year................. 355 291
-------- ------
Cash and Cash Equivalents, end of year....................... $ 419 $ 355
======== ======
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest..................................... $ 7 $ 1
Cash paid for income taxes................................. 6 8
</TABLE>
The accompanying notes are an integral part of these statements.
F-58
<PAGE>
ECONOMY RESTAURANT FIXTURES, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1997
1. Business and Organization
Economy Restaurant Fixtures, Inc. (the "Company") was founded and
incorporated in the state of California in 1967. The Company's primary business
is the sale and distribution of equipment and supplies to food service
providers, such as restaurants, hotels, cafeterias, and caterers. The Company
also performs design services for food service providers. The Company's
operations are located in California.
2. Summary of Significant Accounting Policies
The following is a summary of significant accounting policies followed in
the preparation of these financial statements.
Revenue Recognition
The Company's revenue is derived from the distribution and sale of
equipment and supplies to food service providers and from customers who request
design of their facilities. Sales revenue is recognized when the risk of
ownership transfers to the customer, generally upon shipment. Design revenue,
which was not material in 1998 and 1997, is recognized on a percentage-of-
completion basis.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Inventories
Inventories include saleable equipment and supplies and are stated at the
lower of cost on a first-in, first-out basis or market.
Property and Equipment, at Cost
Property and equipment are stated at cost and are depreciated or amortized
using the straight-line or accelerated methods. The estimated useful lives are
as follows:
<TABLE>
<S> <C>
Leasehold improvements............... Lesser of lease term or useful life
Fixtures............................. 7 years
Automobiles and equipment............ 5 years
</TABLE>
Costs of normal maintenance and repairs and minor replacements are charged
to expense as incurred. Major replacements or betterments are capitalized. When
assets are sold or otherwise disposed of, the costs and related accumulated
depreciation and amortization are removed from the accounts, and any resulting
gain or loss is included in the income statement.
F-59
<PAGE>
ECONOMY RESTAURANT FIXTURES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
In 1996, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 121, "Accounting for the Impairment of Long-lived Assets and for
Long-lived Assets to Be Disposed of." SFAS No. 121 requires that long-lived
assets and certain identifiable intangibles to be held and used by an entity be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount may not be recoverable. Impairment is measured by
comparing the carrying value of the long-lived asset to the estimated
undiscounted future cash flows expected to result from use of the assets and
their eventual disposition. The Company determined that for the years ended
December 31, 1998 and 1997, there had not been an impairment in the carrying
value of long-lived or intangible assets.
Income Taxes
The Company is an S corporation for income tax purposes. The Company's
income (whether distributed or not) is subject to federal income tax as part of
the individual stockholder's tax returns. Accordingly, no provision for federal
income tax is required in the financial statements. The Company provides for
certain state income taxes.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentration
of credit risk consist primarily of trade accounts receivable. The Company
sells primarily on 30-day terms, performs credit evaluation procedures on its
customers, and generally does not require collateral on its accounts
receivable. Most of the Company's sales are in California. The Company
maintains an allowance for potential credit losses. No single customer
represented more than ten percent of sales in any period.
Procurement Rebates
The Company receives quarterly and annual cash rebates on qualifying
purchases from many of its suppliers. The amount of these rebates has been
estimated and accrued in these financial statements. Actual rebates earned
could differ from the estimated amounts.
Financial Instruments
The carrying amounts for cash, receivables, and accounts payable
approximate fair value due to the short-term nature of these instruments. Other
fair value disclosures are in the respective notes.
Comprehensive Income
In 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards to measure all changes in equity
that result from transactions and other economic events other than transactions
with owners. Comprehensive income is the total of net income and all other
nonowner changes in equity. Other than net income, the Company has no
comprehensive income.
New Accounting Pronouncements
In 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which requires companies to report
financial and descriptive information about its reportable operating segments
in the interim and annual financial statements. The Company adopted SFAS No.
131 in 1998 and its adoption did not have a significant impact on the financial
statements or related footnote disclosures.
F-60
<PAGE>
ECONOMY RESTAURANT FIXTURES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
In 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits," which standardizes the disclosure
requirements for pensions and other postretirement benefits to the extent
practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis, and eliminates certain disclosures that are no longer useful. The
Company adopted SFAS No. 132 in 1998 and its adoption did not have a
significant impact on the financial statements or related footnote disclosures.
In 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 established a new accounting
model for derivative instruments and hedging activities. The Company will adopt
SFAS No. 133 in the year ending December 31, 1999. Since the Company has not
and presently does not own derivative instruments or engage in hedging
activities, it believes that adoption of SFAS No. 133 will not significantly
affect the Company's financial position and results of operations.
3. Property and Equipment
Property and equipment at December 31, 1998 and 1997, consists of the
following:
<TABLE>
<CAPTION>
1998 1997
----- -----
(In
thousands)
<S> <C> <C>
Leasehold improvements...................................... $ 188 $ 204
Fixtures and equipment...................................... 226 299
Automobiles................................................. 168 168
----- -----
Total property and equipment, at cost..................... 582 671
Less: Accumulated depreciation.............................. (378) (423)
----- -----
Net property and equipment................................ $ 204 $ 248
===== =====
</TABLE>
Depreciation of property and equipment in 1998 and 1997, was $60,000 and
$59,000, respectively.
4. Company Stock
The Company has authorized and issued 450 shares of $10 par value common
stock.
5. Debt
Debt at December 31, 1998 and 1997, consists of the following:
<TABLE>
<CAPTION>
1998 1997
----- -----
(In
thousands)
<S> <C> <C>
Revolving line of credit with a maximum availability in
the amount of $750 at December 31, 1998 and 1997,
expiring in June 1999; advances under the line accrue
interest at the prime rate plus 0.5 percent (8.25
percent at December 31, 1998, and 9.0 percent at
December 31, 1997) and are secured by substantially all
of the Company's assets................................. $ 100 $ 100
Note payable to a bank due in monthly installments of $1,
including interest through November 2001 at 9.75
percent................................................. 35 45
----- -----
Total debt.............................................. 135 145
Less: Current maturities.................................. (111) (111)
----- -----
Long-term portion.................................... $ 24 $ 34
===== =====
</TABLE>
F-61
<PAGE>
ECONOMY RESTAURANT FIXTURES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The Company also has a standby letter of credit arrangement with a bank
with a maximum availability of $1 million as of December 31, 1998, and
$800,000 as of December 31, 1997. No amounts were drawn against this facility
at December 31, 1998 or 1997.
Both the line of credit and the standby letter of credit are personally
guaranteed by the Company's stockholders.
The following is a schedule of annual maturities of long-term debt at
December 31, 1998 (in thousands):
<TABLE>
<S> <C>
Years Ending December 31
1999............................................................... $111
2000............................................................... 12
2001............................................................... 12
</TABLE>
6. Employee Benefits
The Company has a retirement savings plan pursuant to section 401(k) of
the Internal Revenue Code that is available to all employees who have
completed 1,000 hours of employment and are at least 21 years of age. Eligible
participants may contribute up to 15 percent or $10,000 of their compensation.
The Company provides discretionary contributions to the Plan that amounted to
$130,000 and $117,000 in 1998 and 1997, respectively.
7. Operating Leases
The Company leases certain facilities consisting of land and improvements
under noncancelable operating leases expiring at various dates through 2005.
Total rent expense for the years ended December 31, 1998 and 1997, was
approximately $403,000 and $395,000, respectively.
At December 31, 1998, future minimum rental payments on noncancelable
operating leases are as follows (in thousands):
<TABLE>
<S> <C>
1999............................................................... $ 454
2000............................................................... 288
2001............................................................... 269
2002............................................................... 258
2003............................................................... 258
Thereafter......................................................... 308
------
Total minimum lease payments..................................... $1,835
======
</TABLE>
8. Related-Party Transactions
During 1998, the Company distributed notes receivable of $115,000 relating
to funds the Company had loaned to its shareholders. The distributions
eliminated all amounts owed by its shareholders to the Company. The balance in
notes receivable of $119,000 for 1997 was included in other assets in the
combined balance sheets.
F-62
<PAGE>
ECONOMY RESTAURANT FIXTURES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
9. Commitments and Contingencies
Various legal claims arise against the Company during the normal course of
business. In the opinion of management, based on the nature of the claims,
underlying insurance coverage, and other defenses, liabilities, if any, arising
from the claims would not have a material effect on the financial statements.
10. Subsequent Events (Unaudited)
Subsequent to December 31, 1998, the Company's shareholders entered into a
definitive agreement to sell the Company to DirectChef, Inc. The sale
transaction, effected through a combination of cash and common stock of
DirectChef, Inc., is contingent and effective upon the initial public offering
of the common stock of DirectChef, Inc. The anticipated selling price of the
Company exceeds its net assets as of December 31, 1998.
F-63
<PAGE>
ECONOMY RESTAURANT FIXTURES, INC.
BALANCE SHEETS--MARCH 31, 1999 AND DECEMBER 31, 1998
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---------- ------------
(In thousands, except
share amounts)
(unaudited)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............................. $ 310 $ 419
Accounts receivable, less allowance for doubtful
accounts of $40 at March 31, 1999 and December 31,
1998................................................ 2,197 2,380
Inventories, net...................................... 3,422 2,738
Prepaid expenses and other............................ 90 84
------ ------
Total current assets................................ 6,019 5,621
PROPERTY AND EQUIPMENT, net........................... 194 204
OTHER ASSETS.......................................... 44 44
------ ------
Total assets........................................ $6,257 $5,869
====== ======
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable...................................... $2,416 $2,455
Customer deposits..................................... 827 374
Accrued liabilities................................... 342 360
Current portion of long term debt..................... 206 111
------ ------
Total current liabilities........................... 3,791 3,300
------ ------
Long-Term Debt, net of current portion................ 21 24
------ ------
COMMITMENTS AND CONTINGENCIES
------ ------
STOCKHOLDERS' EQUITY
Common stock, $10 par value:
Authorized and outstanding--450 shares at March 31,
1999 and December 31, 1998......................... 5 5
Retained earnings..................................... 2,440 2,540
------ ------
Total stockholders' equity.......................... 2,445 2,545
------ ------
Total liabilities and stockholders' equity.......... $6,257 $5,869
====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-64
<PAGE>
ECONOMY RESTAURANT FIXTURES, INC.
STATEMENTS OF INCOME
For the Three Months Ended March 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
(In thousands)
(unaudited) (unaudited)
<S> <C> <C>
NET REVENUE............................................ $4,945 $4,530
COST OF REVENUE........................................ 3,611 3,352
------ ------
Gross profit......................................... 1,334 1,178
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES.......... 1,351 1,288
------ ------
Loss before income taxes............................. (17) (110)
INCOME TAXES........................................... 5 (4)
------ ------
NET LOSS............................................... $ (22) $ (106)
====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-65
<PAGE>
ECONOMY RESTAURANT FIXTURES, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
For the Three Months Ended March 31, 1999
<TABLE>
<CAPTION>
Common Stock Total
------------- Retained Stockholders'
Shares Amount Earnings Equity
------ ------ -------- -------------
(In thousands, except share amounts)
<S> <C> <C> <C> <C>
BALANCE, December 31, 1998................ 450 $ 5 $2,540 $2,545
Net loss (unaudited).................... -- -- (22) (22)
Distributions (unaudited)............... -- -- (78) (78)
--- --- ------ ------
BALANCE, MARCH 31, 1999 (unaudited)....... 450 $ 5 $2,440 $2,445
=== === ====== ======
</TABLE>
The accompanying notes are an integral part of this statement.
F-66
<PAGE>
ECONOMY RESTAURANT FIXTURES
STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
(In thousands)
(unaudited) (unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................... $ (22) $(106)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation......................................... 18 12
Changes in assets and liabilities:
Accounts receivable............................... 183 802
Inventories....................................... (684) (176)
Prepaid expenses and other........................ (6) --
Accounts payable.................................. (39) 42
Accrued liabilities............................... (18) 27
Customer deposits................................. 453 --
Other............................................. (3) 3
----- -----
Net cash provided by (used in) operating
activities.................................... (118) 604
----- -----
CASH FLOWS FROM INVESTING ACTIVITIES: Expenditures for
property and equipment............................... (8) --
----- -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from (payments on) line of credit......... 95 (244)
Repayment of notes payable............................. -- (100)
Distributions to stockholders.......................... (78) (174)
----- -----
Net cash provided by (used in) financing
activities.................................... 17 (518)
----- -----
Net increase (decrease) in cash and cash
equivalents................................... (109) 86
CASH AND CASH EQUIVALENTS, at the beginning of the
period............................................... 419 355
----- -----
CASH AND CASH EQUIVALENTS, at the end of the period.... $ 310 $ 441
===== =====
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest................................. $ -- $ --
Cash paid for income taxes............................. $ 7 $ --
</TABLE>
The accompanying notes are an integral part of these statements.
F-67
<PAGE>
ECONOMY RESTAURANT FIXTURES
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The financial statements for the interim periods included herein are
unaudited; however, they contain all adjustments which, in the opinion of
management, are necessary to present fairly the financial position of Economy
Restaurant Fixtures ("Company") at March 31, 1999, and the statements of
income, cash flows and stockholders' equity for the three-month periods ended
March 31, 1999 and 1998. All such adjustments are of a normal recurring nature.
Accounting measurements at interim dates inherently involve greater reliance on
estimates than at year end, thus the results of operations for the periods
presented are not necessarily indicative of the results to be expected for the
full year. The accompanying financial statements do not include footnotes and
certain financial presentations normally required under generally accepted
accounting principles and, therefore, should be read in conjunction with the
audited financial statements for the year ended December 31, 1998 and December
31, 1997.
2. Agreement to Sell Company
In the first quarter of 1999, the Company's stockholders entered a
definitive agreement to sell the Company to DirectChef, Inc. The sale
transaction, effected through a combination of cash and common stock of
DirectChef, Inc., is contingent and effective upon the initial public offering
of the common stock of DirectChef, Inc. The anticipated selling price of the
Company exceeds its net assets as of March 31, 1999.
F-68
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of Curtis Restaurant Equipment, Inc.:
We have audited the accompanying balance sheets of Curtis Restaurant
Equipment, Inc. (an Oregon corporation) as of December 31, 1998 and 1997 and
the related statements of income, stockholders' equity and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Curtis Restaurant
Equipment, Inc. as of December 31, 1998 and 1997, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/ Arthur Andersen LLP
Portland, Oregon,
February 17, 1999
F-69
<PAGE>
CURTIS RESTAURANT EQUIPMENT, INC.
BALANCE SHEETS
As of December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
------ ------
(In
thousands)
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents...................................... $ 28 $ 95
Trade accounts receivable, less allowance for doubtful
accounts of $164 in 1998 and $268 in 1997.................... 3,943 2,330
Rebates receivable............................................. 811 576
Inventories.................................................... 1,060 949
Prepaid expenses............................................... 44 23
Income tax receivable.......................................... -- 176
------ ------
Total current assets........................................ 5,886 4,149
Property and Equipment, net...................................... 241 235
Other Long-term Assets:
Note receivable................................................ -- 202
Other.......................................................... 159 90
------ ------
Total assets................................................ $6,286 $4,676
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Line of credit................................................. $1,900 $1,100
Accounts payable............................................... 1,083 954
Accrued liabilities............................................ 313 376
Deferred revenue............................................... 375 125
Current portion of long-term debt and capital leases........... 68 64
Income taxes payable........................................... 73 --
Deferred income taxes.......................................... 233 145
------ ------
Total current liabilities................................... 4,045 2,764
Long-term Liabilities:
Notes payable, net of current portion.......................... 28 65
Obligations under capital leases............................... 40 12
------ ------
Total liabilities........................................... 4,113 2,841
Stockholders' Equity:
Common stock, no par value..................................... 58 58
Retained earnings.............................................. 2,115 1,777
------ ------
Total stockholders' equity.................................. 2,173 1,835
------ ------
Total liabilities and stockholders' equity.................. $6,286 $4,676
====== ======
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-70
<PAGE>
CURTIS RESTAURANT EQUIPMENT, INC.
STATEMENTS OF INCOME
For the Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
------- -------
(In thousands)
<S> <C> <C>
Net revenue................................................... $20,279 $19,933
Cost of revenue............................................... 16,526 16,434
------- -------
Gross profit............................................. 3,753 3,499
Selling, general and administrative expenses.................. 3,103 3,335
------- -------
Income from operations................................... 650 164
Other income (expense):
Interest expense............................................ (109) (151)
Other....................................................... 15 18
------- -------
Income before income taxes.................................... 556 31
Income taxes.................................................. 218 12
------- -------
Net income.................................................... $ 338 $ 19
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-71
<PAGE>
CURTIS RESTAURANT EQUIPMENT, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
Common Stock Total
------------- Retained Stockholders'
Shares Amount Earnings Equity
------ ------ -------- -------------
(In thousands, except shares)
<S> <C> <C> <C> <C>
Balance, December 31, 1996................ 93 $ 58 $1,777 $1,835
Net income.............................. -- -- 19 19
Owner distributions..................... -- -- (19) (19)
--- ---- ------ ------
Balance, December 31, 1997................ 93 58 1,777 1,835
Net income.............................. -- -- 338 338
--- ---- ------ ------
Balance, December 31, 1998................ 93 $ 58 $2,115 $2,173
=== ==== ====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-72
<PAGE>
CURTIS RESTAURANT EQUIPMENT, INC.
STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
------- -----
(In
thousands)
<S> <C> <C>
Cash Flows from Operating Activities:
Net income................................................... $ 338 $ 19
Adjustments to reconcile net income to net cash provided by
(used in) operating activities--
Depreciation.............................................. 60 49
Loss on sale of assets.................................... 3 --
Deferred taxes............................................ 88 (106)
Changes in assets and liabilities--
Accounts receivable....................................... (1,613) 822
Rebates receivable........................................ (235) 165
Inventories............................................... (111) 185
Prepaid expenses.......................................... (21) (3)
Income taxes receivable................................... 176 (22)
Other assets.............................................. (47) --
Income tax payable........................................ 73 --
Accounts payable.......................................... 129 (462)
Accrued liabilities....................................... (63) (48)
Deferred revenues......................................... 250 (115)
------- -----
Net cash (used in) provided by operating activities..... (973) 484
Cash Flows from Investing Activities:
Expenditures for property and equipment...................... (23) (8)
Proceeds from the sale of assets............................. 6 --
Key Man Insurance............................................ (22) (16)
------- -----
Net cash used in investing activities................... (39) (24)
------- -----
Cash Flows from Financing Activities:
Line of credit, net.......................................... 800 (300)
Payments received on long-term note receivable............... 202 16
Payments on debt, net........................................ (57) (64)
Dividends to stockholders.................................... -- (19)
------- -----
Net cash provided by (used in) financing activities..... 945 (367)
Net Increase (Decrease) in Cash and Cash Equivalents........... (67) 93
Cash and Cash Equivalents, beginning of year................... 95 2
------- -----
Cash and Cash Equivalents, end of year......................... $ 28 $ 95
======= =====
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest....................................... $ 107 $ 168
Cash paid for income taxes................................... 32 139
Noncash transactions--
Capital leases............................................ 52 --
</TABLE>
The accompanying notes are an integral part of these statements.
F-73
<PAGE>
CURTIS RESTAURANT EQUIPMENT, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1997
1. Nature of Operations
Curtis Restaurant Equipment, Inc. (the "Company") was incorporated in the
State of Oregon on July 1, 1975. The Company is headquartered in Springfield,
Oregon, with a branch office in Medford, Oregon. The Company, a dealer for all
major foodservice equipment and supplies manufacturers, sells durable goods to
a wide range of commercial foodservice providers. Sales are made of replacement
items as well as entire new facilities and remodels. Design, layout and
installation services are offered to customers. The Company does not perform
any manufacturing process and only very limited repair functions.
2. Summary of Significant Accounting Policies
The following is a summary of significant accounting policies used in the
preparation of these financial statements.
Revenue and Cost Recognition
Revenues represent sales to individual consumers or business owners
(Individual Sales), and sales to large projects (Job Sales). Individual Sales
and Job Sales represent approximately 33% and 67%, respectively, of total sales
for the year ended December 31, 1998 and 1997. Revenues and the related costs
of revenues are recognized when the goods are sold off the showroom floor,
delivered to the customer or installed at the customer's location, depending on
whether the sale relates to an Individual Sale or Job Sale. Deferred revenue
represents customer deposits on Job Sales.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Financial Instruments
Cash and cash equivalents, receivables, accounts receivables and accounts
payable are settled within a year and are not subject to market rate
fluctuations. Debt instruments are generally at market rates. The carrying
value of these financial instruments approximates fair market value at December
31, 1998 and 1997.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
Rebates Receivable
The Company is a member of two buying groups. As a member of these groups
the Company receives rebates for reaching certain purchasing thresholds. The
Company also receives rebates from several individual suppliers for achieving
certain purchasing thresholds. Rebates are included as a reduction of cost of
revenues.
Inventories
Inventories are stated at the lower of cost or market. Costs are determined
on the last-in, first-out (LIFO) method.
F-74
<PAGE>
CURTIS RESTAURANT EQUIPMENT, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Property and Equipment,
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the following lives:
<TABLE>
<S> <C>
Fixtures and equipment............ 2-7 years
Vehicles.......................... 5 years
Leasehold improvements............ Shorter of lease term or useful life of the asset
</TABLE>
Costs of normal maintenance and repairs and minor replacements are charged
to expense as incurred. Major replacements or betterments are capitalized. When
assets are sold or otherwise disposed of, the costs and related accumulated
depreciation are removed from the accounts and any resulting gain or loss is
included in the income statement.
Concentration of Credit Risk
Customers are located across the United States with a heavier concentration
in Oregon and the Pacific Northwest. Trade receivables consist primarily of
balances due for sales made in the normal course of business. While most sales
on open account are made on an unsecured basis, certain balances are subject to
purchase money security agreements. As of December 31, 1998, three customers
accounted for 23%, 14% and 10% of trade accounts receivable. As of December 31,
1997, one customer accounted for 16% of trade accounts receivable.
Sales to two customers combined accounted for 47% and 36% of total sales
for the years ended December 31, 1998 and 1997, respectively.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS
109). This pronouncement requires deferred tax assets and liabilities to be
valued using the enacted tax rates expected to be in effect when the temporary
differences are recovered or settled.
The Company recognizes deferred tax liabilities and assets for the expected
future tax consequences of temporary differences between the carrying amount
and the tax bases of assets and liabilities.
Other Assets
Other assets consist primarily of the cash surrender value of insurance
policies on the lives of the Company's primary officers/shareholders for which
the Company is the beneficiary.
Comprehensive Income
In 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards to measure all changes in equity
that result from transactions and other economic events other than transactions
with owners. Comprehensive income is the total of net income and all other
nonowner changes in equity. Other than net income, the Company has no
comprehensive income.
F-75
<PAGE>
CURTIS RESTAURANT EQUIPMENT, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
New Accounting Pronouncements
In 1997, the Financial Accounting Standards Board (FASB) issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information,"
which requires companies to report financial and descriptive information about
its reportable operating segments in the interim and annual financial
statements. The Company will adopt SFAS No. 131 in 1999 and does not expect its
adoption to have a significant impact on the financial statements or related
footnote disclosures.
In 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits," which standardizes the disclosure
requirements for pensions and other postretirement benefits to the extent
practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis, and eliminates certain disclosures that are no longer useful. The
Company will adopt SFAS No. 132 in 1999 and does not expect its adoption to
have a significant impact on the financial statements or related footnote
disclosures.
In 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 established a new accounting
model for derivative instruments and hedging activities. The Company will adopt
SFAS No. 133 in 1999. The Company believes that adoption of SFAS No. 133 will
not significantly affect the Company's financial position and results of
operations.
3. Inventories
Inventories at December 31, 1998 and 1997 consist of the following:
<TABLE>
<CAPTION>
1998 1997
------- -------
(In thousands)
<S> <C> <C>
Smallwares and equipment................................. $ 777 $ 797
Job inventory............................................ 551 399
------- -------
FIFO inventory........................................... 1,328 1,196
LIFO reserve............................................. (268) (247)
------- -------
Net inventories........................................ $ 1,060 $ 949
======= =======
</TABLE>
4. Property and Equipment
Property and equipment at December 31, 1998 and 1997 consists of the
following:
<TABLE>
<CAPTION>
1998 1997
------- -------
(In thousands)
<S> <C> <C>
Leasehold improvements.................................... $ 236 $ 236
Fixtures and equipment.................................... 235 179
Vehicles.................................................. 159 174
------- -------
Total property and equipment............................ 630 589
Accumulated depreciation.................................. (389) (354)
------- -------
Net property and equipment................................ $ 241 $ 235
======= =======
</TABLE>
5. Line of Credit
The Company has a revolving line of credit with a bank, secured by accounts
receivable, for the amount of $2,000,000. As of December 31, 1998 and 1997,
borrowings outstanding under the Company's line of credit
F-76
<PAGE>
CURTIS RESTAURANT EQUIPMENT, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
were $1,900,000 and $1,100,000, respectively. The line of credit bears
interest at prime rate plus 0.50%, which was 8.25% and 9.00% at December 31,
1998 and 1997, respectively. The line expires in April 1999.
Under the terms of the line of credit the Company has agreed to maintain
certain financial covenants. The Company was in compliance with these
covenants as of December 31, 1998.
6. Long Term Notes Payable
The Company's long-term obligations consisted of the following at December
31:
<TABLE>
<CAPTION>
1998 1997
------- -------
(In thousands)
<S> <C> <C>
Note payable to the bank, secured by tenant improvements.
Payable in monthly installments of $2,232. Interest is
at 9.75% per annum, maturing in July 2000............... $ 36 $ 57
Note payable to the bank, secured by vehicle. Payable in
monthly installments of $468. Interest is at 9.25% per
annum, maturing in January 2002......................... 15 --
Note payable to the bank, secured by vehicle. Payable in
monthly installments of $616. Interest is at 9.25% per
annum, maturing in November 2000........................ 13 19
Note payable to a former stockholder. Payable in monthly
installments of $2,366. Interest is at 9.00% per annum,
maturing in July 1999................................... 16 42
Note payable to a credit corporation, secured by vehicle.
Payable in monthly installments of $324. Interest is at
2.9% per annum, and matured in December 1998............ -- 4
Note payable to the bank, secured by vehicle. Payable in
monthly installments of $324. Interest is at 9.25% per
annum and matured in June 1998.......................... -- 2
------- ------
80 124
Less--Current portion..................................... (52) (59)
------- ------
Total................................................... $ 28 $ 65
======= ======
</TABLE>
Future minimum payments of long-term debt as of December 31, 1998 are as
follows (in thousands):
<TABLE>
<S> <C>
1999................................................................. $52
2000................................................................. 22
2001................................................................. 5
2002................................................................. 1
Thereafter........................................................... --
---
$80
===
</TABLE>
In 1998, the Company's bank issued an irrevocable standby letter of credit
in favor of each of the Company's two buying groups, effectively guaranteeing
payment to the buying group if the Company should fail to do so. The limit on
the letter of credit was $500,000 at December 31, 1998.
F-77
<PAGE>
CURTIS RESTAURANT EQUIPMENT, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
7. Capital Leases
The Company has five year capital leases for equipment. The Company's
obligations under capital leases for the years ended December 31, 1998 and
1997 were $57,000 and $17,000, respectively.
Future minimum lease payments under capital leases as of December 31 are
as follows (in thousands):
<TABLE>
<S> <C>
1999................................................................ $ 22
2000................................................................ 22
2001................................................................ 16
2002................................................................ 6
Thereafter.......................................................... --
----
Total minimum lease payments...................................... 66
Less--Amount representing interest (at rates ranging from 6.25% to
11.10%)......................................................... (10)
----
Present value of minimum lease payments............................. 56
Less--Current portion............................................... (16)
----
$ 40
====
</TABLE>
8. Income Taxes
The provision for income taxes consists of the following for the year
ended December 31:
<TABLE>
<CAPTION>
1998 1997
---- -----
(In
thousands)
<S> <C> <C>
Current tax provision--
Federal........................................................ $108 $ 106
State.......................................................... 22 12
---- -----
130 118
Deferred tax provision (benefit)................................. 88 (106)
---- -----
Total provision............................................. $218 $ 12
==== =====
</TABLE>
A reconciliation of the provision for income taxes at the federal
statutory income tax rate to the provision for income taxes as reported is as
follows for December 31:
<TABLE>
<CAPTION>
1998 1997
----- -----
<S> <C> <C>
Federal rate................................................... 34.00% 34.00%
State rate, net................................................ 4.36% 2.53%
Non-deductible dues and other.................................. 0.85% 2.18%
----- -----
Effective tax.................................................. 39.21% 38.71%
===== =====
</TABLE>
The State of Oregon had a one-time reduction in its state income tax rate
in 1997.
F-78
<PAGE>
CURTIS RESTAURANT EQUIPMENT, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Deferred tax assets and liabilities are comprised of the following
components at December 31:
<TABLE>
<CAPTION>
1998 1997
----- -----
(In
thousands)
<S> <C> <C>
Current deferred tax (liability) asset--
Rebates receivable.......................................... $(311) $(221)
Allowance for doubtful accounts............................. 42 42
Other....................................................... 36 34
----- -----
Total current deferred tax liability..................... $(233) $(145)
===== =====
</TABLE>
9. Related Party Transactions
The Company has guaranteed to the bank a note payable by the majority
stockholders. The guarantee is collateralized by the Springfield facility.
The majority stockholders also own 51% of one of the Company's suppliers,
Pacific Stainless Products, Inc. (Pacific). Purchases from Pacific for the
years ended December 31, 1998 and 1997 were approximately $1,600,000 and
$1,592,000, respectively. At December 31, 1998 and 1997 the Company owed
Pacific $150,000 and $109,000, respectively, which is included in the
Company's accounts payable in the balance sheets.
The majority stockholders are also shareholders in Vangard Technology, Inc
(Vangard), one of the Company's suppliers. At December 31, 1997, the Company
had a note receivable from Vangard of $195,000. This amount was paid off in
1998.
The Company leases its Springfield facility from the majority
stockholders. The current lease expires December 1, 2002. Lease payments were
$6,000 per month for 1997 and six months of 1998. In June 1998, lease payments
were increased to $10,000 per month.
The Company's majority stockholders also own minority interests in JB
Roadhouse/Colts (JB) and US Basketball Academy (US). Sales to JB for the years
ended December 31, 1998 and 1997 were $1,000 and $78,000, respectively. At
December 31, 1998 and 1997, JB owed the Company $43,000 and $52,000,
respectively. Sales to US for the years ended December 31, 1998 and 1997 were
$0 and $212,000, respectively. At December 31, 1998 and 1997, US owed the
Company $76,000 and $67,000, respectively.
10. Commitments and Contingencies
Operating Leases
The Company leases certain equipment and its operating facility under
operating lease agreements. Future minimum lease payments are as follows (in
thousands):
<TABLE>
<S> <C>
1999.................................................................... $138
2000.................................................................... 133
2001.................................................................... 121
2002.................................................................... 120
2003.................................................................... 100
Thereafter.............................................................. --
----
$612
====
</TABLE>
Rent expense for the year ended December 31, 1998 and 1997 was $100,000
and $82,000, respectively.
F-79
<PAGE>
CURTIS RESTAURANT EQUIPMENT, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
11. Supplemental Retirement Plan
The Company has a security interest in a life insurance policy for cash
advances made to implement an equity split dollar life insurance fringe benefit
plan for certain key employees of the Company. An assignment of the Company's
security interest has been made for the purpose of providing security for the
indebtedness incurred by the Company to facilitate the implementation of this
benefit plan without disruption of working capital needed for other business
purposes.
12. Profit Sharing Plan
The Company has a discretionary profit sharing plan for all of its
employees. No fixed contribution plan percentage exists. The Company
contributed $120,000 and $140,000 relating to the years ended December 31, 1998
and 1997, respectively.
13. Capital Stock
As of December 31, 1998 and 1997, the Company had the following amounts of
authorized (500 no par value, fully paid, nonassessable) and issued shares
outstanding:
<TABLE>
<CAPTION>
Issued and
Authorized Outstanding
---------- -----------
<S> <C> <C>
1998.................................................. 500 93
1997.................................................. 500 93
</TABLE>
14. Subsequent Event (Unaudited)
Subsequent to December 31, 1998, the Company's stockholders entered into a
definitive agreement to sell the Company to DirectChef, Inc. The sale
transaction, effected through a combination of cash and common stock of
DirectChef, Inc., is contingent and effective upon the initial public offering
of the common stock of DirectChef, Inc. The anticipated selling price of the
Company exceeds its net assets as of December 31, 1998.
F-80
<PAGE>
CURTIS RESTAURANT EQUIPMENT, INC.
BALANCE SHEETS
As of March 31, 1999 and December 31, 1998
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
----------- ------------
(In thousands)
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................. $ -- $ 28
Trade accounts receivable, less allowance for doubtful
accounts of $164 on March 31, 1999 and December 31,
1998................................................ 2,824 3,943
Rebates receivable.................................... 767 811
Inventories........................................... 1,078 1,060
Prepaid expenses...................................... 30 44
Income taxes receivable............................... 52 --
------ ------
Total current assets................................ 4,751 5,886
PROPERTY AND EQUIPMENT, net........................... 229 241
OTHER ASSETS.......................................... 159 159
------ ------
Total assets........................................ $5,139 $6,286
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit........................................ $ 900 $1,900
Accounts payable...................................... 1,324 1,083
Accrued liabilities................................... 140 313
Deferred revenue...................................... 261 375
Current portion of long-term debt and capital leases.. 62 68
Income taxes payable.................................. -- 73
Deferred income taxes................................. 200 233
------ ------
Total current liabilities........................... 2,887 4,045
------ ------
NOTES PAYABLE, net of current portion................. 20 28
------ ------
OBLIGATIONS UNDER CAPITAL LEASES, net of current
portion............................................. 35 40
------ ------
Total liabilities................................... 2,942 4,113
------ ------
STOCKHOLDERS' EQUITY
Common stock, no par value............................ 58 58
Retained earnings..................................... 2,139 2,115
------ ------
Total stockholders' equity.......................... 2,197 2,173
------ ------
Total liabilities and stockholders' equity.......... $5,139 $6,286
====== ======
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-81
<PAGE>
CURTIS RESTAURANT EQUIPMENT, INC.
STATEMENTS OF INCOME
For the Three Months Ended March 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
(In thousands)
(unaudited) (unaudited)
<S> <C> <C>
NET REVENUE............................................ $4,305 $4,268
COST OF REVENUE........................................ 3,486 3,455
------ ------
Gross profit......................................... 819 813
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES.......... 739 710
------ ------
Income from operations............................... 80 103
------ ------
OTHER INCOME (EXPENSE):
Interest expense....................................... (46) (30)
Other.................................................. 7 2
------ ------
Income before income taxes........................... 41 75
INCOME TAXES........................................... 17 31
------ ------
NET INCOME............................................. $ 24 $ 44
====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-82
<PAGE>
CURTIS RESTAURANT EQUIPMENT, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
For the Three Months Ended March 31, 1999
<TABLE>
<CAPTION>
Common Stock Total
------------- Retained Stockholders'
Shares Amount Earnings Equity
------ ------ -------- -------------
(In thousands, except share amounts)
<S> <C> <C> <C> <C>
BALANCE, December 31, 1998................ 93 $58 $2,115 $2,173
Net income (unaudited).................. -- -- 24 24
--- --- ------ ------
BALANCE, March 31, 1999 (unaudited)..... 93 $58 $2,139 $2,197
=== === ====== ======
</TABLE>
The accompanying notes are an integral part of this statement.
F-83
<PAGE>
CURTIS RESTAURANT EQUIPMENT, INC.
STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
(In thousands)
(unaudited) (unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................ $ 24 $ 44
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation........................................ 15 11
Deferred taxes...................................... (33) (20)
Changes in assets and liabilities:
Trade accounts receivable........................ 1,119 382
Rebates receivable............................... 44 51
Inventories...................................... (18) 44
Prepaid expenses................................. 14 3
Income taxes receivable.......................... (52) 15
Accounts payable................................. 241 17
Accrued liabilities.............................. (173) (108)
Deferred revenue................................. (114) 145
Income taxes payable............................. (73) --
------- -----
Net cash provided by operating activities...... 994 584
------- -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property and equipment............... (3) (12)
------- -----
Net cash used in investing activities.......... (3) (12)
------- -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Line of credit, net................................... (1,000) (600)
Proceeds from notes receivable........................ -- 202
Borrowings (repayment) of notes payable............... (19) 2
------- -----
Net cash used in financing activities.......... (1,019) (396)
------- -----
Net (decrease) increase in cash and cash
equivalents.................................. (28) 176
CASH AND CASH EQUIVALENTS, at beginning of period..... 28 95
------- -----
CASH AND CASH EQUIVALENTS, at end of period........... $ -- $ 271
======= =====
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest................................ $ 46 $ 30
Cash paid for income taxes............................ $ 175 $ 42
</TABLE>
The accompanying notes are an integral part of these statements.
F-84
<PAGE>
CURTIS RESTAURANT EQUIPMENT
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The financial statements for the interim periods included herein are
unaudited; however, they contain all adjustments which, in the opinion of
management, are necessary to present fairly the financial position of Curtis
Restaurant Equipment, Inc. (the Company) at March 31, 1999, and the statements
of income, cash flows and stockholders' equity for the three-month periods
ended March 31, 1999 and 1998. All such adjustments are of a normal recurring
nature. Accounting measurements at interim dates inherently involve greater
reliance on estimates than at year end, thus the results of operations for the
periods presented are not necessarily indicative of the results to be expected
for the full year. The accompanying financial statements do not include
footnotes and certain financial presentations normally required under generally
accepted accounting principles and, therefore, should be read in conjunction
with the audited financial statements for the years ended December 31, 1998 and
1997.
2. Agreement to Sell Company
In the first quarter of 1999, the Company's stockholders entered a
definitive agreement to sell the Company to DirectChef, Inc. The sale
transaction, effected through a combination of cash and common stock of
DirectChef, Inc., is contingent and effective upon the initial public offering
of the common stock of DirectChef, Inc. The anticipated selling price of the
Company exceeds its net assets as of March 31, 1999.
F-85
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Bintz Distributing Co.:
We have audited the accompanying balance sheets of Bintz Distributing Co.
(a Utah corporation) as of December 31, 1998 and 1997, and the related
statements of operations, stockholders' equity and cash flows for the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Bintz Distributing Co. as
of December 31, 1998 and 1997, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.
/s/ Arthur Andersen LLP
Salt Lake City, Utah
February 15, 1999
F-86
<PAGE>
BINTZ DISTRIBUTING CO.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------ ------------
(In thousands, except
shares)
<S> <C> <C>
ASSETS
Current Assets:
Cash................................................. $ -- $ --
Trade accounts receivable, less allowance for
doubtful accounts of $47 and $33 in 1998 and 1997,
respectively....................................... 2,390 1,934
Rebates receivable................................... 502 348
Inventories.......................................... 1,095 1,289
Prepaid expenses and other........................... 15 107
------ ------
Total current assets.............................. 4,002 3,678
------ ------
Property and Equipment:
Leasehold improvements............................... 290 284
Fixtures and equipment............................... 180 154
Vehicles............................................. 116 110
Warehouse equipment.................................. 33 31
Equipment held under capital lease................... 24 24
------ ------
643 603
Less accumulated depreciation and amortization.... (305) (214)
------ ------
Net property and equipment........................ 338 389
------ ------
Total Assets........................................... $4,340 $4,067
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Line of credit....................................... $1,375 $1,434
Accounts payable..................................... 903 678
Accrued liabilities.................................. 195 187
Customer deposits.................................... 125 492
Current portion of notes payable..................... 14 13
Current portion of obligations under capital
leases............................................. 7 8
------ ------
Total current liabilities......................... 2,619 2,812
------ ------
Long-term Liabilities:
Related party notes payable.......................... 163 164
Notes payable, net of current portion................ 7 21
Obligations under capital leases, net of current
portion............................................ 3 8
------ ------
173 193
------ ------
Commitments and Contingencies (Notes 8 and 10)
Stockholders' Equity:
Common stock, no par value
Authorized--50,000 shares...........................
Issued--17,500 shares............................... 350 350
Retained earnings.................................... 1,198 712
------ ------
Total Stockholders' Equity............................. 1,548 1,062
------ ------
Total Liabilities and Stockholders' Equity............. $4,340 $4,067
====== ======
</TABLE>
The accompanying notes to financial statements are an integral part of these
balance sheets.
F-87
<PAGE>
BINTZ DISTRIBUTING CO.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended
December 31,
----------------
1998 1997
------- -------
(In thousands)
<S> <C> <C>
Net revenue.................................................. $17,835 $13,097
Cost of revenue.............................................. 14,647 10,719
------- -------
Gross profit................................................. 3,188 2,378
Selling, general and administrative expenses................. 2,448 2,071
------- -------
Income from operations....................................... 740 307
Other income (expense):
Interest................................................... (125) (144)
Other...................................................... 1 6
------- -------
Net income................................................... $ 616 $ 169
======= =======
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-88
<PAGE>
BINTZ DISTRIBUTING CO.
STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
Common Stock Total
------------- Retained Stockholders'
Shares Amount Earnings Equity
------ ------ -------- -------------
(In thousands, except shares)
<S> <C> <C> <C> <C>
Balance, December 31, 1996................ 17,500 $350 $ 702 $1,052
Net income.............................. -- -- 169 169
Distributions to stockholders........... -- -- (159) (159)
------ ---- ------ ------
Balance, December 31, 1997................ 17,500 350 712 1,062
Net income.............................. -- -- 616 616
Distributions to stockholders........... -- -- (130) (130)
------ ---- ------ ------
Balance, December 31, 1998................ 17,500 $350 $1,198 $1,548
====== ==== ====== ======
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-89
<PAGE>
BINTZ DISTRIBUTING CO.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended
December
31,
------------
1998 1997
----- -----
(In
thousands)
<S> <C> <C>
Cash Flows from Operating Activities:
Net income..................................................... $ 616 $ 169
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................... 92 80
Gain on sale of assets...................................... -- (6)
Changes in assets and liabilities:
Decrease (increase) in:
Trade accounts receivable................................... (456) (97)
Rebates receivable.......................................... (154) (10)
Inventories................................................. 194 (149)
Prepaid expenses and other.................................. 92 (102)
Increase (decrease) in:
Accounts payable............................................ 225 153
Accrued liabilities......................................... 8 (10)
Customer deposits........................................... (367) 439
----- -----
Net cash provided by operating activities................. 250 467
----- -----
Cash Flows from Investing Activities:
Expenditures for property and equipment........................ (41) (159)
Proceeds from disposal of property and equipment............... -- 13
----- -----
Net cash used in investing activities..................... (41) (146)
----- -----
Cash Flows from Financing Activities:
Net change in line of credit................................... (59) (133)
Payments on capital lease obligations.......................... (6) (5)
Payments on notes payable...................................... (14) (24)
Distributions to stockholders.................................. (130) (159)
----- -----
Net cash used in financing activities..................... (209) (321)
----- -----
Net Increase (Decrease) in Cash.................................. -- --
Cash, at Beginning of Period..................................... -- --
----- -----
Cash, at End of Period........................................... $ -- $ --
===== =====
</TABLE>
The accompanying notes to financial statements are an integtal part of these
statements.
F-90
<PAGE>
BINTZ DISTRIBUTING CO.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended
December 31,
--------------------
1998 1997
--------- ---------
(In thousands)
<S> <C> <C>
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest.................................... $125 $144
Non-cash transactions related to capital lease
obligations............................................. -- 9
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-91
<PAGE>
BINTZ DISTRIBUTING CO.
NOTES TO FINANCIAL STATEMENTS
1. Business and Organization
Bintz Distributing Co. (the "Company"), a Utah corporation, is engaged in
the sale of restaurant equipment and supplies, principally to restaurants,
schools, service stations and other companies with headquarters or operations
in the state of Utah.
2. Summary of Significant Accounting Policies
The following is a summary of significant accounting policies followed in
the preparation of these financial statements.
Revenue Recognition
Revenues are generally recognized when equipment and supplies are shipped.
For certain orders primarily from the Company's significant customers (see Note
9), at the customer's request, the order is prepared for shipment and the
customer takes title and accepts billing but the equipment and supplies are
held at the Company's warehouse until the customer is ready for installation of
the equipment and supplies at its facility. Bill and hold arrangements are
covered by written contracts and the customer generally retains ten percent of
the invoice price until installation of the shipment at its facility. Revenues
for bill and hold arrangements are recognized when equipment and supplies are
ready for shipment.
Additionally, the Company requires a pre-payment from certain customers
placing large equipment orders. These pre-payments are recorded as customer
deposits and recognized as revenue when the equipment and supplies are shipped.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
The carrying amounts of all financial instruments approximate fair value.
The estimated fair values have been determined using appropriate market
information and valuation methodologies. The Company's financial instruments
consist primarily of cash, trade accounts receivable, accounts payable and debt
instruments.
Inventories
Inventories are stated at the lower of cost, as determined by the LIFO
method, or market. If inventories had been valued by the first-in, first-out
("FIFO") method, such inventory costs would exceed LIFO costs by approximately
$325,000 and $301,000 at December 31, 1998 and 1997, respectively. Gross profit
and net income during the years ended December 31, 1998 and 1997 would have
been higher by approximately $24,000 and $33,000, respectively, had the Company
valued its inventories using the FIFO method.
F-92
<PAGE>
BINTZ DISTRIBUTING CO.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Property and Equipment
Property and equipment are stated at cost and are depreciated or amortized
using the straight-line method. The estimated useful lives are as follows:
<TABLE>
<S> <C>
Leasehold improvements.................... Lesser of lease term or 2-10 years
Fixtures and equipment.................... 3-5 years
Vehicles.................................. 3-5 years
Warehouse equipment....................... 3-5 years
Equipment held under capital lease........ 3-5 years
</TABLE>
Costs of normal maintenance and repairs and minor replacements are charged
to expense as incurred. Major replacements or betterments are capitalized. When
assets are sold or otherwise disposed of, the costs and related accumulated
depreciation and amortization are removed from the accounts and any resulting
gain or loss is included in the determination of income.
Long-lived assets to be held and used by the Company are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. Impairment is measured by comparing the
carrying value of the long-lived assets to the estimated undiscounted future
cash flows expected to result from use of the assets and their eventual
disposition. The Company determined that as of December 31, 1998, there had not
been an impairment in the carrying value of long-lived assets.
Income Taxes
The Company has elected S corporation status as defined by the Internal
Revenue Code, whereby the Company is not subject to taxation for federal income
tax purposes. Under the Internal Revenue Code provisions applicable to S
corporations and similar provisions of the state tax code for the states in
which the Company operates, the stockholders report the Company's taxable
earnings or losses in their personal federal and state income tax returns.
Accordingly, no provision for federal and state income taxes has been reflected
in the accompanying financial statements.
Volume Rebates
The Company records purchase volume rebates at the time of purchase based
upon estimates of purchases during the period. Volume rebates are reflected as
a reduction of the cost of inventory purchases.
Concentration of Credit Risk
In the normal course of business, the Company extends credit to its
customers. The receivables due from the two significant customers identified in
Note 9 amounted to approximately 45 percent and 3 percent of the Company's
trade accounts receivable as of December 31, 1998. If any of these customers'
receivable balances should be deemed uncollectable, it would have a material
effect on the Company's results of operations and financial condition. The
Company regularly reviews accounts receivable and makes provision for
potentially uncollectable balances. At December 31, 1998, management believes
the Company had incurred no material impairments in the carrying values of its
accounts receivable other than those for which provision has been made.
F-93
<PAGE>
BINTZ DISTRIBUTING CO.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Comprehensive Income
In 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards to measure all changes in equity
that result from transactions and other economic events other than transactions
with owners. Comprehensive income is the total of net income and all other
nonowner changes in equity. Other than net income, the Company has no
comprehensive income.
New Accounting Pronouncements
In 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which requires companies to report
financial and descriptive information about its reportable operating segments
in the interim and annual financial statements. The Company adopted SFAS No.
131 in 1998 and its adoption did not have a significant impact on the financial
statements or related footnote disclosures.
In 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits," which standardizes the disclosure
requirements for pensions and other postretirement benefits to the extent
practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis, and eliminates certain disclosures that are no longer useful. The
Company adopted SFAS No. 132 in 1998 and its adoption did not have a
significant impact on the financial statements or related footnote disclosures.
In 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 established a new accounting
model for derivative instruments and hedging activities. The Company will adopt
SFAS No. 133 in the year ending December 31, 1999. The Company believes that
adoption of SFAS No. 133 will not significantly affect the Company's financial
position and results of operations.
3. Employee Benefit Plans
The Company has an employees' savings plan under section 401(k) of the
Internal Revenue Code. This plan covers all employees, except union employees
and nonresident aliens, who are at least 21 years of age, have at least one
year of service, and work at least 1,000 hours per year. The Company matches 50
percent of the employee contributions up to a maximum of 6 percent of the
employee's salary. The Company's matching contributions vest at a rate of 20
percent per year beginning after the first year and are fully vested after six
years. The Company contributed approximately $24,000 and $25,000 during the
years ended December 31, 1998 and 1997, respectively.
4. Line of Credit
The Company has a line of credit arrangement ("Line") with a bank for the
lesser of $2,000,000 or the borrowing base, as defined in the Line agreement.
The Line bears an interest rate of prime rate plus 0.25 percent (8 percent at
December 31, 1998) and matures in June 1999. The Company is required to make
monthly interest payments. Accounts receivable and inventories collateralize
the Line. Additionally, the Line is guaranteed by a stockholder of the Company.
At December 31, 1998, the Company had $625,000 available under the Line. The
weighted average interest rate on the Line was 8.31 percent during the year
ended December 31, 1998. The Line contains certain financial and non-financial
covenants with respect to the operations of the Company, including tangible net
worth, net worth ratio, current ratio and a cash flow requirements ratio. Under
the terms of the Line, upon the successful completion of the potential merger
described in Note 10, the outstanding balance will be immediately due and
payable.
F-94
<PAGE>
BINTZ DISTRIBUTING CO.
NOTES TO FINANCIAL STATEMENTS--(Continued)
As the Company receives cash and deposits the cash into its bank account,
the bank account is then swept to the line of credit to reduce the outstanding
balance.
5. Notes Payable
Notes payable at December 31, 1998 and 1997 consist of the following
items:
<TABLE>
<CAPTION>
1998 1997
------- -------
(In thousands)
<S> <C> <C>
Various notes payable to banks, at interest rates ranging
from 8 to 8.9%, due in monthly installments, with
maturities from November 1999 through May 2001, secured
by vehicles............................................. $ 21 $ 34
Less current maturities................................... (14) (13)
------- -------
$ 7 $ 21
======= =======
</TABLE>
The following is a schedule of future maturities of notes payable at
December 31, 1998 (in thousands):
<TABLE>
<S> <C>
Year Ending December 31,
1999.................................................................. $14
2000.................................................................. 4
2001.................................................................. 3
---
$21
===
</TABLE>
Related Party Notes Payable
Related party notes payable at December 31, 1998 and 1997 consists of the
following items:
<TABLE>
<CAPTION>
1998 1997
------- -------
(In thousands)
<S> <C> <C>
9% uncollateralized note payable to an officer, principal
due in July 2000, interest payable quarterly............ $ 100 $ 100
9% uncollateralized note payable to an affiliate company,
controlled by a stockholder, principal due in July 2000,
interest payable quarterly.............................. 63 64
------- -------
$ 163 $ 164
======= =======
</TABLE>
The related party notes payable were paid in full during January 1999.
6. Capital Lease Obligations
The Company leases certain equipment used in its operations. Future
minimum capital lease obligations at December 31, 1998 consist of the
following items (in thousands):
<TABLE>
<S> <C>
Year ending December 31,
1999................................................................. $ 8
2000................................................................. 3
---
Total minimum lease payments........................................... 11
Less amount representing interest...................................... (1)
---
Present value of net minimum lease payments............................ 10
Less current maturities................................................ (7)
---
$ 3
===
</TABLE>
F-95
<PAGE>
BINTZ DISTRIBUTING CO.
NOTES TO FINANCIAL STATEMENTS--(Continued)
7. Related-Party Transactions
As discussed in Note 5, the Company has notes payable to an officer and an
affiliate company. Additionally, as discussed in Note 8, the Company leases a
building from an affiliate company.
8. Commitments and Contingencies
Operating Lease Commitments
The Company leases a building from an affiliate company controlled by a
stockholder of the Company. Effective June 1, 1996, the Company entered into a
lease agreement with the affiliate company for a five-year period, currently
requiring a payment of $9,000 per month. The lease agreement may be renewed at
the Company's option for up to three consecutive five-year periods subject to a
cost-of-living adjustment.
In connection with the purchase of the building, the affiliate company
incurred debt, on which the Company signed as a co-borrower on the promissory
note. At December 31, 1998, the affiliate company was current on the promissory
note which had an outstanding balance of $844,641.
Additionally, the Company leases certain equipment used in its operations.
The future minimum lease payments for operating leases are due as follows:
<TABLE>
<CAPTION>
Affiliate Other Total
--------- ----- -----
(In thousands)
<S> <C> <C> <C>
Year ending December 31,
1999................................................ $108 $ 4 $112
2000................................................ 108 4 112
2001................................................ 45 4 49
2002................................................ -- 2 2
---- --- ----
$261 $14 $275
==== === ====
</TABLE>
During the years ended December 31, 1998 and 1997, the Company received
approximately $19,000 and $4,000 in sublease income related to the building
leased from an affiliate company. The terms of the sublease are on a month to
month basis. The net amount paid for operating lease expenses totaled
approximately $111,000 and $109,000 during the years ended December 31, 1998
and 1997, respectively.
Litigation
The Company is a party to certain legal proceedings arising in the ordinary
course of business. Management believes the outcome of such legal proceedings
will be covered by the Company's insurance policy and will not have a material
adverse effect on the Company's financial position or results of operations.
9. Significant Customers
During the year ended December 31, 1998, sales to two major customers
represented approximately 32 percent and 14 percent, respectively, of the
Company's total revenue. During the year ended December 31, 1997, sales to two
major customers represented approximately 40 percent and 16 percent,
respectively, of the Company's total revenue.
F-96
<PAGE>
BINTZ DISTRIBUTING CO.
NOTES TO FINANCIAL STATEMENTS--(Continued)
10. Subsequent Events (Unaudited)
Subsequent to December 31, 1998, the Company's stockholders entered into a
definitive agreement to sell the Company to DirectChef, Inc. The sale
transaction, effected through a combination of cash and common stock of
DirectChef, Inc., is contingent and effective upon the initial public offering
of the common stock of DirectChef, Inc. The anticipated selling price of the
Company exceeds its net assets as of December 31, 1998.
F-97
<PAGE>
BINTZ DISTRIBUTING CO.
BALANCE SHEETS
<TABLE>
<CAPTION>
March
31, December 31,
1999 1998
------ ------------
(In thousands,
except
share amounts)
(unaudited)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash.......................................................... $ -- $ --
Trade accounts receivable, less allowance for doubtful
accounts of approximately $47............................... 2,541 2,390
Rebates receivable............................................ 256 502
Inventories................................................... 1,027 1,095
Prepaid expenses and other.................................... 17 15
------ ------
Total current assets..................................... 3,841 4,002
------ ------
PROPERTY AND EQUIPMENT:
Leasehold improvements........................................ 290 290
Fixtures and equipment........................................ 186 180
Vehicles...................................................... 131 116
Warehouse equipment........................................... 39 33
Equipment held under capital lease............................ 24 24
------ ------
670 643
Less accumulated depreciation and amortization.............. (331) (305)
------ ------
Net property and equipment.................................. 339 338
------ ------
TOTAL ASSETS............................................. $4,180 $4,340
====== ======
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES:
Line of credit................................................ $1,364 $1,375
Accounts payable.............................................. 857 903
Accrued liabilities........................................... 193 195
Customer deposits............................................. 118 125
Current portion of notes payable.............................. 8 14
Current portion of obligations under capital leases........... 7 7
------ ------
Total current liabilities................................ 2,547 2,619
------ ------
LONG-TERM LIABILITIES:
Related party notes payable................................... -- 163
Notes payable, net of current portion......................... 7 7
Obligations under capital leases, net of current portion...... 1 3
------ ------
8 173
------ ------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, no par value
Authorized--50,000 shares
Issued--17,500 shares....................................... 350 350
Retained earnings............................................. 1,275 1,198
------ ------
TOTAL STOCKHOLDERS' EQUITY............................... 1,625 1,548
------ ------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............... $4,180 $4,340
====== ======
</TABLE>
The accompanying notes to financial statements are an integral part of
these balance sheets.
F-98
<PAGE>
BINTZ DISTRIBUTING CO.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months
Ended March
31,
--------------
1999 1998
------ ------
(In
thousands)
(unaudited)
<S> <C> <C>
NET REVENUE.................................................... $4,358 $4,733
COST OF REVENUE................................................ 3,538 3,936
------ ------
GROSS PROFIT................................................... 820 797
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES..................................................... 535 594
------ ------
INCOME FROM OPERATIONS......................................... 285 203
OTHER INCOME (EXPENSE):
Interest..................................................... (29) (30)
------ ------
NET INCOME..................................................... $ 256 $ 173
====== ======
</TABLE>
The accompanying notes to financial statements are an integral part of
these statements.
F-99
<PAGE>
BINTZ DISTRIBUTING CO.
STATEMENT OF STOCKHOLDERS' EQUITY
For the Three Months Ended March 31, 1999
(In thousands, except share amounts)
<TABLE>
<CAPTION>
Common Stock Total
------------- Retained Stockholders'
Shares Amount Earnings Equity
------ ------ -------- -------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1998............... 17,500 $350 $1,198 $1,548
Net income (unaudited)................. -- -- 256 256
Distributions to stockholders
(unaudited).......................... -- -- (179) (179)
------ ---- ------ ------
BALANCE, March 31, 1999 (unaudited)...... 17,500 $350 $1,275 $1,625
====== ==== ====== ======
</TABLE>
The accompanying notes to financial statements are an integral part of
these statements.
F-100
<PAGE>
BINTZ DISTRIBUTING CO.
STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Three Months
Ended
March 31,
--------------
1999 1998
------ ------
(In
thousands)
(unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................... $ 256 $ 173
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization............................... 25 22
Changes in assets and liabilities:
Decrease (increase) in:
Trade accounts receivable................................ (151) (280)
Rebates receivable....................................... 246 (71)
Inventories.............................................. 68 110
Prepaid expenses and other............................... (2) 7
Increase (decrease) in:
Accounts payable......................................... (46) 40
Accrued liabilities...................................... (1) 33
Customer deposits........................................ (7) (400)
------ ------
Net cash provided by (used in) operating activities.... 388 (366)
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property and equipment....................... (26) (7)
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in line of credit.................................. (11) 303
Proceeds from issuance of notes payable....................... -- 75
Payments on capital lease obligations......................... (2) (2)
Payments on notes payable..................................... (170) (3)
Distributions to stockholders................................. (179) --
------ ------
Net cash used in financing activities.................. (362) 373
------ ------
NET INCREASE (DECREASE) IN CASH............................... -- --
CASH, at beginning of period.................................. -- --
------ ------
CASH, at end of period........................................ $ -- $ --
====== ======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest........................................ $ 29 $ 29
</TABLE>
The accompanying notes to financial statements are an integral part of
these statements.
F-101
<PAGE>
BINTZ DISTRIBUTING CO.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
Interim Financial Information
The accompanying unaudited financial statements as of March 31, 1999, and
for the three months ended March 31, 1999 and 1998 of Bintz Distributing Co.
(the "Company"), reflect all adjustments which are, in the opinion of
management, necessary to a fair statement of the results of the interim periods
presented. All such adjustments are of a normal recurring nature. The results
of operations for interim periods are not necessarily indicative of the results
for the entire fiscal year. Accounting measurements at interim dates inherently
involve greater reliance on estimates than at year end, thus the results of
operations for the periods presented are not necessarily indicative of the
results to be expected for the full year. The accompanying financial statements
do not include footnotes and certain financial presentations normally required
under generally accepted accounting principles and, therefore, should be read
in conjunction with the audited financial statements for the years ended
December 31, 1998 and 1997.
2. AGREEMENT TO SELL COMPANY
In the first quarter of 1999, the Company's stockholders entered a
definitive agreement to sell the Company to DirectChef, Inc. The sale
transaction, effected through a combination of cash and common stock of
DirectChef, Inc., is contingent and effective upon the initial public offering
of the common stock of DirectChef, Inc. The anticipated selling price of the
Company exceeds its net assets as of March 31, 1999.
F-102
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Castino Restaurant Equipment and Supply, Inc.:
We have audited the accompanying balance sheets of Castino Restaurant
Equipment and Supply, Inc., a California corporation, as of December 31, 1998,
and March 31, 1998, and the related statements of income, stockholder's equity,
and cash flows for the nine months ended December 31, 1998, and for the year
ended March 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 audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Castino Restaurant
Equipment and Supply, Inc. at December 31, 1998, and March 31, 1998, and the
results of its operations and its cash flows for the nine months ended December
31, 1998, and for the year ended March 31, 1998, in conformity with generally
accepted accounting principles.
/s/ Arthur Andersen LLP
San Francisco, California
February 5, 1999
F-103
<PAGE>
CASTINO RESTAURANT EQUIPMENT AND SUPPLY, INC.
BALANCE SHEETS
As of December 31, 1998 and March 31, 1998
<TABLE>
<CAPTION>
December 31, March 31,
1998 1998
------------ ---------
(In thousands, except
share amounts)
ASSETS
<S> <C> <C>
Current Assets:
Cash.................................................. $ 5 $ 4
Accounts receivable, less allowance for doubtful
accounts of $30 and $20 at December 31, 1998 and
March 31, 1998...................................... 510 470
Other receivables..................................... 46 81
Inventories, net...................................... 723 878
Deferred income taxes................................. 14 --
Prepaid expenses and other............................ 42 35
------ ------
Total current assets............................... 1,340 1,468
Property and Equipment, net............................. 156 119
Related Party Receivables............................... 94 123
Deferred Income Taxes................................... 37 37
Other Assets............................................ 12 11
------ ------
$1,639 $1,758
====== ======
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Bank overdraft........................................ $ 55 $ 44
Accounts payable...................................... 277 386
Income tax payable.................................... 26 --
Accrued liabilities................................... 226 176
Customer advances..................................... 227 284
Deferred income taxes................................. -- 9
Borrowings under lines of credit...................... 252 297
Current portion of long-term debt..................... 50 45
------ ------
Total current liabilities.......................... 1,113 1,241
Long-term Debt.......................................... 102 104
Commitments and Contingencies
Stockholder's Equity:
Common stock, no par value; 2,500 shares authorized,
400 shares issued and outstanding at December 31,
1998 and March 31, 1998............................. 4 4
Retained earnings..................................... 420 409
------ ------
Total stockholder's equity......................... 424 413
------ ------
Total liabilities and stockholder's equity......... $1,639 $1,758
====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-104
<PAGE>
CASTINO RESTAURANT EQUIPMENT AND SUPPLY, INC.
STATEMENTS OF INCOME
For the Nine Months Ended December 31, 1998 and
For the Year Ended March 31, 1998
<TABLE>
<CAPTION>
December 31, March 31,
1998 1998
------------ ---------
(In thousands)
<S> <C> <C>
Net revenue.............................................. $4,619 $5,921
Cost of revenue.......................................... 3,395 4,342
------ ------
Gross profit........................................ 1,224 1,579
Selling, general and administrative expenses............. 1,215 1,470
------ ------
Income from operations.............................. 9 109
Other income (expense):
Interest income and finance charges, net............... 6 22
Interest expense....................................... (29) (36)
Gain on sale of assets................................. 16 9
Other.................................................. 13 6
------ ------
6 1
------ ------
Income before income taxes.......................... 15 110
Income taxes............................................. (4) (40)
------ ------
Net income.......................................... $ 11 $ 70
====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-105
<PAGE>
CASTINO RESTAURANT EQUIPMENT AND SUPPLY, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
For the Nine Months Ended December 31, 1998 and
For the Year Ended March 31, 1998
<TABLE>
<CAPTION>
Common Stock Total
------------- Retained Stockholders'
Shares Amount Earnings Equity
------ ------ -------- -------------
(In thousands, except share amounts)
<S> <C> <C> <C> <C>
Balance, April 1, 1997.................... 400 $ 4 $339 $343
Net income.............................. -- -- 70 70
--- --- ---- ----
Balance, March 31, 1998................... 400 4 409 413
Net income.............................. -- -- 11 11
--- --- ---- ----
Balance, December 31, 1998................ 400 $ 4 $420 $424
=== === ==== ====
</TABLE>
The accompanying notes are an integral part of these statements.
F-106
<PAGE>
CASTINO RESTAURANT EQUIPMENT AND SUPPLY, INC.
STATEMENTS OF CASH FLOWS
For the Nine Months Ended December 31, 1998 and
For the Year Ended March 31, 1998
<TABLE>
<CAPTION>
December 31, March 31,
1998 1998
------------ ---------
(In thousands)
<S> <C> <C>
Cash Flows from Operating Activities:
Net income........................................... $ 11 $ 70
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization..................... 70 60
Gain on sale of assets............................ (16) (7)
Deferred income taxes............................. (23) 21
Change in assets and liabilities:
Accounts receivables.............................. (40) 377
Other receivables................................. 35 (82)
Inventories....................................... 155 (240)
Prepaid expenses and other........................ (7) (21)
Related party receivables......................... 29 (49)
Other assets...................................... (1) (3)
Accounts payable.................................. (110) (296)
Income tax payable................................ 26 0
Accrued liabilities............................... 50 (14)
Customer advances................................. (57) 216
----- -----
Net cash provided by operating activities....... 122 32
----- -----
Cash Flows from Investing Activities:
Purchase of property and equipment................... (115) (103)
Sale of property and equipment....................... 25 12
----- -----
Net cash used in investing activities........... (90) (91)
----- -----
Cash Flows from Financing Activities:
Change in bank overdraft, net........................ 11 (14)
Decrease in lines of credit, net..................... (45) (34)
Payments on long-term debt........................... (50) (39)
Proceeds from issuance of long-term debt............. 53 139
----- -----
Net cash provided by (used in) financing
activities.................................... (31) 52
----- -----
Increase (Decrease) in Cash............................ 1 (7)
Cash at Beginning of Period............................ 4 11
----- -----
Cash at End of Period.................................. $ 5 $ 4
===== =====
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest.......................................... $ 29 $ 36
Income taxes...................................... 4 88
Supplemental Schedule of Noncash Investing and
Financing Activities: During the year ended March 31,
1998, the Company entered into an equipment finance
lease for the purchase of office equipment totaling
$9
</TABLE>
The accompanying notes are an integral part of these statements.
F-107
<PAGE>
CASTINO RESTAURANT EQUIPMENT AND SUPPLY, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
1. Business and Organization
Castino Restaurant Equipment and Supply, Inc. (the "Company") was founded
and incorporated in the state of California in 1974. The Company is principally
engaged in the sale and installation of restaurant equipment and in the
wholesale distribution of restaurant supplies. The Company's operations are
located in California.
2. Summary of Significant Accounting Policies
The following is a summary of significant accounting policies followed in
the preparation of these financial statements.
Revenue Recognition
Revenue is derived from the distribution and sale of equipment and supplies
to restaurants. Sales revenue is recognized when the risk of ownership
transfers to the customer, generally upon shipment. Monies received on
equipment and installation sales contracts for which delivery and installation
has yet to be performed is recorded as a customer advance and the related
revenue is recognized upon delivery and installation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Inventories
Inventories include saleable equipment and supplies and are stated at the
lower of cost or market using an average cost method.
Property and Equipment, net
Property and Equipment are stated at cost. Depreciation is computed
principally by an accelerated method over the estimated useful lives of the
assets, which range from 5 to 7 years. Leasehold improvements are amortized
over the lesser of the lease term or their estimated useful life.
Costs of normal maintenance and repairs and minor replacements are charged
to expense as incurred. Major replacements or betterments are capitalized. When
assets are sold or otherwise disposed of, the costs and related accumulated
depreciation and amortization are removed from the accounts, and any resulting
gain or loss is included in the statements of income.
Income Taxes
Using the asset and liability method of the Financial Accounting Standards
Board (FASB) Statement No. 109, "Accounting for Income Taxes," deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Valuation reserves are recorded if it is
uncertain as to the realizability of deferred tax assets.
F-108
<PAGE>
CASTINO RESTAURANT EQUIPMENT AND SUPPLY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentration
of credit risk consist primarily of trade accounts receivable. The Company
sells primarily on 30-day terms, performs credit evaluation procedures on its
customers, and generally does not require collateral on its accounts
receivable. Most of the Company's sales are in California. The Company
maintains an allowance for potential credit losses. No single customer
represented more than 10 percent of sales in any period.
Procurement Rebates
The Company receives quarterly and annual cash rebates on qualifying
purchases from many of its suppliers. The amount of these rebates has been
estimated and accrued in these financial statements. Actual rebates earned
could differ from the estimated amounts.
Financial Instruments
The carrying amounts for cash, receivables, and accounts payable
approximate fair value due to the short-term nature of these instruments. Other
fair value disclosures are in the respective notes.
Comprehensive Income
In 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards to measure all changes in equity
that result from transactions and other economic events other than transactions
with owners. Comprehensive income is the total of net income and all other
nonowner changes in equity. Other than net income, the Company has no
comprehensive income.
New Accounting Pronouncements
In 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which requires companies to report
financial and descriptive information about its reportable operating segments
in the interim and annual financial statements. The Company will adopt SFAS No.
131 in 1999 and does not expect its adoption to have a significant impact on
the financial statements or related footnote disclosures.
In 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits," which standardizes the disclosure
requirements for pensions and other postretirement benefits to the extent
practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis, and eliminates certain disclosures that are no longer useful. The
Company will adopt SFAS No. 132 in 1999 and does not expect its adoption to
have a significant impact on the financial statements or related footnote
disclosures.
In 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 established a new accounting
model for derivative instruments and hedging activities. The Company will adopt
SFAS No. 133 in 1999. The Company believes that adoption of SFAS No. 133 will
not significantly affect the Company's financial position and results of
operations.
F-109
<PAGE>
CASTINO RESTAURANT EQUIPMENT AND SUPPLY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
3. Property and Equipment
Property and equipment at December 31, 1998 and March 31, 1998, consists of
the following:
<TABLE>
<CAPTION>
December 31, March 31,
1998 1998
------------ ---------
(In thousands)
<S> <C> <C>
Furniture and fixtures................................ $ 54 $ 44
Office equipment...................................... 106 102
Automotive equipment.................................. 222 217
Computer equipment.................................... 148 146
Leasehold improvements................................ 110 72
----- -----
640 581
Accumulated depreciation and amortization............. (484) (462)
----- -----
$ 156 $ 119
===== =====
</TABLE>
Depreciation and amortization expense for the nine months ended December
31, 1998, and for the year ended March 31, 1998, was $70,000 and $60,000,
respectively.
4. Related Party Receivables
At December 31, 1998, and March 31, 1998 the Company had two notes
receivable with balances totaling $113,000, and $136,000, respectively from the
stockholder and an employee of the Company. The receivable from the stockholder
is unsecured with interest at 6.52 percent per annum. Principal and interest
are being paid currently; the entire amount is to be paid in full by January,
2002. The receivable from the employee is unsecured with interest at 10.25
percent at December 31, 1998. Principal and interest are being paid currently;
the entire amount is to be paid in full by July, 2002. The current portion of
the related party receivables is shown on the balance sheets in other
receivables.
5. Borrowings Under Lines of Credit
The Company has two revolving line of credit agreements with a bank
expiring on September 1, 1999, which provide for maximum borrowings of $650,000
and are collateralized by the assets of the Company not otherwise encumbered.
The principal balances at December 31, 1998, and March 31, 1998, were $252,000
and $282,000, respectively. Interest is payable monthly at the bank's reference
rate plus 1.75 percent, which was 10 percent at December 31, 1998.
In addition, the Company has a revolving line of credit with a bank,
expiring on February 10, 2001, which provides for maximum borrowings of
$300,000 and is collateralized by inventory, accounts receivable, and equipment
of the Company. The principal balances at December 31, 1998, and March 31,
1998, were $0 and $15,000, respectively.
The Company believes the terms of the debt are representative of current
market and therefore, face value equals carrying value.
All borrowings are personally guaranteed by the stockholder.
F-110
<PAGE>
CASTINO RESTAURANT EQUIPMENT AND SUPPLY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
6. Lease Commitments
The Company leases its business premises from a related partnership with
total monthly rental payments of approximately $13,000. The leases expire on
August 31, 2000 and March 31, 2001. There is an option to renew the primary
business lease for an additional three years with terms and conditions to be
agreed by both parties upon six months prior to expiration.
At December 31, 1998, future minimum annual rental payments required under
these leases are as follows (in thousands):
<TABLE>
<S> <C>
Year Ending December 31
1999................................................................ $155
2000................................................................ 144
2001................................................................ 30
2002................................................................ --
2003................................................................ --
Thereafter.......................................................... --
----
$329
====
</TABLE>
Total rent expense was $112,000 and $133,000 for the nine months ended
December 31, 1998, and for the year ended March 31, 1998, respectively.
7. Long-term Debt
Long-term debt at December 31, 1998 and March 31, 1998, consists of the
following:
<TABLE>
<CAPTION>
December 31, March 31,
1998 1998
------------ ---------
(In thousands)
<S> <C> <C>
Note payable, financial institution, personally
guaranteed by stockholder, interest at 10.25
percent at December 31, 1998; due July 2002....... $ 57 $ 68
Note payable, finance company, secured by automotive
equipment, interest at 9.75 percent per annum; due
July 2000......................................... 13 18
Note payable, finance company, secured by automotive
equipment, interest at 7.91 percent per annum; due
May 2002.......................................... 20 --
Note payable, finance company, secured by automotive
equipment, interest at 9.0 percent per annum; due
May 2001.......................................... 25 --
Note payable, finance company, secured by automotive
equipment, interest at 5.91 percent per annum; due
October 2002...................................... 19 23
Note payable, finance company, secured by automotive
equipment, interest at 8.25 percent per annum; due
April 2001........................................ 18 23
Note payable, finance company, secured by automotive
equipment, interest at 8.0 percent per annum; paid
August 1998....................................... -- 2
Note payable, financial institution, secured by
automotive equipment, interest at 10.25 percent
per annum; paid April 1998........................ -- 8
Lease payable, financial institution, secured by
copier equipment, interest at 11 percent per
annum; paid October 1998.......................... -- 7
---- ----
Total............................................... 152 149
Less: Current maturities............................ (50) (45)
---- ----
Long-term portion................................... $102 $104
==== ====
</TABLE>
F-111
<PAGE>
CASTINO RESTAURANT EQUIPMENT AND SUPPLY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Principal payments required on long-term debt for each of the next five
years ending December 31, are as follows (in thousands):
<TABLE>
<S> <C>
1999.................................................................. $ 50
2000.................................................................. 49
2001.................................................................. 36
2002.................................................................. 17
2003.................................................................. --
----
$152
====
</TABLE>
8. Income Taxes
The provision for income taxes consists of the following for the nine
months ended December 31, 1998 and the year ended March 31, 1998:
<TABLE>
<CAPTION>
December 31, March 31,
1998 1998
------------ ---------
(In thousands)
<S> <C> <C>
Current:
Federal.......................................... $ 22 $11
State and local.................................. 8 6
---- ---
30 17
Deferred:
Federal.......................................... (20) 18
State and local.................................. (6) 5
---- ---
$ 4 $40
==== ===
</TABLE>
The reconciliation of income tax from continuing operations computed at the
U.S. federal statutory tax rate to the Company's effective income tax rate is
as follows for the nine months ended December 31, 1998, and for the year ended
March 31, 1998:
<TABLE>
<CAPTION>
December 31, March 31,
1998 1998
------------ ---------
(In thousands)
<S> <C> <C>
Federal statutory income tax rate.................. 34.0% 34.0%
State income tax rate, net of federal benefit...... 6.1 6.1
Permanent items: items not deductible for
tax return purposes, net......................... 29.4 2.2
Benefit resulting from graduated federal tax rates
and other........................................ (42.5) (5.9)
------ -----
Total provision.................................. 27.0% 36.4%
====== =====
</TABLE>
At December 31, 1998, the Company had approximately $51,000 in net deferred
tax assets. These net assets consisted of approximately $5,000 in liabilities
and $56,000 in assets resulting principally from reserves deductible in the
future and differences between book and tax depreciation.
At March 31, 1998, the Company had approximately $28,000 in net deferred
tax assets resulting principally from reserves deductible in the future and
differences between book and tax depreciation.
F-112
<PAGE>
CASTINO RESTAURANT EQUIPMENT AND SUPPLY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
9. Retirements Plans
The Company has a defined contribution plan covering substantially all of
its employees. Pension expense for the nine months ended December 31, 1998, and
for the year ended March 31, 1998, was $32,000 and $40,000, respectively. The
Company makes an annual contribution to the plan equal to approximately
6 percent of eligible compensation.
The Company also has a profit-sharing plan covering substantially all of
its employees. Contributions are made at the discretion of the Board of
Directors and are allocated proportionately based on eligible compensation. At
December 31, 1998, and March 31, 1998, the contribution accrued was $14,000 and
$20,000, respectively.
10. Commitments and Contingencies
Various legal claims arise against the Company during the normal course of
business. In the opinion of management, based on the nature of the claims,
underlying insurance coverage, and other defenses, liabilities, if any, arising
from the claims would not have a material effect on the financial statements.
11. Subsequent Events (Unaudited)
Subsequent to December 31, 1998, the Company's stockholder entered into a
definitive agreement to sell the Company to DirectChef, Inc. The sale
transaction, effected through a combination of cash and common stock of
DirectChef, Inc., is contingent and effective upon the initial public offering
of the common stock of DirectChef, Inc. The anticipated selling price of the
Company exceeds its net assets as of December 31, 1998.
F-113
<PAGE>
CASTINO RESTAURANT EQUIPMENT AND SUPPLY, INC.
BALANCE SHEETS
As of March 31, 1999 and December 31, 1998
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
----------- ------------
(In thousands, except
share amounts)
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash.................................................. $ 5 $ 5
Accounts receivable, less allowance for doubtful
accounts of $30 and $30 at March 31, 1999 and
December 31, 1998................................... 504 510
Other receivables..................................... 134 46
Inventories, net...................................... 637 723
Prepaid expenses and other............................ 36 42
Deferred income taxes................................. 14 14
------ ------
Total current assets................................ 1,330 1,340
PROPERTY AND EQUIPMENT, net........................... 158 156
RELATED PARTY RECEIVABLES............................. 89 94
OTHER ASSETS.......................................... 8 12
DEFERRED INCOME TAXES................................. 37 37
------ ------
Total assets........................................ $1,622 $1,639
====== ======
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Bank overdraft........................................ $ 159 $ 55
Accounts payable...................................... 386 277
Customer advances..................................... 191 227
Accrued liabilities................................... 164 252
Borrowings under revolving line of credit............. 210 252
Current portion of long-term debt..................... 50 50
------ ------
Total current liabilities........................... 1,160 1,113
------ ------
LONG-TERM DEBT........................................ 89 102
------ ------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY
Common stock, no par value; 2,500 shares authorized,
400 shares issued and outstanding at March 31, 1999
and December 31, 1998............................... 4 4
Retained earnings..................................... 369 420
------ ------
Total stockholder's equity.......................... 373 424
------ ------
Total liabilities and stockholder's equity.......... $1,622 $1,639
====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-114
<PAGE>
CASTINO RESTAURANT EQUIPMENT AND SUPPLY, INC.
STATEMENTS OF INCOME
For the Three Months Ended March 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
(In thousands)
(unaudited) (unaudited)
<S> <C> <C>
NET REVENUE............................................ $1,114 $1,312
COST OF REVENUE........................................ 824 978
------ ------
Gross profit......................................... 290 334
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES.......... 383 365
------ ------
Loss from operations................................. (93) (31)
------ ------
OTHER INCOME (EXPENSE):
Interest income........................................ 3 11
Interest expense....................................... (7) (11)
Gain on sale of assets................................. 19 8
Other.................................................. 8 9
------ ------
23 17
------ ------
Loss before provision for income taxes............... (70) (14)
BENEFIT FROM INCOME TAXES.............................. (19) (5)
------ ------
NET LOSS............................................... $ (51) $ (9)
====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-115
<PAGE>
CASTINO RESTAURANT EQUIPMENT AND SUPPLY, INC.
STATEMENT OF STOCKHOLDER'S EQUITY
For the Three Months Ended March 31, 1999
<TABLE>
<CAPTION>
Common Stock Total
------------- Retained Stockholder's
Shares Amount Earnings Equity
------ ------ -------- -------------
(In thousands, except share amounts)
<S> <C> <C> <C> <C>
BALANCE, December 31, 1998................ 400 $ 4 $420 $424
Net income (unaudited).................. -- -- (51) (51)
--- --- ---- ----
BALANCE, MARCH 31, 1999 (unaudited)....... 400 4 $369 $373
=== === ==== ====
</TABLE>
The accompanying notes are an integral part of this statement.
F-116
<PAGE>
CASTINO RESTAURANT EQUIPMENT AND SUPPLY, INC.
STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
(In thousands)
(unaudited) (unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.............................................. $(51) $ (9)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation........................................ 12 19
Gain on sales of assets............................. (19) --
Changes in assets and liabilities:
Accounts receivable.............................. 6 159
Inventories...................................... 86 (77)
Prepaid expenses and other....................... (73) (37)
Deferred tax assets.............................. -- (10)
Accounts payable................................. 109 52
Accrued liabilities.............................. (88) 29
Customer advances................................ (36) 30
---- -----
Net cash provided by (used in) operating
activities................................... (54) 156
---- -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment.................... (28) (55)
Sale of property and equipment........................ 33 --
---- -----
Net cash provided by (used in) investing
activities................................... 5 (55)
---- -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in lines of credit, net...................... (55) (108)
Bank overdraft........................................ 104 --
---- -----
Net cash provided by (used in) financing
activities................................... 49 (108)
---- -----
Net increase in cash........................... -- (7)
CASH at beginning of period........................... 5 12
---- -----
CASH at end of period................................. $ 5 $ 5
==== =====
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest................................ $ 7 $ 11
Cash paid for income taxes............................ $ 2 $ 9
</TABLE>
The accompanying notes are an integral part of these statements.
F-117
<PAGE>
CASTINO RESTAURANT EQUIPMENT & SUPPLY, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The financial statements for the interim periods included herein are
unaudited; however, they contain all adjustments which, in the opinion of
management, are necessary to present fairly the financial position of CASTINO
RESTAURANT EQUIPMENT & SUPPLY, INC. ("Company") at March 31, 1999, and the
statements of income, cash flows and stockholders' equity for the three-month
periods ended March 31, 1999 and 1998. All such adjustments are of a normal
recurring nature. Accounting measurements at interim dates inherently involve
greater reliance on estimates than at year end, thus the results of operations
for the periods presented are not necessarily indicative of the results to be
expected for the full year. The accompanying financial statements do not
include footnotes and certain financial presentations normally required under
generally accepted accounting principles and, therefore, should be read in
conjunction with the audited financial statements for the fiscal year ended
March 31, 1998 and the nine months ended December 31, 1998.
2. Agreement to Sell Company
In the first quarter of 1999, the Company's stockholders entered a
definitive agreement to sell the Company to DirectChef, Inc. The sale
transaction, effected through a combination of cash and common stock of
DirectChef, Inc., is contingent and effective upon the initial public offering
of the common stock of DirectChef, Inc. The anticipated selling price of the
Company exceeds its net assets as of March 31, 1999.
F-118
<PAGE>
[DirectChef Logo Appears Here]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth the costs and expenses we will pay in
connection with the sale of the common stock we are offering, other than
underwriting commissions and discounts.
<TABLE>
<CAPTION>
Item Amount
---- ----------
<S> <C>
SEC registration fee............................................ $ 25,976
NASD filing fee................................................. 9,844
Nasdaq National Market Listing Fee.............................. 69,375
Blue Sky fees and expenses...................................... 5,000*
Printing and engraving expenses................................. 200,000*
Legal fees and expenses......................................... 250,000*
Accounting fees and expenses.................................... 1,250,000*
Transfer Agent and Registrar fees............................... 6,500*
Miscellaneous expenses.......................................... 8,305*
----------
Total......................................................... $1,825,000
==========
</TABLE>
- --------
*Estimated
Item 14. Indemnification of Directors and Officers.
We have included in our Amended and Restated Certificate of Incorporation
and Restated Bylaws provisions to eliminate the personal liability of our
directors for monetary damages resulting from breaches of their fiduciary duty
to the extent permitted by the General Corporation Law of the State of Delaware
and to indemnify our directors and officers to the fullest extent permitted by
Delaware law, including circumstances in which indemnification is otherwise
discretionary.
Section 145 of the Delaware General Corporation Law permits a corporation,
under specified circumstances, to indemnify its directors, officers, employees
or agents against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlements actually and reasonably incurred by each in
connection with any action, suit or proceeding brought by third parties by
reason of the fact that they were or are directors, officers, employees or
agents of the corporation, if such directors, officers, employees or agents
acted in good faith and in a manner they reasonably believed to be in, or not
opposed to, the best interests of the corporation and, with respect to any
criminal action or proceeding, had no reason to believe their conduct was
unlawful. In a derivative action, i.e., one by or in the right of the
corporation, indemnification may be made only for expenses (including
attorneys' fees) actually and reasonably incurred by directors, officers,
employees or agents in connection with the defense or settlement of an action
or suit, and only with respect to a matter as to which they shall have acted in
good faith and in a manner they reasonably believed to be in, or not opposed
to, the best interests of the corporation, except that no indemnification shall
be made if such person shall have been adjudged liable to the corporation,
unless and only to the extent that the court in which the action or suit was
brought shall determine upon application that the defendant director, officer,
employee or agent is fairly and reasonably entitled to indemnity for such
expenses despite such adjudication of liability.
We have entered into indemnification agreements with our directors and
certain key officers pursuant to which we are generally obligated to indemnify
our directors and such officers to the full extent permitted by Section 145 as
described above.
We intend to purchase insurance for our directors and officers indemnifying
them against certain civil liabilities, including liabilities under the federal
securities laws, which they might incur in such capacity.
II-1
<PAGE>
The Underwriting Agreement (Exhibit 1.1) provides for the underwriters to
indemnify us, our directors and officers, and for us to indemnify the
underwriters, for certain liabilities, including liabilities arising under the
Securities Act, and affords certain rights of contribution with respect
thereto.
Item 15. Recent Sales of Unregistered Securities.
Since our incorporation in June 1998, we have issued and sold the following
unregistered securities:
(1) In July 1998, in connection with our formation, we issued an
aggregate of 1,639,375 shares of common stock to private investors for
aggregate cash consideration of $7,625. See "Certain Transactions."
(2) In September 1998, we issued an aggregate of 182,354 shares of our
Series A preferred stock to private investors for cash consideration of
$775,004.50. We issued these shares pursuant to Subscription Agreements
between us and each of the investors.
(3) In January 1999, we issued an aggregate of 134,120 shares of our
Series A preferred stock to private investors for cash consideration of
$570,010. We issued these shares pursuant to Subscription Agreements
between us and each of the investors. See "Certain Transactions."
The sales of the above securities were deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) of the
Securities Act or Regulation D promulgated thereunder as transactions by an
issuer not involving a public offering. The recipients of securities in each
such transaction represented their intention to acquire the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof and appropriate legends were attached to the share
certificates issued in such transactions.
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits
<TABLE>
<CAPTION>
Number Description of Document
------ -----------------------
<C> <S>
1.1 Form of Underwriting Agreement.
2.1** Agreement and Plan of Reorganization, dated as of February 26, 1999,
by and among Hospitality Design & Supply, Inc., now known as
DirectChef, Inc. ("DirectChef"), Raygal Design Associates, Inc. and
the stockholders named therein.
2.2** Agreement and Plan of Reorganization, dated as of February 27, 1999,
by and among DirectChef, East Bay Restaurant Supply, Inc. and the
stockholders named therein.
2.3** Agreement and Plan of Reorganization, dated as of February 26, 1999,
by and among DirectChef, ERF California, Inc., Economy Restaurant
Fixtures, Inc. and the stockholders named therein.
2.4** Agreement and Plan of Reorganization, dated as of February 26, 1999,
by and among DirectChef, Curtis Restaurant Equipment and the
stockholders named therein.
2.5** Agreement and Plan of Reorganization, dated as of February 26, 1999,
by and among DirectChef, HDS Utah, Inc., Bintz Distributing Co. and
the stockholders named therein.
2.6** Agreement and Plan of Reorganization, dated as of February 26, 1999,
by and among DirectChef, Castino Restaurant Equipment and Supply,
Inc. and the stockholders named therein.
3.1** Amended and Restated Certificate of Incorporation of DirectChef, as
amended.
3.2** Bylaws of DirectChef.
4.1 Specimen Common Stock Certificate.
4.2** Registration Rights Agreement, dated February 26, 1999, between
DirectChef and stockholders named on signature page.
5.1** Opinion of Howard, Rice, Nemerovski, Canady, Falk & Rabkin, A
Professional Corporation, as to the validity of the issuance of the
securities DirectChef is offering.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Number Description of Document
------ -----------------------
<C> <S>
10.1** DirectChef Stock Option Plan.
10.2** Form of Indemnification Agreement.
10.3** Executive Employment Agreement, dated as of July 20, 1998, between
DirectChef and Roger M. Laverty.
10.4** Executive Employment Agreement, dated as of November 16, 1998,
between DirectChef and James Castleberry.
10.5** Form of Employment Agreement, to be dated as of completion of this
offering, between DirectChef and Ygal Sonenshine.
10.6** Form of Employment Agreement, to be dated as of completion of this
offering, between DirectChef and John Breznikar.
10.7** Form of Employment Agreement, to be dated as of completion of this
offering, between DirectChef and Michael Weinstock.
10.8** Form of Employment Agreement, to be dated as of completion of this
offering, between DirectChef and Michael Curtis.
10.9** Form of Employment Agreement, to be dated as of completion of this
offering, between DirectChef and Daniel Curtis.
10.10** Form of Employment Agreement, to be dated as of completion of this
offering, between DirectChef and William A. Williams.
10.11** Form of Employment Agreement, to be dated as of completion of this
offering, between DirectChef and David Castino.
10.12** Form of Consulting Agreement, to be dated as of completion of this
offering, between DirectChef and Ross Berner.
10.13** Form of Consulting Agreement, to be dated as of completion of this
offering, between DirectChef and Charles Rothkopf.
23.1** Consent of Howard, Rice, Nemerovski, Canady, Falk & Rabkin, A
Professional Corporation (included in Exhibit 5.1).
23.2** Consent of Arthur Andersen LLP.
24.1** Powers of Attorney (included on signature page).
27.1** Financial Data Schedule.
99.1** Form of Consent of director nominee to being named as director.
</TABLE>
- --------
* To be filed by amendment.
** Previously filed.
(b) Financial Statement Schedules
All schedules are omitted because they are inapplicable or the requested
information is shown in the financial statements of the registrant or related
notes thereto.
II-3
<PAGE>
Item 17. Undertakings.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described in Item 14, or otherwise, the
registrant has been advised that, in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement: (a) to include
any prospectus required by Section 10(a)(3) of the Securities Act; (b) to
reflect in the prospectus any facts or events arising after the effective
date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration
statement; (c) to include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the registration
statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of this offering.
(4) That for purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in
the form of prospectus filed by the registrant pursuant to Rule 424(b)(1)
or (4) or 497(h) under the Securities Act shall be deemed to be part of
this registration statement as of the time it was declared effective.
(5) That for the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therewith, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 4 to Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of San
Francisco, State of California, on the 20th day of May, 1999.
DIRECTCHEF, INC.
By: /s/ Roger M. Laverty
----------------------------------
Roger M. Laverty
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act, this Amendment to
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<C> <S> <C>
/s/ Roger M. Laverty President, Chief Executive May 20, 1999
__________________________________ Officer and Director
Roger M. Laverty (Principal Executive
Officer)
/s/ James Castleberry Executive Vice President May 20, 1999
____________________________________ and Chief Financial
James Castleberry Officer (Principal
Financial and Accounting
Officer)
* Director May 20, 1999
____________________________________
Ross Berner
* Director May 20, 1999
____________________________________
Mark McKinney
</TABLE>
*By: /s/ James Castleberry
----------------------------
James
Castleberry
Attorney-in-
Fact
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Number Description of Document
------ -----------------------
<C> <S> <C>
1.1 Form of Underwriting Agreement.
2.1** Agreement and Plan of Reorganization, dated as of February 26,
1999, by and among Hospitality Design & Supply, Inc., now known
as DirectChef, Inc. ("DirectChef"), Raygal Design Associates,
Inc. and the stockholders named therein.
2.2** Agreement and Plan of Reorganization, dated as of February 27,
1999, by and among DirectChef, East Bay Restaurant Supply, Inc.
and the stockholders named therein.
2.3** Agreement and Plan of Reorganization, dated as of February 26,
1999, by and among DirectChef, ERF California, Inc., Economy
Restaurant Fixtures, Inc. and the stockholders named therein.
2.4** Agreement and Plan of Reorganization, dated as of February 26,
1999, by and among DirectChef, Curtis Restaurant Equipment and
the stockholders named therein.
2.5** Agreement and Plan of Reorganization, dated as of February 26,
1999, by and among DirectChef, HDS Utah, Inc., Bintz
Distributing Co. and the stockholders named therein.
2.6** Agreement and Plan of Reorganization, dated as of February 26,
1999, by and among DirectChef, Castino Restaurant Equipment and
Supply, Inc. and the stockholders named therein.
3.1** Amended and Restated Certificate of Incorporation of DirectChef,
as amended.
3.2** Bylaws of DirectChef.
4.1 Specimen Common Stock Certificate.
4.2** Registration Rights Agreement, dated February 26, 1999, between
DirectChef and stockholders named on signature page.
5.1** Opinion of Howard, Rice, Nemerovski, Canady, Falk & Rabkin, A
Professional Corporation, as to the validity of the issuance of
the securities DirectChef is offering.
10.1** DirectChef Stock Option Plan.
10.2** Form of Indemnification Agreement.
10.3** Executive Employment Agreement, dated as of July 20, 1998,
between DirectChef and Roger M. Laverty.
10.4** Executive Employment Agreement, dated as of November 16, 1998,
between DirectChef and James Castleberry.
10.5** Form of Employment Agreement, to be dated as of completion of
this offering, between DirectChef and Ygal Sonenshine.
10.6** Form of Employment Agreement, to be dated as of completion of
this offering, between DirectChef and John Breznikar.
10.7** Form of Employment Agreement, to be dated as of completion of
this offering, between DirectChef and Michael Weinstock.
10.8** Form of Employment Agreement, to be dated as of completion of
this offering, between DirectChef and Michael Curtis.
10.9** Form of Employment Agreement, to be dated as of completion of
this offering, between DirectChef and Daniel Curtis.
10.10** Form of Employment Agreement, to be dated as of completion of
this offering, between DirectChef and William A. Williams.
10.11** Form of Employment Agreement, to be dated as of completion of
this offering, between DirectChef and David Castino.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Number Description of Document
------ -----------------------
<C> <S> <C>
10.12** Form of Consulting Agreement, to be dated as of completion of
this offering, between DirectChef and Ross Berner.
10.13** Form of Consulting Agreement, to be dated as of completion of
this offering, between DirectChef and Charles Rothkopf.
23.1** Consent of Howard, Rice, Nemerovski, Canady, Falk & Rabkin, A
Professional Corporation (included in Exhibit 5.1).
23.2** Consent of Arthur Andersen LLP.
24.1** Powers of Attorney (included on signature page).
27.1** Financial Data Schedule.
99.1** Form of Consent of director nominee to being named as director.
</TABLE>
- --------
* To be filed by amendment.
** Previously filed.
<PAGE>
EXHIBIT 1.1
[Draft of [Date]
[Execution Copy]
[Conformed Copy]
Underwriting Agreement
May , 1999
---
BancBoston Robertson Stephens Inc.
The Robinson-Humphrey Company
Thomas Weisel Partners LLC
As Representatives of the several Underwriters
c/o BancBoston Robertson Stephens Inc.
555 California Street, Suite 2600
San Francisco, CA 94104
Ladies and Gentlemen:
Introductory. DirectChef, Inc., a Delaware corporation (the "Company),
proposes to issue and sell to the several underwriters named in Schedule A (the
----------
"Underwriters") an aggregate of 6,250,000 shares (the "Firm Shares") of its
Common Stock, par value $[ ] per share (the "Common Shares"). In addition,
---
the Company has granted to the Underwriters an option to purchase up to an
additional 937,500 Common Shares (the "Option Shares") as provided in Section 2.
The Firm Shares and, if and to the extent such option is exercised, the Option
Shares are collectively called the "Shares". BancBoston Robertson Stephens
Inc., The Robinson-Humphrey Company and Thomas Weisel Partners LLC have agreed
to act as representatives of the several Underwriters (in such capacity, the
"Representatives") in connection with the offering and sale of the Shares.
Simultaneously with the closing of the purchase of the Shares by the
Representatives, the Company will acquire in separate transactions all of the
common stock and ownership interest of the Founding Companies (as defined in
Section 1(l) hereof) (collectively, the "Founding Company Acquisitions"), the
consideration for which will be a combination of cash and shares of Common
Shares as described in the Registration Statement (as hereinafter defined).
The Company has prepared and filed with the Securities and Exchange
Commission (the "Commission") a registration statement on Form S-1 (File No.
333-[ ]), which contains a form of prospectus to be used in connection with
---
the public offering and sale of the Shares. Such registration statement, as
amended, including the financial statements, exhibits and schedules thereto, in
the form in which it was declared effective by the Commission under the
Securities Act of 1933 and the rules
<PAGE>
and regulations promulgated thereunder (collectively, the "Securities Act"),
including any information deemed to be a part thereof at the time of
effectiveness pursuant to Rule 430A or Rule 434 under the Securities Act, is
called the "Registration Statement". Any registration statement filed by the
Company pursuant to Rule 462(b) under the Securities Act is called the "Rule
462(b) Registration Statement", and from and after the date and time of filing
of the Rule 462(b) Registration Statement the term "Registration Statement"
shall include the Rule 462(b) Registration Statement. Such prospectus, in the
form first used by the Underwriters to confirm sales of the Shares, is called
the "Prospectus"; provided, however, if the Company has, with the consent of
BancBoston Robertson Stephens Inc., elected to rely upon Rule 434 under the
Securities Act, the term "Prospectus" shall mean the Company's prospectus
subject to completion (each, a "preliminary prospectus") dated [ ] (such
---
preliminary prospectus is called the "Rule 434 preliminary prospectus"),
together with the applicable term sheet (the "Term Sheet") prepared and filed by
the Company with the Commission under Rules 434 and 424(b) under the Securities
Act and all references in this Agreement to the date of the Prospectus shall
mean the date of the Term Sheet. All references in this Agreement to (i) the
Registration Statement, the Rule 462(b) Registration Statement, a preliminary
prospectus, the Prospectus or the Term Sheet, or any amendments or supplements
to any of the foregoing, shall include any copy thereof filed with the
Commission pursuant to its Electronic Data Gathering, Analysis and Retrieval
System ("EDGAR").
The Company hereby confirms its agreements with the Underwriters as
follows:
Section 1. Representations and Warranties of the Company.
The Company hereby represents, warrants and covenants to each Underwriter
as follows:
(a) Compliance with Registration Requirements. The Registration Statement
and any Rule 462(b) Registration Statement have been declared effective by the
Commission under the Securities Act. The Company has complied to the
Commission's satisfaction with all requests of the Commission for additional or
supplemental information. No stop order suspending the effectiveness of the
Registration Statement or any Rule 462(b) Registration Statement is in effect
and no proceedings for such purpose have been instituted or are pending or, to
the best knowledge of the Company, are contemplated or threatened by the
Commission.
Each preliminary prospectus and the Prospectus when filed complied in
all material respects with the Securities Act and, if filed by electronic
transmission pursuant to EDGAR, was identical to the copy thereof delivered to
the Underwriters for use in connection with the offer and sale of the Shares
(except as may be permitted by Regulation S-T under the Securities Act). Each
of the Registration Statement, any Rule 462(b) Registration Statement and any
post-effective amendment thereto, at the time it became effective and at all
subsequent times, complied and will comply in all material respects with the
Securities Act and did not and will not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading. The Prospectus, as
amended or supplemented, as of its date and at all subsequent times, did not and
will not contain any untrue statement of a material fact or omit to state a
material fact
2
<PAGE>
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. The representations
and warranties set forth in the two immediately preceding sentences do not apply
to statements in or omissions from the Registration Statement, any Rule 462(b)
Registration Statement, or any post-effective amendment thereto, or the
Prospectus, or any amendments or supplements thereto, made in reliance upon and
in conformity with information relating to any Underwriter furnished to the
Company in writing by the Representatives expressly for use therein. There are
no contracts or other documents required to be described in the Prospectus or to
be filed as exhibits to the Registration Statement which have not been described
or filed as required.
(b) Offering Materials Furnished to Underwriters. The Company has
delivered to the Representatives three complete conformed copies of the
Registration Statement and of each consent and certificate of experts filed as a
part thereof, and conformed copies of the Registration Statement (without
exhibits) and preliminary prospectuses and the Prospectus, as amended or
supplemented, in such quantities and at such places as the Representatives have
reasonably requested for each of the Underwriters.
(c) Distribution of Offering Material By the Company. The Company has not
distributed and will not distribute, prior to the later of the Second Closing
Date (as defined below) and the completion of the Underwriters' distribution of
the Shares, any offering material in connection with the offering and sale of
the Shares other than a preliminary prospectus, the Prospectus or the
Registration Statement.
(d) The Underwriting Agreement. This Agreement has been duly authorized,
executed and delivered by, and is a valid and binding agreement of, the Company,
enforceable in accordance with its terms, except as rights to indemnification
hereunder may be limited by applicable law and except as the enforcement hereof
may be limited by bankruptcy, insolvency, reorganization, moratorium or other
similar laws relating to or affecting the rights and remedies of creditors or by
general equitable principles.
(e) Authorization of the Shares. The Shares to be purchased by the
Underwriters from the Company have been duly authorized for issuance and sale
pursuant to this Agreement and, when issued and delivered by the Company
pursuant to this Agreement, will be validly issued, fully paid and
nonassessable.
(f) No Applicable Registration or Other Similar Rights. There are no
persons with registration or other similar rights to have any equity or debt
securities registered for sale under the Registration Statement or included in
the offering contemplated by this Agreement, except for such rights as have been
duly waived.
(g) No Material Adverse Change. Subsequent to the respective dates as of
which information is given in the Prospectus: (i) there has been no material
adverse change, or any development that could reasonably be expected to result
in a material adverse change, in the condition, financial or otherwise, or in
the earnings, business, operations or prospects, whether or not arising from
transactions in the ordinary course of business, of the Company and its
subsidiaries and the Founding Companies, taken as a whole, (any such change or
effect, where the context so requires, is called a "Material Adverse Change" or
a "Material Adverse Effect"); (ii) except as described in the Prospectus, the
Company and its subsidiaries, and the Founding Companies, taken as a
3
<PAGE>
whole, have not incurred any material liability or obligation, indirect, direct
or contingent, not in the ordinary course of business nor entered into any
material transaction or agreement not in the ordinary course of business; and
(iii) there has been no dividend or distribution of any kind declared, paid or
made by the Company or, except for dividends paid to the Company or other
subsidiaries, any of its subsidiaries or any of the Founding Companies, except
as permitted under the Merger Agreements, on any class of capital stock or
repurchase or redemption by the Company or any of its subsidiaries of any class
of capital stock.
(h) Independent Accountants. Arthur Andersen LLP, who have expressed
their opinion with respect to the financial statements (which term as used in
this Agreement includes the related notes thereto) filed with the Commission as
a part of the Registration Statement and included in the Prospectus, are
independent public or certified public accountants with respect to the Company
and each of the Founding Companies as required by the Securities Act.
(i) Preparation of the Financial Statements. The consolidated financial
statements of the Company and the separate financial statements of each of the
Founding Companies filed with the Commission as a part of the Registration
Statement and included in the Prospectus present fairly the consolidated
financial position of the Company and its subsidiaries and each of the Founding
Companies as of and at the dates indicated and the results of their operations
and cash flows for the periods specified. Such financial statements have been
prepared in conformity with generally accepted accounting principles applied on
a consistent basis throughout the periods involved, except as may be expressly
stated in the related notes thereto. No other financial statements or
supporting schedules are required to be included in the Registration Statement.
The financial data set forth in the Prospectus under the captions "Prospectus
Summary--Summary Selected Financial Data", "Selected Financial Data" and
"Capitalization" fairly present the information set forth therein on a basis
consistent with that of the audited financial statements contained in the
Registration Statement. The pro forma consolidated financial statements of the
Company and its subsidiaries and the Founding Companies and the related notes
thereto included under the caption "Prospectus Summary--Summary Pro Forma
Combined Financial Data", "Pro Forma Combined Selected Financial Data" and
elsewhere in the Prospectus and in the Registration Statement present fairly the
information contained therein, have been prepared in accordance with the
Commission's rules and guidelines with respect to pro forma financial statements
and have been properly presented on the bases described therein, and the
assumptions used in the preparation thereof are reasonable and the adjustments
used therein are appropriate to give effect to the transactions and
circumstances referred to therein. No other pro forma financial information is
required to be included in the Registration Statement pursuant to Regulation
S-X.
(j) Company's Accounting System. The Company and each of the Founding
Companies maintains a system of accounting controls sufficient to provide
reasonable assurances that (i) transactions are executed in accordance with
management's general or specific authorization; (ii) transactions are recorded
as necessary to permit preparation of financial statements in conformity with
generally accepted accounting principles as applied in the United States and to
maintain accountability for assets; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and (iv) the
recorded accountability for assets is compared with
4
<PAGE>
existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(k) Subsidiaries of the Company The Company's subsidiaries as of the date
hereof are set forth in Exhibit .
---
(l) Incorporation and Good Standing of the Company and of the Founding
Companies. The Company has been duly organized and is validly existing as a
corporation or limited liability company, as the case may be, in good standing
under the laws of the jurisdiction in which it is organized with full corporate
power and authority to own its properties and conduct its business as described
in the prospectus, and is duly qualified to do business as a foreign corporation
and is in good standing under the laws of each jurisdiction in which the nature
of its business or its ownership of properties requires such qualification.
Each of Raygal, Inc., East Bay Restaurant Supply, Inc., Economy Restaurant
Fixtures, Inc., Bintz Restaurant Supply, Inc., Castino Restaurant Equipment and
Supply, Inc., and Curtis Restaurant Equipment, and each of their respective
subsidiaries (collectively, the "Founding Companies") has been duly organized
and is validly existing as a corporation or limited liability company, as the
case may be, in good standing under the laws of the jurisdiction in which it is
organized with full corporate power and authority to own its properties and
conduct its business as described in the prospectus, and is duly qualified to do
business as a foreign corporation and is in good standing under the laws of each
jurisdiction in which the nature of its business or its ownership of properties
requires such qualification.
(m) Capitalization and Other Capital Stock Matters. The authorized,
issued and outstanding capital stock of the Company is as set forth in the
Prospectus under the caption "Capitalization" (other than for subsequent
issuances, if any, pursuant to employee benefit plans described in the
Prospectus or upon exercise of outstanding options or warrants described in the
Prospectus). The Common Shares (including the Shares) conform in all material
respects to the description thereof contained in the Prospectus. All of the
issued and outstanding Common Shares have been duly authorized and validly
issued, are fully paid and nonassessable and have been issued in compliance with
federal and state securities laws. None of the outstanding Common Shares were
issued in violation of any preemptive rights, rights of first refusal or other
similar rights to subscribe for or purchase securities of the Company. There are
no authorized or outstanding options, warrants, preemptive rights, rights of
first refusal or other rights to purchase, or equity or debt securities
convertible into or exchangeable or exercisable for, any capital stock of the
Company or any of its subsidiaries other than those accurately described in the
Prospectus. The description of the Company's stock option, stock bonus and other
stock plans or arrangements, and the options or other rights granted thereunder,
set forth in the Prospectus accurately and fairly presents the information
required to be shown with respect to such plans, arrangements, options and
rights. The Common Shares to be issued in connection with the Founding Company
Acquisitions have been duly authorized and, upon completion of the Founding
Company Acquisitions in the manner described in the Registration Statement, will
be validly issued, fully paid and nonassessable when issued as contemplated by
the Merger Agreements (as hereinafter defined) and such Common Shares to be
issued in the Founding Company Acquisitions will be subject to any preemptive or
similar right.
(n) Capitalization of the Founding Companies. All of the issued and
outstanding capital stock of each of the Founding Companies has been duly
authorized
5
<PAGE>
and validly issued, is fully paid and nonassessable and has been issued in
compliance with federal and state securities laws. Except as described in the
Registration Statement, immediately prior to the consummation of the Founding
Company Acquisitions, the issued and outstanding capital stock of each of the
Founding Companies will be owned by the stockholders of the Founding Companies,
directly or indirectly through one or more subsidiaries, free and clear of any
security interest, claim, lien, encumbrance or adverse interest of any nature
and no options, warrants or other rights to purchase, agreements or other
obligations to issue or other rights to convert any obligations into shares of
capital stock of or ownership interest in any of the Founding Companies will be
outstanding.
(o) Stock Exchange Listing. The Shares have been approved for listing on
the Nasdaq National Market, subject only to official notice of issuance.
(p) No Consents, Approvals or Authorizations Required. No consent,
approval, authorization, filing with or order of any court or governmental
agency or regulatory body is required in connection with the transactions
contemplated herein, except such as have been obtained or made under the
Securities Act and such as may be required (i) under the blue sky laws of any
jurisdiction in connection with the purchase and distribution of the Shares by
the Underwriters in the manner contemplated here and in the Prospectus, (ii) by
the National Association of Securities Dealers, LLC and (iii) by the federal and
provincial laws of Canada.
(q) Non-Contravention of Existing Instruments Agreements. Neither the
issuance and sale of the Shares nor the consummation of any other of the
transactions herein contemplated nor the fulfillment of the terms hereof by the
Company, nor the execution delivery and performance of the Merger Agreements by
the Company and the Founding Companies, the compliance by the Company and the
Founding Companies with the provisions thereof and the consummation of the
transactions contemplated thereby will conflict with, result in a breach or
violation or imposition of any lien, charge or encumbrance upon any property or
assets of the Company or any of the Founding Companies pursuant to, (i) the
charter or by-laws of the Company or any of the Founding Companies, (ii) the
terms of any indenture, contract, lease, mortgage, deed of trust, note
agreement, loan agreement or other agreement, obligation, condition, covenant or
instrument to which the Company or any of the Founding Companies is a party or
bound or to which its or their property is subject or (iii) any statute, law,
rule, regulation, judgment, order or decree applicable to the Company or any of
the Founding Companies of any court, regulatory body, administrative agency,
governmental body, arbitrator or other authority having jurisdiction over the
Company or any of the Founding Companies or any of its or their properties.
(r) No Defaults or Violations. None of the Company nor any of the
Founding Companies is in violation or default of (i) any provision of its
respective charter or by-laws, (ii) the terms of any indenture, contract, lease,
mortgage, deed of trust, note agreement, loan agreement or other agreement,
obligation, condition, covenant or instrument to which the Company or any of the
Founding Companies is a party or bound or to which their respective properties
are subject or (iii) any statute, law, rule, regulation, judgment, order or
decree of any court, regulatory body, administrative agency, governmental body,
arbitrator or other authority having jurisdiction over the Company or any of the
Founding Companies or any of their respective properties, as applicable,
6
<PAGE>
except any such violation or default which would not, singly or in the
aggregate, result in a Material Adverse Change except as otherwise disclosed in
the Prospectus.
(s) No Actions, Suits or Proceedings. No action, suit or proceeding by or
before any court or governmental agency, authority or body or any arbitrator
involving the Company or any of the Founding Companies or their respective
properties is pending or, to the knowledge of the Company, threatened that (i)
could reasonably be expected to have a Material Adverse Effect on the
performance of this Agreement or the consummation of any of the transactions
contemplated hereby or (ii) could reasonably be expected to result in a Material
Adverse Effect.
(t) All Necessary Permits, Etc. The Company and each of the Founding
Companies possesses such valid and current certificates, authorizations or
permits issued by the appropriate state, federal or foreign regulatory agencies
or bodies necessary to conduct their respective businesses, and neither the
Company nor any of the Founding Companies has received any notice of
proceedings relating to the revocation or modification of, or non-compliance
with, any such certificate, authorization or permit which, singly or in the
aggregate, if the subject of an unfavorable decision, ruling or finding, could
result in a Material Adverse Change.
(u) Title to Properties. The Company and each of the Founding Companies
has good and marketable title to all the properties and assets reflected as
owned in the financial statements referred to in Section 1(i) above (or
elsewhere in the Prospectus), in each case free and clear of any security
interests, mortgages, liens, encumbrances, equities, claims and other defects,
except such as do not materially and adversely affect the value of such property
and do not materially interfere with the use made or proposed to be made of such
property by the Company or such Founding Company. The real property,
improvements, equipment and personal property held under lease by the Company or
any of the Founding Companies are held under valid and enforceable leases, with
such exceptions as are not material and do not materially interfere with the use
made or proposed to be made of such real property, improvements, equipment or
personal property by the Company or such Founding Company.
(v) Tax Law Compliance. The Company and each of the Founding Companies has
filed all necessary federal, state and foreign income and franchise tax returns
and have paid all taxes required to be paid by any of them and, if due and
payable, any related or similar assessment, fine or penalty levied against any
of them. The Company and each of the Founding Companies has made adequate
charges, accruals and reserves in the applicable financial statements referred
to in Section 1(i) above in respect of all federal, state and foreign income and
franchise taxes for all periods as to which the tax liability of the Company or
any of the Founding Companies has not been finally determined. The Company is
not aware of any tax deficiency that has been or might be asserted or threatened
against it or any of the Founding Companies that could result in a Material
Adverse Change.
(w) Intellectual Property Rights. The Company and each of the Founding
Companies owns or possesses adequate rights to use all patents, patent rights or
licenses, inventions, collaborative research agreements, trade secrets, know-
how, trademarks, service marks, trade names and copyrights as are necessary to
conduct its businesses as described in the Registration Statement; the Company
and each of the Founding Companies has not received any notice of, and has no
knowledge of, any
7
<PAGE>
infringement of or conflict with asserted rights of the Company or any of the
Founding Companies by others with respect to any patent, patent rights,
inventions, trade secrets, know-how, trademarks, service marks, trade names or
copyrights; and the Company has not received any notice of, and has no knowledge
of, any infringement of or conflict with asserted rights of others with respect
to any patent, patent rights, inventions, trade secrets, know-how, trademarks,
service marks, trade names or copyrights which, singly or in the aggregate, if
the subject of an unfavorable decision, ruling or finding, might have a Material
Adverse Change. There is no claim being made against the Company or any of the
Founding Companies regarding patents, patent rights or licenses, inventions,
collaborative research, trade secrets, know-how, trademarks, service marks,
trade names or copyrights. To the Company's knowledge, the Company and each of
the Founding Companies do not in the conduct of their business as now or
proposed to be conducted as described in the Prospectus infringe or conflict
with any right or patent of any third party, or any discovery, invention,
product or process which is the subject of a patent application filed by any
third party, known to the Company or any Founding Company, which infringement or
conflict is reasonably likely to result in a Material Adverse Change.
(x) Year 2000 Preparedness. There are no issues related to the Company's,
or any of Founding Companies', preparedness for the Year 2000 that (i) are of a
character required to be described or referred to in the Registration Statement
or Prospectus by the Securities Act which have not been accurately described in
the Registration Statement or Prospectus or (ii) might reasonably be expected to
result in any Material Adverse Change or that might materially affect their
properties, assets or rights.
(y) No Transfer Taxes or Other Fees. There are no transfer taxes or other
similar fees or charges under Federal law or the laws of any state, or any
political subdivision thereof, required to be paid in connection with the
execution and delivery of this Agreement or the issuance and sale by the Company
of the Shares.
(z) Company Not an "Investment Company. The Company has been advised of
the rules and requirements under the Investment Company Act of 1940, as amended
(the "Investment Company Act"). The Company is not, and after receipt of
payment for the Shares will not be, an "investment company" or an entity
"controlled" by an "investment company" within the meaning of the Investment
Company Act and will conduct its business in a manner so that it will not become
subject to the Investment Company Act.
(aa) Insurance. The Company and each of the Founding Companies is insured
by recognized, financially sound and reputable institutions with policies in
such amounts and with such deductibles and covering such risks as are generally
deemed adequate and customary for its businesses including, but not limited to,
policies covering general liability and Directors and Officers liability. The
Company has no reason to believe that, upon consummation of the Founding Company
Acquisitions, it will not be able to obtain insurance coverage similar to that
possessed by the Founding Companies as of the date hereof or as may be necessary
or appropriate to conduct its business as proposed and at a cost that would not
result in a Material Adverse Change. Neither the Company nor any of the
Founding Companies has been denied any insurance coverage which it has sought or
for which it has applied.
8
<PAGE>
(bb) Labor Matters. To the Company's knowledge, no labor disturbance by
the employees of the Company or any of the Founding Companies exists or is
imminent, and the Company is not aware of any existing or imminent labor
disturbance by the employees of any of its principal suppliers or the material
suppliers of any of the Founding Companies, in each case that might be expected
to result in a Material Adverse Change.
(cc) No Price Stabilization or Manipulation. The Company has not taken and
will not take, directly or indirectly (except as described in "Underwriting"
section of the Prospectus), any action designed to or that might be reasonably
expected to cause or result in stabilization or manipulation of the price of the
Common Shares to facilitate the sale or resale of the Shares.
(dd) Lock-Up Agreements. Each officer, director and each person who has
agreed to serve as a director of the Company and each stockholder of the Company
has agreed to sign an agreement substantially in the form attached hereto as
Exhibit A. In addition, each former stockholder of the Founding Companies who
- ---------
will receive shares of capital stock of the Company in connection with the
Founding Company Acquisitions has agreed to sign an agreement attached hereto as
Exhibit . The agreements attached hereto as Exhibit A and Exhibit shall
- ----------- --------- -----------
be collectively referred to as the "Lock-up Agreements"). The Company has
provided to counsel for the Underwriters a complete and accurate list of all
securityholders of the Company and the number and type of securities held by
each securityholder. The Company has provided to counsel for the Underwriters
true, accurate and complete copies of all of the Lock-up Agreements presently in
effect or effected hereby. The Company hereby represents and warrants that it
will not release any of its officers, directors, persons who have agreed to
serve as directors, or other stockholders from any Lock-up Agreements currently
existing or hereafter effected without the prior written consent of BancBoston
Robertson Stephens Inc.
(ee) Related Party Transactions. There are no business relationships or
related-party transactions involving the Company or any of the Founding
Companies or any other person required to be described in the Prospectus which
have not been described as required.
(ff) Environmental Laws. Except as otherwise disclosed in the Prospectus
(i) each of the Company and each of the Founding Companies is in compliance with
all rules, laws and regulations relating to the use, treatment, storage and
disposal of toxic substances and protection of health or the environment
("Environmental Laws") which are applicable to its business, except where the
failure to comply would not result in a Material Adverse Change, (ii) each of
the Company and each of the Founding Companies has received no notice from any
governmental authority or third party of an asserted claim under Environmental
Laws, which claim is required to be disclosed in the Registration Statement and
the Prospectus, (iii) each of the Company and each of the Founding Companies
will not be required to make future material capital expenditures to comply with
Environmental Laws and (iv) no property which is owned, leased or occupied by
the Company or any of the Founding Companies has been designated as a Superfund
site pursuant to the Comprehensive Response, Compensation, and Liability Act of
1980, as amended (42 U.S.C. (S) 9601, et seq.), or otherwise designated as a
-- ---
contaminated site under applicable state or local law.
9
<PAGE>
(gg) ERISA Compliance. The Company and each of the Founding Companies and
any "employee benefit plan" (as defined under the Employee Retirement Income
Security Act of 1974, as amended, and the regulations and published
interpretations thereunder (collectively, "ERISA")) established or maintained by
the Company, any of the Founding Companies or their "ERISA Affiliates" (as
defined below) are in compliance in all material respects with ERISA. "ERISA
Affiliate" means, with respect to the Company or each of the Founding Companies,
any member of any group of organizations described in Sections 414(b),(c),(m) or
(o) of the Internal Revenue Code of 1986, as amended, and the regulations and
published interpretations thereunder (the "Code") of which the Company or any
Founding Company. No "reportable event" (as defined under ERISA) has occurred
or is reasonably expected to occur with respect to any "employee benefit plan"
established or maintained by the Company, any of the Founding Companies or any
of their ERISA Affiliates. No "employee benefit plan" established or maintained
by the Company, any of the Founding Companies or any of their ERISA Affiliates,
if such "employee benefit plan" were terminated, would have any "amount of
unfounded benefit liabilities" (as defined under ERISA). Neither the Company,
any of the Founding Companies nor any of their ERISA Affiliates has incurred or
reasonably expects to incur any liability under (i) Title IV of ERISA with
respect to termination of, or withdrawal from, any "employee benefit plan" or
(ii) Sections 412, 4971, 4975 or 4980B of the Code. Each "employee benefit
plan" established or maintained by the Company, any of the Founding Companies or
any of their ERISA Affiliates that is intended to be qualified under Section
401(a) of the Code is so qualified and nothing has occurred, whether by action
or failure to act, which would cause the loss of such qualification.
(hh) The Company has entered into the agreements (the "Merger Agreements")
set forth in Exhibits 2.1 through 2.6 of the Registration Statement, pursuant to
which the Company will acquire in separate transactions all of the capital stock
and ownership interest of the Founding Companies. Each of the Merger Agreements
is in full force and effect, has been duly and validly authorized, executed and
delivered by the parties thereto, and is valid and binding on the parties
thereto in accordance with its terms and neither the Company nor, to the
Company's knowledge, any other part thereto, is in default in any respect
thereunder. A complete and correct copy of each Merger Agreement (including
Exhibits and Schedule) has been delivered to the Representatives and no changes
therein will be made subsequent hereto and prior to the Closing Date.
(ii) The representations, warranties and covenants made in each Merger
Agreement by the Company, and to the Company's knowledge, by each of the
Founding Companies and by each stockholder of each of the Founding Companies are
true and correct in all material respects, except for such changes permitted or
contemplated by, or waived pursuant to, such Merger Agreement.
(jj) All conditions precedent to the obligations of the Company to
consummate the Founding Company Acquisitions have been satisfied or waived as of
the date hereof.
Any certificate signed by an officer of the Company and delivered to
the Representatives or to counsel for the Underwriters shall be deemed to be a
representation and warranty by the Company to each Underwriter as to the matters
set forth therein.
10
<PAGE>
Section 2. Purchase, Sale and Delivery of the Shares.
(a) The Firm Shares. The Company agrees to issue and sell to the several
Underwriters the Firm Shares upon the terms and subject to the conditions herein
set forth. On the basis of the representations, warranties and agreements
herein contained, and upon the terms but subject to the conditions herein set
forth, the Underwriters agree, severally and not jointly, to purchase from the
Company the respective number of Firm Shares set forth opposite their names on
Schedule A. The purchase price per Firm Share to be paid by the several
- ----------
Underwriters to the Company shall be $[ ] per share.
---
(b) The First Closing Date. Delivery of the Firm Shares to be purchased
by the Underwriters and payment therefor shall be made by the Company and the
Representatives at 6:00 a.m. San Francisco time, at the offices of Brobeck
Phleger & Harrison LLP, Two Embarcadero Place, 2200 Geng Road, Palo Alto,
California 94303 (or at such other place as may be agreed upon among the
Representatives and the Company), (i) on the third (3rd) full business day
following the first day that Shares are traded, (ii) if this Agreement is
executed and delivered after 1:30 P.M., San Francisco time, the fourth (4th)
full business day following the day that this Agreement is executed and
delivered or (iii) at such other time and date not later that seven (7) full
business days following the first day that Shares are traded as the
Representatives and the Company may determine (or at such time and date to which
payment and delivery shall have been postponed pursuant to Section 8 hereof),
such time and date of payment and delivery being herein called the "Closing
Date;" provided, however, that if the Company has not made available to the
Representatives copies of the Prospectus within the time provided in Section
2(g) hereof, the Representatives may, in their sole discretion, postpone the
Closing Date until no later that two (2) full business days following delivery
of copies of the Prospectus to the Representatives.
(c) The Option Shares; the Second Closing Date. In addition, on the
basis of the representations, warranties and agreements herein contained, and
upon the terms but subject to the conditions herein set forth, the Company
hereby grants an option to the several Underwriters to purchase, severally and
not jointly, up to an aggregate of 937,500 Option Shares from the Company at the
purchase price per share to be paid by the Underwriters for the Firm Shares.
The option granted hereunder is for use by the Underwriters solely in covering
any over-allotments in connection with the sale and distribution of the Firm
Shares. The option granted hereunder may be exercised at any time upon notice
by the Representatives to the Company, which notice may be given at any time
within 30 days from the date of this Agreement. The time and date of delivery
of the Option Shares, if subsequent to the First Closing Date, is called the
"Second Closing Date" and shall be determined by the Representatives and shall
not be earlier than three nor later than five full business days after delivery
of such notice of exercise. If any Option Shares are to be purchased, each
Underwriter agrees, severally and not jointly, to purchase the number of Option
Shares (subject to such adjustments to eliminate fractional shares as the
Representatives may determine) that bears the same proportion to the total
number of Option Shares to be purchased as the number of Firm Shares set forth
on Schedule A opposite the name of such Underwriter bears to the total number of
----------
Firm Shares The Representatives may cancel the option at any time prior to its
expiration by giving written notice of such cancellation to the Company.
11
<PAGE>
(d) Public Offering of the Shares. The Representatives hereby advise
the Company that the Underwriters intend to offer for sale to the public, as
described in the Prospectus, their respective portions of the Shares as soon
after this Agreement has been executed and the Registration Statement has been
declared effective as the Representatives, in their sole judgment, have
determined is advisable and practicable.
(e) Payment for the Shares. Payment for the Shares shall be made at the
First Closing Date (and, if applicable, at the Second Closing Date) by wire
transfer in immediately available-funds to the order of the Company.
It is understood that the Representatives have been authorized, for
their own accounts and the accounts of the several Underwriters, to accept
delivery of and receipt for, and make payment of the purchase price for, the
Firm Shares and any Option Shares the Underwriters have agreed to purchase.
BancBoston Robertson Stephens Inc., individually and not as the Representative
of the Underwriters, may (but shall not be obligated to) make payment for any
Shares to be purchased by any Underwriter whose funds shall not have been
received by the Representatives by the First Closing Date or the Second Closing
Date, as the case may be, for the account of such Underwriter, but any such
payment shall not relieve such Underwriter from any of its obligations under
this Agreement.
(f) Delivery of the Shares. The Company shall deliver, or cause to be
delivered, a credit representing the Firm Shares to an account or accounts at
The Depository Trust Company, as designated by the Representatives for the
accounts of the Representatives and the several Underwriters at the First
Closing Date, against the irrevocable release of a wire transfer of immediately
available funds for the amount of the purchase price therefor. The Company
shall also deliver, or cause to be delivered a credit representing the Option
Shares the Underwriters have agreed to purchase at the First Closing Date (or
the Second Closing Date, as the case may be), to an account or accounts at The
Depository Trust Company as designated by the Representatives for the accounts
of the Representatives and the several Underwriters, against the irrevocable
release of a wire transfer of immediately available funds for the amount of the
purchase price therefor. Time shall be of the essence, and delivery at the time
and place specified in this Agreement is a further condition to the obligations
of the Underwriters.
(g) Delivery of Prospectus to the Underwriters. Not later than 12:00
noon on the second business day following the date the Shares are released by
the Underwriters for sale to the public, the Company shall deliver or cause to
be delivered copies of the Prospectus in such quantities and at such places as
the Representatives shall request.
Section 3. Covenants of the Company.
The Company further covenants and agrees with each Underwriter as follows:
(a) Registration Statement Matters. The Company will (i) use its best
efforts to cause a registration statement on Form 8-A (the "Form 8-A
Registration Statement") as required by the Securities Exchange Act of 1934 (the
"Exchange Act") to become effective simultaneously with the Registration
Statement, (ii) use its best efforts to cause the Registration Statement to
become effective or, if the procedure in Rule 430A of the
12
<PAGE>
Securities Act is followed, to prepare and timely file with the Commission under
Rule 424(b) under the Securities Act a Prospectus in a form approved by the
Representatives containing information previously omitted at the time of
effectiveness of the Registration Statement in reliance on Rule 430A of the
Securities Act and (iii) not file any amendment to the Registration Statement or
supplement to the Prospectus of which the Representatives shall not previously
have been advised and furnished with a copy or to which the Representatives
shall have reasonably objected in writing or which is not in compliance with the
Securities Act. If the Company elects to rely on Rule 462(b) under the
Securities Act, the Company shall file a Rule 462(b) Registration Statement with
the Commission in compliance with Rule 462(b) under the Securities Act prior to
the time confirmations are sent or given, as specified by Rule 462(b)(2) under
the Securities Act, and shall pay the applicable fees in accordance with Rule
111 under the Securities Act.
(b) Securities Act Compliance. The Company will advise the
Representatives promptly (i) when the Registration Statement or any post-
effective amendment thereto shall have become effective, (ii) of receipt of any
comments from the Commission, (iii) of any request of the Commission for
amendment of the Registration Statement or for supplement to the Prospectus or
for any additional information and (iv) of the issuance by the Commission of any
stop order suspending the effectiveness of the Registration Statement or the use
of the Prospectus or of the institution of any proceedings for that purpose. The
Company will use its best efforts to prevent the issuance of any such stop order
preventing or suspending the use of the Prospectus and to obtain as soon as
possible the lifting thereof, if issued.
(c) Blue Sky Compliance. The Company will cooperate with the
Representatives and counsel for the Underwriters in endeavoring to qualify the
Shares for sale under the securities laws of such jurisdictions (both national
and foreign) as the Representatives may reasonably have designated in writing
and will make such applications, file such documents, and furnish such
information as may be reasonably required for that purpose, provided the Company
shall not be required to qualify as a foreign corporation or to file a general
consent to service of process in any jurisdiction where it is not now so
qualified or required to file such a consent. The Company will, from time to
time, prepare and file such statements, reports and other documents as are or
may be required to continue such qualifications in effect for so long a period
as the Representatives may reasonably request for distribution of the Shares.
(d) Amendments and Supplements to the Prospectus and Other Securities Act
Matters. The Company will comply with the Securities Act and the Exchange Act,
and the rules and regulations of the Commission thereunder, so as to permit the
completion of the distribution of the Shares as contemplated in this Agreement
and the Prospectus. If during the period in which a prospectus is required by
law to be delivered by an Underwriter or dealer, any event shall occur as a
result of which, in the judgment of the Company or in the reasonable opinion of
the Representatives or counsel for the Underwriters, it becomes necessary to
amend or supplement the Prospectus in order to make the statements therein, in
the light of the circumstances existing at the time the Prospectus is delivered
to a purchaser, not misleading, or, if it is necessary at any time to amend or
supplement the Prospectus to comply with any law, the Company promptly will
prepare and file with the Commission, and furnish at its own expense to the
Underwriters and to dealers, an appropriate amendment to the Registration
Statement or supplement to the Prospectus so that the Prospectus as so amended
or supplemented
13
<PAGE>
will not, in the light of the circumstances when it is so delivered, be
misleading, or so that the Prospectus will comply with the law.
(e) Copies of any Amendments and Supplements to the Prospectus. The
Company agrees to furnish the Representatives, without charge, during the period
beginning on the date hereof and ending on the later of the First Closing Date
or such date, as in the opinion of counsel for the Underwriters, the Prospectus
is no longer required by law to be delivered in connection with sales by an
Underwriter or dealer (the "Prospectus Delivery Period"), as many copies of the
Prospectus and any amendments and supplements thereto (including any documents
incorporated or deemed incorporated by reference therein) as the Representatives
may request.
(f) Insurance. The Company shall (i) obtain Directors and Officers
liability insurance in the minimum amount of $10 million which shall apply to
the offering contemplated hereby and (ii) shall cause BancBoston Robertson
Stephens Inc. to be added as an additional insured to such policy in respect of
the offering contemplated hereby.
(g) Notice of Subsequent Events. If at any time during the ninety (90)
day period after the Registration Statement becomes effective, any rumor,
publication or event relating to or affecting the Company shall occur as a
result of which in your opinion the market price of the Company Shares has been
or is likely to be materially affected (regardless of whether such rumor,
publication or event necessitates a supplement to or amendment of the
Prospectus), the Company will, after written notice from you advising the
Company to the effect set forth above, forthwith prepare, consult with you
concerning the substance of and disseminate a press release or other public
statement, reasonably satisfactory to you, responding to or commenting on such
rumor, publication or event.
(h) Use of Proceeds. The Company shall apply the net proceeds from the
sale of the Shares sold by it in the manner described under the caption "Use of
Proceeds" in the Prospectus.
(i) Transfer Agent. The Company shall engage and maintain, at its
expense, a registrar and transfer agent for the Company Shares.
(j) Earnings Statement. As soon as practicable, the Company will make
generally available to its security holders and to the Representatives an
earnings statement (which need not be audited) covering the twelve-month period
ending June 30, 2000 that satisfies the provisions of Section 11(a) of the
Securities Act.
(k) Periodic Reporting Obligations. During the Prospectus Delivery Period
the Company shall file, on a timely basis, with the Commission and the Nasdaq
National Market all reports and documents required to be filed under the
Exchange Act.
(l) Agreement Not to Offer or Sell Additional Securities. The Company will
not, without the prior written consent of BancBoston Robertson Stephens Inc.,
for a period of 180 days following the date of the Prospectus, offer, sell or
contract to sell, or otherwise dispose of or enter into any transaction which is
designed to, or could be expected to, result in the disposition (whether by
actual disposition or effective economic disposition due to cash settlement or
otherwise by the Company or any affiliate of the Company or any person in
privity with the Company or any affiliate of the Company)
14
<PAGE>
directly or indirectly, or announce the offering of, any other Common Shares or
any securities convertible into, or exchangeable for, Common Shares; provided,
however, that the Company may (i) issue and sell Common Shares pursuant to any
director or employee stock option plan, stock ownership plan or dividend
reinvestment plan of the Company in effect at the date of the Prospectus and
described in the Prospectus so long as none of those shares may be transferred
on during the period of 180 days from the date that the Registration Statement
is declared effective (the "Lock-Up Period") and the Company shall enter stop
transfer instructions with its transfer agent and registrar against the transfer
of any such Common Shares, (ii) the Company may issue Common Shares issuable
upon the conversion of securities or the exercise of warrants outstanding at the
date of the Prospectus and described in the Prospectus and (iii) the Company may
issue shares in connection with acquisitions, provided that the individuals or
entities receiving Company shares in such acquisition(s) agree not to transfer
such shares during the Lock-Up Period.
(m) Future Reports to the Representatives. During the period of five
years hereafter the Company will furnish to the Representatives (i) as soon as
practicable after the end of each fiscal year, copies of the Annual Report of
the Company containing the balance sheet of the Company as of the close of such
fiscal year and statements of income, stockholders' equity and cash flows for
the year then ended and the opinion thereon of the Company's independent public
or certified public accountants; (ii) as soon as practicable after the filing
thereof, copies of each proxy statement, Annual Report on Form 10-K, Quarterly
Report on Form 10-Q, Current Report on Form 8-K or other report filed by the
Company with the Commission, the National Association of Securities Dealers, LLC
or any securities exchange; and (iii) as soon as available, copies of any report
or communication of the Company mailed generally to holders of its capital
stock.
Section 4. Conditions of the Obligations of the Underwriters. The
obligations of the several Underwriters to purchase and pay for the Shares as
provided herein on the First Closing Date and, with respect to the Option
Shares, the Second Closing Date, shall be subject to the accuracy of the
representations and warranties on the part of the Company set forth in Section 1
hereof as of the date hereof and as of the First Closing Date as though then
made and, with respect to the Option Shares, as of the Second Closing Date as
though then made, to the timely performance by the Company of its covenants and
other obligations hereunder, and to each of the following additional conditions:
(a) Compliance with Registration Requirements; No Stop Order; No Objection
from the National Association of Securities Dealers, LLC The Registration
Statement shall have become effective prior to the execution of this Agreement,
or at such later date as shall be consented to in writing by you; and no stop
order suspending the effectiveness thereof shall have been issued and no
proceedings for that purpose shall have been initiated or, to the knowledge of
the Company or any Underwriter, threatened by the Commission, and any request of
the Commission for additional information (to be included in the Registration
Statement or the Prospectus or otherwise) shall have been complied with to the
satisfaction of Underwriters' Counsel; and the National Association of
Securities Dealers, LLC shall have raised no objection to the fairness and
reasonableness of the underwriting terms and arrangements.
15
<PAGE>
(b) Corporate Proceedings. All corporate proceedings and other legal
matters in connection with this Agreement, the Merger Agreements, the form of
Registration Statement and the Prospectus, and the registration, authorization,
issue, sale and delivery of the Shares, shall have been reasonably satisfactory
to Underwriters' Counsel, and such counsel shall have been furnished with such
papers and information as they may reasonably have requested to enable them to
pass upon the matters referred to in this Section.
(c) No Material Adverse Change. Subsequent to the execution and delivery
of this Agreement and prior to the First Closing Date, or the Second Closing
Date, as the case may be, there shall not have been any Material Adverse Change
in the condition (financial or otherwise), earnings, operations, business or
business prospects of the Company and the Founding Companies considered as one
enterprise from that set forth in the Registration Statement or Prospectus,
which, in your sole judgment, is material and adverse and that makes it, in your
sole judgment, impracticable or inadvisable to proceed with the public offering
of the Shares as contemplated by the Prospectus.
(d) Opinion of Counsel for the Company. You shall have received on the
First Closing Date, or the Second Closing Date, as the case may be, an opinion
of Howard, Rice, Nemerovski, Canady, Falk & Rabkin, a Professional Corporation,
counsel for the Company substantially in the form of Exhibit B attached hereto,
---------
dated the First Closing Date, or the Second Closing Date, addressed to the
Underwriters and with reproduced copies or signed counterparts thereof for each
of the Underwriters.
(e) Opinion of Counsel for the Underwriters. You shall have received on
the First Closing Date or the Second Closing Date, as the case may be, an
opinion of Brobeck, Phleger & Harrison LLP, substantially in the form of
Exhibit C hereto. The Company shall have furnished to such counsel such
- ---------
documents as they may have requested for the purpose of enabling them to pass
upon such matters.
(f) Accountants' Comfort Letter. You shall have received on the First
Closing Date and on the Second Closing Date, as the case may be, a letter from
Arthur Andersen LLP addressed to the Underwriters, dated the First Closing Date
or the Second Closing Date, as the case may be, confirming that they are
independent certified public accountants with respect to the Company within the
meaning of the Act and the applicable published Rules and Regulations and based
upon the procedures described in such letter delivered to you concurrently with
the execution of this Agreement (herein called the "Original Letter"), but
carried out to a date not more than four (4) business days prior to the First
Closing Date or the Second Closing Date, as the case may be, (i) confirming, to
the extent true, that the statements and conclusions set forth in the Original
Letter are accurate as of the First Closing Date or the Second Closing Date, as
the case may be, and (ii) setting forth any revisions and additions to the
statements and conclusions set forth in the Original Letter which are necessary
to reflect any changes in the facts described in the Original Letter since the
date of such letter, or to reflect the availability of more recent financial
statements, data or information. The letter shall not disclose any change in
the condition (financial or otherwise), earnings, operations, business or
business prospects of the Company and the Founding Companies from that set forth
in the Registration Statement or Prospectus, which, in your sole judgment, is
material and adverse and that makes it, in your sole judgment, impracticable or
inadvisable to proceed with the public offering of the Shares as contemplated by
the Prospectus. The Original
16
<PAGE>
Letter from Arthur Andersen LLP shall be addressed to or for the use of the
Underwriters in form and substance satisfactory to the Underwriters and shall
(i) represent, to the extent true, that they are independent certified public
accountants with respect to the Company within the meaning of the Act and the
applicable published Rules and Regulations, (ii) set forth their opinion with
respect to their examination of the consolidated balance sheet of the Company as
of December 31, 1998 and related consolidated statements of operations,
shareholders' equity, and cash flows for the twelve (12) months ended December
31,1998, (iii) state that Arthur Andersen LLP has performed the procedures set
out in Statement on Auditing Standards No. 71 ("SAS 71") for a review of interim
financial information and providing the report of Arthur Andersen LLP as
described in SAS 71 on the financial statements for each of the quarters in the
one-quarter period ended March 31, 1999 (the "Quarterly Financial Statements"),
(iv) state that in the course of such review, nothing came to their attention
that leads them to believe that any material modifications need to be made to
any of the Quarterly Financial Statements in order for them to be in compliance
with generally accepted accounting principles consistently applied across the
periods presented, and address other matters agreed upon by Arthur Anderson LLP
and you. In addition, you shall have received from Arthur Andersen LLP a letter
addressed to the Company and made available to you for the use of the
Underwriters stating that their review of the Company's system of internal
accounting controls, to the extent they deemed necessary in establishing the
scope of their examination of the Company's consolidated financial statements as
of December 31, 1998, did not disclose any weaknesses in internal controls that
they considered to be material weaknesses.
(g) Officers' Certificate. You shall have received on the First Closing
Date and the Second Closing Date, as the case may be, a certificate of the
Company, dated the First Closing Date or the Second Closing Date, as the case
may be, signed by the Chief Executive Officer and Chief Financial Officer of the
Company, to the effect that, and you shall be satisfied that:
(i) The representations and warranties of the Company in this Agreement
are true and correct, as if made on and as of the First Closing Date or the
Second Closing Date, as the case may be, and the Company has complied with
all the agreements (including the Merger Agreements) and satisfied all the
conditions on its part to be performed or satisfied at or prior to the
First Closing Date or the Second Closing Date, as the case may be;
(ii) No stop order suspending the effectiveness of the Registration
Statement has been issued and to the Company's knowledge no proceedings for
that purpose have been instituted or are pending or threatened under the
Act;
(iii) When the Registration Statement became effective and at all times
subsequent thereto up to the delivery of such certificate, the Registration
Statement and the Prospectus, and any amendments or supplements, contained
all material information required to be included therein by the Securities
Act and in all material respects conformed to the requirements of the
Securities Act; the Registration Statement and the Prospectus, and any
amendments or supplements thereto, did not and do not include any untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not
misleading; and, since the effective date of the Registration Statement,
17
<PAGE>
there has occurred no event required to be set forth in an amended or
supplemented Prospectus which has not been so set forth; and
(iv) Subsequent to the respective dates as of which information is given
in the Registration Statement and Prospectus, there has not been (a) any
material adverse change in the condition (financial or otherwise),
earnings, operations, business or business prospects of the Company and the
Founding Companies considered as one enterprise, (b) any transaction that
is material to the Company and the Founding Companies considered as one
enterprise, except transactions entered into in the ordinary course of
business, (c) any obligation, direct or contingent, that is material to the
Company and the Founding Companies considered as one enterprise, incurred
by the Company or any of the Founding Companies, except obligations
incurred in the ordinary course of business or obligations described in or
contemplated by the Prospectus, (d) any change in the capital stock or
outstanding indebtedness of the Company or any of the Founding Companies
that is material to the Company and the Founding Companies considered as
one enterprise or obligations described in or contemplated by the
Prospectus, (e) any dividend or distribution of any kind declared, paid or
made on the capital stock of the Company or any of the Founding Companies,
or (f) any loss or damage (whether or not insured) to the property of the
Company or any of the Founding Companies which has been sustained or will
have been sustained which has a material adverse effect on the condition
(financial or otherwise), earnings, operations, business or business
prospects of the Company and the Founding Companies considered as one
enterprise.
(h) Lock-up Agreement from Certain Stockholders of the Company. The
Company shall have obtained and delivered to you an agreement substantially in
the form of Exhibit A attached hereto from each officer and director of the
---------
Company, and persons who have agreed to serve as directors and each stockholder.
In addition, the Company shall have obtained and delivered to you an
agreement substantially in the form of Exhibit attached hereto from each
-----------
former stockholder of the Founding Companies who will receive shares of capital
stock of the Company in connection with the Founding Company Acquisitions.
(i) Stock Exchange Listing. The Shares shall have been approved for
inclusion on the Nasdaq National Market, subject only to official notice of
issuance.
(j) Compliance with Prospectus Delivery Requirements. The Company shall
have complied with the provisions of Sections 2(g) and 3(e) hereof with respect
to the furnishing of Prospectuses.
(k) Additional Documents. On or before each of the First Closing Date and
the Second Closing Date, as the case may be, the Representatives and counsel for
the Underwriters shall have received such information, documents and opinions as
they may reasonably require for the purposes of enabling them to pass upon the
issuance and
18
<PAGE>
sale of the Shares as contemplated herein, or in order to evidence the accuracy
of any of the representations and warranties, or the satisfaction of any of the
conditions or agreements, herein contained.
(l) Founding Company Acquisitions. Each Founding Company Merger shall
have been consummated upon the terms set forth in the Prospectus simultaneously
with the closing of the purchase of Firm Shares by the Underwriters hereunder;
and each certificate delivered to the Company pursuant to each Merger Agreement
shall have been delivered to the Underwriters.
If any condition specified in this Section 4 is not satisfied when and as
required to be satisfied, this Agreement may be terminated by the
Representatives by notice to the Company at any time on or prior to the First
Closing Date and, with respect to the Option Shares, at any time prior to the
Second Closing Date, which termination shall be without liability on the part of
any party to any other party, except that Section 5 (Payment of Expenses),
Section 6 (Reimbursement of Underwriters' Expenses), Section 7 (Indemnification
and Contribution) and Section 10 (Representations and Indemnities to Survive
Delivery) shall at all times be effective and shall survive such termination.
Section 5. Payment of Expenses. The Company agrees to pay all costs, fees
and expenses incurred in connection with the performance of its obligations
hereunder and in connection with the transactions contemplated hereby, including
without limitation (i) all expenses incident to the issuance and delivery of the
Common Shares (including all printing and engraving costs), (ii) all fees and
expenses of the registrar and transfer agent of the Common Stock, (iii) all
necessary issue, transfer and other stamp taxes in connection with the issuance
and sale of the Shares to the Underwriters, (iv) all fees and expenses of the
Company's counsel, independent public or certified public accountants and other
advisors, (v) all costs and expenses incurred in connection with the
preparation, printing, filing, shipping and distribution of the Registration
Statement (including financial statements, exhibits, schedules, consents and
certificates of experts), each preliminary prospectus and the Prospectus, and
all amendments and supplements thereto, and this Agreement, (vi) all filing
fees, attorneys' fees and expenses incurred by the Company or the Underwriters
in connection with qualifying or registering (or obtaining exemptions from the
qualification or registration of) all or any part of the Shares for offer and
sale under the state securities or blue sky laws or the provincial securities
laws of Canada or any other country, and, if requested by the Representatives,
preparing and printing a "Blue Sky Survey", an "International Blue Sky Survey"
or other memorandum, and any supplements thereto, advising the Underwriters of
such qualifications, registrations and exemptions, (vii) the filing fees
incident to, and the reasonable fees and expenses of counsel for the
Underwriters in connection with, the National Association of Securities Dealers,
LLC review and approval of the Underwriters' participation in the offering and
distribution of the Common Shares (viii) the fees and expenses associated with
listing the Common Shares on the Nasdaq National Market, (ix) all costs and
expenses of the Company incident to the preparation and undertaking of "road
show" presentations to be made to prospective investors, and (x) all other fees,
costs and expenses referred to in Item 13 of Part II of the Registration
Statement. Except as provided in this Section 5, Section 6, and Section 7
hereof, the Underwriters shall pay their own expenses, including the fees and
disbursements of their counsel.
19
<PAGE>
Section 6. Reimbursement of Underwriters' Expenses. If this Agreement is
terminated by the Representatives pursuant to Section 4 or Section 9, or if the
sale to the Underwriters of the Shares on the First Closing Date is not
consummated because of any refusal, inability or failure on the part of the
Company to perform any agreement herein or to comply with any provision hereof,
the Company agrees to reimburse the Representatives and the other Underwriters
(or such Underwriters as have terminated this Agreement with respect to
themselves), severally, upon demand for all out-of-pocket expenses that shall
have been reasonably incurred by the Representatives and the Underwriters in
connection with the proposed purchase and the offering and sale of the Shares,
including but not limited to fees and disbursements of counsel, printing
expenses, travel expenses, postage, facsimile and telephone charges.
Section 7. Indemnification and Contribution.
(a) Indemnification of the Underwriters. The Company agrees to indemnify
and hold harmless each Underwriter, its officers and employees, and each person,
if any, who controls any Underwriter within the meaning of the Securities Act
and the Exchange Act against any loss, claim, damage, liability or expense, as
incurred, to which such Underwriter or such controlling person may become
subject, under the Securities Act, the Exchange Act or other federal or state
statutory law or regulation, or at common law or otherwise (including in
settlement of any litigation, if such settlement is effected with the written
consent of the Company, which consent shall not be unreasonably withheld),
insofar as such loss, claim, damage, liability or expense (or actions in respect
thereof as contemplated below) arises out of or is based (i) upon any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement, or any amendment thereto, including any information
deemed to be a part thereof pursuant to Rule 430A or Rule 434 under the
Securities Act, or the omission or alleged omission therefrom of a material fact
required to be stated therein or necessary to make the statements therein not
misleading; or (ii) upon any untrue statement or alleged untrue statement of a
material fact contained in any preliminary prospectus or the Prospectus (or any
amendment or supplement thereto), or the omission or alleged omission therefrom
of a material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading; or (iii)
in whole or in part upon any inaccuracy in the representations and warranties of
the Company contained herein; or (iv) in whole or in part upon any failure of
the Company to perform its obligations hereunder or under law; or (v) any act or
failure to act or any alleged act or failure to act by any Underwriter in
connection with, or relating in any manner to, the Shares or the offering
contemplated hereby, and which is included as part of or referred to in any
loss, claim, damage, liability or action arising out of or based upon any matter
covered by clause (i), (ii), (iii) or (iv) above, provided that the Company
shall not be liable under this clause (v) to the extent that a court of
competent jurisdiction shall have determined by a final judgment that such loss,
claim, damage, liability or action resulted directly from any such acts or
failures to act undertaken or omitted to be taken by such Underwriter through
its bad faith or willful misconduct; and to reimburse each Underwriter and each
such controlling person for any and all expenses (including the fees and
disbursements of counsel chosen by BancBoston Robertson Stephens Inc.) as such
expenses are reasonably incurred by such Underwriter or such controlling person
in connection with investigating, defending, settling, compromising or paying
any such loss, claim, damage, liability, expense or action; provided, however,
that the foregoing
20
<PAGE>
indemnity agreement shall not apply to any loss, claim, damage, liability or
expense to the extent, but only to the extent, arising out of or based upon any
untrue statement or alleged untrue statement or omission or alleged omission
made in reliance upon and in conformity with written information furnished to
the Company by the Representatives expressly for use in the Registration
Statement, any preliminary prospectus or the Prospectus (or any amendment or
supplement thereto); and provided, further, that with respect to any preliminary
prospectus, the foregoing indemnity agreement shall not inure to the benefit of
any Underwriter from whom the person asserting any loss, claim, damage,
liability or expense purchased Shares, or any person controlling such
Underwriter, if copies of the Prospectus were timely delivered to the
Underwriter pursuant to Section 2 and a copy of the Prospectus (as then amended
or supplemented if the Company shall have furnished any amendments or
supplements thereto) was not sent or given by or on behalf of such Underwriter
to such person, if required by law so to have been delivered, at or prior to the
written confirmation of the sale of the Shares to such person, and if the
Prospectus (as so amended or supplemented) would have cured the defect giving
rise to such loss, claim, damage, liability or expense. The indemnity agreement
set forth in this Section 7(a) shall be in addition to any liabilities that the
Company may otherwise have.
(b) Indemnification of the Company, its Directors and Officers. Each
Underwriter agrees, severally and not jointly, to indemnify and hold harmless
the Company, each of its directors, each of its officers who signed the
Registration Statement and each person, if any, who controls the Company within
the meaning of the Securities Act or the Exchange Act, against any loss, claim,
damage, liability or expense, as incurred, to which the Company, or any such
director, officer or controlling person may become subject, under the Securities
Act, the Exchange Act, or other federal or state statutory law or regulation, or
at common law or otherwise (including in settlement of any litigation, if such
settlement is effected with the written consent of such Underwriter), insofar as
such loss, claim, damage, liability or expense (or actions in respect thereof as
contemplated below) arises out of or is based upon any untrue or alleged untrue
statement of a material fact contained in the Registration Statement, any
preliminary prospectus or the Prospectus (or any amendment or supplement
thereto), or arises out of or is based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, in each case to the extent, but only to
the extent, that such untrue statement or alleged untrue statement or omission
or alleged omission was made in the Registration Statement, any preliminary
prospectus, the Prospectus (or any amendment or supplement thereto), in reliance
upon and in conformity with written information furnished to the Company by the
Representatives expressly for use therein; and to reimburse the Company, or any
such director, officer or controlling person for any legal and other expense
reasonably incurred by the Company, or any such director, officer or controlling
person in connection with investigating, defending, settling, compromising or
paying any such loss, claim, damage, liability, expense or action. The indemnity
agreement set forth in this Section 7(b) shall be in addition to any liabilities
that each Underwriter may otherwise have.
(c) Information Provided by the Underwriters. The Company hereby
acknowledges that the only information that the Underwriters have furnished to
the Company expressly for use in the Registration Statement, any preliminary
prospectus or the Prospectus (or any amendment or supplement thereto) are the
statements set forth in the table in the first paragraph, second and third
paragraphs and under the
21
<PAGE>
subheading "New Underwriter" under the caption "Underwriting" in the Prospectus;
and the Underwriters confirm that such statements are correct.
(d) Notifications and Other Indemnification Procedures. Promptly after
receipt by an indemnified party under this Section 7 of notice of the
commencement of any action, such indemnified party will, if a claim in respect
thereof is to be made against an indemnifying party under this Section 7, notify
the indemnifying party in writing of the commencement thereof, but the omission
so to notify the indemnifying party will not relieve it from any liability which
it may have to any indemnified party for contribution or otherwise than under
the indemnity agreement contained in this Section 7 or to the extent it is not
prejudiced as a proximate result of such failure. In case any such action is
brought against any indemnified party and such indemnified party seeks or
intends to seek indemnity from an indemnifying party, the indemnifying party
will be entitled to participate in, and, to the extent that it shall elect,
jointly with all other indemnifying parties similarly notified, by written
notice delivered to the indemnified party promptly after receiving the aforesaid
notice from such indemnified party, to assume the defense thereof with counsel
reasonably satisfactory to such indemnified party; provided, however, if the
defendants in any such action include both the indemnified party and the
indemnifying party and the indemnified party shall have reasonably concluded
that a conflict may arise between the positions of the indemnifying party and
the indemnified party in conducting the defense of any such action or that there
may be legal defenses available to it and/or other indemnified parties which are
different from or additional to those available to the indemnifying party, the
indemnified party or parties shall have the right to select separate counsel to
assume such legal defenses and to otherwise participate in the defense of such
action on behalf of such indemnified party or parties. Upon receipt of notice
from the indemnifying party to such indemnified party of such indemnifying
party's election so to assume the defense of such action and approval by the
indemnified party of counsel, the indemnifying party will not be liable to such
indemnified party under this Section 7 for any legal or other expenses
subsequently incurred by such indemnified party in connection with the defense
thereof unless (i) the indemnified party shall have employed separate counsel in
accordance with the proviso to the next preceding sentence (it being understood,
however, that the indemnifying party shall not be liable for the expenses of
more than one separate counsel (together with local counsel), approved by the
indemnifying party (BancBoston Robertson Stephens Inc. in the case of Section
7(b) and Section 8), representing the indemnified parties who are parties to
such action), (ii) the indemnifying party shall not have employed counsel
satisfactory to the indemnified party to represent the indemnified party within
a reasonable time after notice of commencement of the action, or (iii) the
indemnifying party has authorized the employment of counsel for the indemnified
party at the expense of the indemnifying party, in each of which cases the fees
and expenses of counsel shall be at the expense of the indemnifying party.
(e) Settlements. The indemnifying party under this Section 7 shall not be
liable for any settlement of any proceeding effected without its written
consent, which consent shall not be unreasonably withheld, but if settled with
such consent or if there be a final judgment for the plaintiff, the indemnifying
party agrees to indemnify the indemnified party against any loss, claim, damage,
liability or expense by reason of such settlement or judgment. Notwithstanding
the foregoing sentence, if at any time an indemnified party shall have requested
an indemnifying party to reimburse the indemnified party for fees and expenses
of counsel as contemplated by Section 7(d) hereof, the indemnifying party agrees
that it shall be liable for any settlement of any
22
<PAGE>
proceeding effected without its written consent if (i) such settlement is
entered into more than 30 days after receipt by such indemnifying party of the
aforesaid request and (ii) such indemnifying party shall not have reimbursed the
indemnified party in accordance with such request prior to the date of such
settlement. No indemnifying party shall, without the prior written consent of
the indemnified party, effect any settlement, compromise or consent to the entry
of judgment in any pending or threatened action, suit or proceeding in respect
of which any indemnified party is or could have been a party and indemnity was
or could have been sought hereunder by such indemnified party, unless such
settlement, compromise or consent includes (i) an unconditional release of such
indemnified party from all liability on claims that are the subject matter of
such action, suit or proceeding and (ii) does not include a statement as to or
an admission of fault, culpability or a failure to act by or on behalf of any
indemnified party.
(f) Contribution. If the indemnification provided for in this Section 7
is unavailable to or insufficient to hold harmless an indemnified party under
Section 7(a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) then each
indemnifying party shall contribute to the aggregate amount paid or payable by
such indemnified party in such proportion as is appropriate to reflect the
relative benefits received by the Company on the one hand and the Underwriters
on the other from the offering of the Shares. If, however, the allocation
provided by the immediately preceding sentence is not permitted by applicable
law then each indemnifying party shall contribute to such amount paid or payable
by such indemnified party in such proportion as is appropriate to reflect not
only such relative benefits but also the relative fault of the Company on the
one hand and the Underwriters on the other in connection with the statements or
omissions which resulted in such losses, claims, damages or liabilities, (or
actions or proceedings in respect thereof), as well as any other relevant
equitable considerations. The relative benefits received by the Company on the
one hand and the Underwriter on the other shall be deemed to be in the same
proportion as the total net proceeds from the offering (before deducting
expenses) received by the Company bears to the total underwriting discounts and
commissions received by the Underwriters, in each case as set forth in the table
on the cover page of the Prospectus. The relative fault shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company on the one hand or the
Underwriters on the other and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The Company and Underwriters agree that it would not be just and equitable
if contributions pursuant to this Section 7(f) were determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to above
23
<PAGE>
in this Section 7(f). The amount paid or payable by an indemnified party as a
result of the losses, claims, damages or liabilities (or actions or proceedings
in respect thereof) referred to above in this Section 7(f) shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this subsection (f), (i) no Underwriter shall
be required to contribute any amount in excess of the underwriting discounts and
commissions applicable to the Shares purchased by such Underwriter and (ii) no
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. The Underwriters'
obligations in this Section 7(f) to contribute are several in proportion to
their respective underwriting obligations and not joint.
(g) Timing of Any Payments of Indemnification. Any losses, claims,
damages, liabilities or expenses for which an indemnified party is entitled to
indemnification or contribution under this Section 7 shall be paid by the
indemnifying party to the indemnified party as such losses, claims, damages,
liabilities or expenses are incurred, but in all cases, no later than thirty
(30) days of invoice to the indemnifying party.
(h) Survival. The indemnity and contribution agreements contained in this
Section 7 and the representation and warranties of the Company set forth in this
Agreement shall remain operative and in full force and effect, regardless of (i)
any investigation made by or on behalf of any Underwriter or any person
controlling any Underwriter, the Company, its directors or officers or any
persons controlling the Company, (ii) acceptance of any Shares and payment
therefor hereunder, and (iii) any termination of this Agreement. A successor to
any Underwriter, or to the Company, its directors or officers, or any person
controlling the Company, shall be entitled to the benefits of the indemnity,
contribution and reimbursement agreements contained in this Section 7.
(i) Acknowledgements of Parties. The parties to this Agreement hereby
acknowledge that they are sophisticated business persons who were represented by
counsel during the negotiations regarding the provisions hereof including,
without limitation, the provisions of this Section 7, and are fully informed
regarding said provisions. They further acknowledge that the provisions of this
Section 7 fairly allocate the risks in light of the ability of the parties to
investigate the Company and its business in order to assure that adequate
disclosure is made in the Registration Statement and Prospectus as required by
the Securities Act and the Exchange Act.
Section 8. Default of One or More of the Several Underwriters. If, on
the First Closing Date or the Second Closing Date, as the case may be, any one
or more of the several Underwriters shall fail or refuse to purchase Shares that
it or they have agreed to purchase hereunder on such date, and the aggregate
number of Common Shares which such defaulting Underwriter or Underwriters agreed
but failed or refused to
24
<PAGE>
purchase does not exceed 10% of the aggregate number of the Shares to be
purchased on such date, the other Underwriters shall be obligated, severally, in
the proportions that the number of Firm Common Shares set forth opposite their
respective names on Schedule A bears to the aggregate number of Firm Shares set
----------
forth opposite the names of all such non-defaulting Underwriters, or in such
other proportions as may be specified by the Representatives with the consent of
the non-defaulting Underwriters, to purchase the Shares which such defaulting
Underwriter or Underwriters agreed but failed or refused to purchase on such
date. If, on the First Closing Date or the Second Closing Date, as the case may
be, any one or more of the Underwriters shall fail or refuse to purchase Shares
and the aggregate number of Shares with respect to which such default occurs
exceeds 10% of the aggregate number of Shares to be purchased on such date, and
arrangements satisfactory to the Representatives and the Company for the
purchase of such Shares are not made within 48 hours after such default, this
Agreement shall terminate without liability of any party to any other party
except that the provisions of Section 4, and Section 7 shall at all times be
effective and shall survive such termination. In any such case either the
Representatives or the Company shall have the right to postpone the First
Closing Date or the Second Closing Date, as the case may be, but in no event for
longer than seven days in order that the required changes, if any, to the
Registration Statement and the Prospectus or any other documents or arrangements
may be effected.
As used in this Agreement, the term "Underwriter" shall be deemed to
include any person substituted for a defaulting Underwriter under this Section
8. Any action taken under this Section 8 shall not relieve any defaulting
Underwriter from liability in respect of any default of such Underwriter under
this Agreement.
Section 9. Termination of this Agreement. Prior to the First Closing
Date, this Agreement may be terminated by the Representatives by notice given to
the Company if at any time (i) trading or quotation in any of the Company's
securities shall have been suspended or limited by the Commission or by the
Nasdaq Stock Market, or trading in securities generally on either the Nasdaq
Stock Market or the New York Stock Exchange shall have been suspended or
limited, or minimum or maximum prices shall have been generally established on
any of such stock exchanges by the Commission or the National Association of
Securities Dealers, LLC; (ii) a general banking moratorium shall have been
declared by any of federal, New York, Delaware or California authorities; (iii)
there shall have occurred any outbreak or escalation of national or
international hostilities or any crisis or calamity, or any substantial change
in the United States or international financial markets, or any change or
development involving a prospective change in United States' or international
political, financial or economic conditions, as in the judgment of the
Representatives is material and adverse and makes it impracticable or
inadvisable to market the Common Shares in the manner and on the terms described
in the Prospectus or to enforce contracts for the sale of securities; (iv) in
the judgment of the Representatives there shall have occurred any Material
Adverse Change; or (v) the Company shall have sustained a loss by strike, fire,
flood, earthquake, accident or other calamity of such character as in the
judgment of the Representatives may interfere materially with the conduct of the
business and operations of the Company regardless of whether or not such loss
shall have been insured. Any termination pursuant to this Section 9 shall be
without liability on the part of (a) the Company to any Underwriter, except that
the Company shall be obligated to reimburse the expenses of the Representatives
and the Underwriters pursuant to Sections 5 and 6 hereof, (b) any
25
<PAGE>
Underwriter to the Company, or (c) of any party hereto to any other party except
that the provisions of Section 7 shall at all times be effective and shall
survive such termination.
Section 10. Representations and Indemnities to Survive Delivery. The
respective indemnities, agreements, representations, warranties and other
statements of the Company, of its officers and of the several Underwriters set
forth in or made pursuant to this Agreement will remain in full force and
effect, regardless of any investigation made by or on behalf of any Underwriter
or the Company or any of its or their partners, officers or directors or any
controlling person, as the case may be, and will survive delivery of and payment
for the Shares sold hereunder and any termination of this Agreement.
Section 11. Notices. All communications hereunder shall be in writing
and shall be mailed, hand delivered or telecopied and confirmed to the parties
hereto as follows:
If to the Representatives:
BANCBOSTON ROBERTSON STEPHENS INC.
555 California Street
San Francisco, California 94104
Facsimile: (415) 676-2696
Attention: General Counsel
If to the Company:
DirectChef, Inc.
5719 Overland Avenue
Culver City, California 90230
Facsimile: [ ]
---
Attention: [ ]
---
Any party hereto may change the address for receipt of communications by giving
written notice to the others.
Section 12. Successors. This Agreement will inure to the benefit of and
be binding upon the parties hereto, including any substitute Underwriters
pursuant to Section 9 hereof, and to the benefit of the employees, officers and
directors and controlling persons referred to in Section 7, and to their
respective successors, and personal representatives, and no other person will
have any right or obligation hereunder. The term "successors" shall not include
any purchaser of the Shares as such from any of the Underwriters merely by
reason of such purchase.
Section 13. Partial Unenforceability. The invalidity or unenforceability
of any Section, paragraph or provision of this Agreement shall not affect the
validity or enforceability of any other Section, paragraph or provision hereof.
If any Section, paragraph or provision of this Agreement is for any reason
determined to be invalid or
26
<PAGE>
unenforceable, there shall be deemed to be made such minor changes (and only
such minor changes) as are necessary to make it valid and enforceable.
Section 14. Governing Law Provisions.
(a) Governing Law. This agreement shall be governed by and construed in
accordance with the internal laws of the state of New York applicable to
agreements made and to be performed in such state.
(b) Consent to Jurisdiction. Any legal suit, action or proceeding arising
out of or based upon this Agreement or the transactions contemplated hereby
("Related Proceedings") may be instituted in the federal courts of the United
States of America located in the City and County of San Francisco or the courts
of the State of California in each case located in the City and County of San
Francisco (collectively, the "Specified Courts"), and each party irrevocably
submits to the exclusive jurisdiction (except for proceedings instituted in
regard to the enforcement of a judgment of any such court (a "Related
Judgment"), as to which such jurisdiction is non-exclusive) of such courts in
any such suit, action or proceeding. Service of any process, summons, notice or
document by mail to such party's address set forth above shall be effective
service of process for any suit, action or other proceeding brought in any such
court. The parties irrevocably and unconditionally waive any objection to the
laying of venue of any suit, action or other proceeding in the Specified Courts
and irrevocably and unconditionally waive and agree not to plead or claim in any
such court that any such suit, action or other proceeding brought in any such
court has been brought in an inconvenient forum. Each party not located in the
United States irrevocably appoints CT Corporation System, which currently
maintains a San Francisco office at 49 Stevenson Street, San Francisco,
California 94105, United States of America, as its agent to receive service of
process or other legal summons for purposes of any such suit, action or
proceeding that may be instituted in any state or federal court in the City and
County of San Francisco.
(c) Waiver of Immunity. With respect to any Related Proceeding, each
party irrevocably waives, to the fullest extent permitted by applicable law, all
immunity (whether on the basis of sovereignty or otherwise) from jurisdiction,
service of process, attachment (both before and after judgment) and execution to
which it might otherwise be entitled in the Specified Courts, and with respect
to any Related Judgment, each party waives any such immunity in the Specified
Courts or any other court of competent jurisdiction, and will not raise or claim
or cause to be pleaded any such immunity at or in respect of any such Related
Proceeding or Related Judgment, including, without limitation, any immunity
pursuant to the United States Foreign Sovereign Immunities Act of 1976, as
amended.
Section 15. General Provisions. This Agreement constitutes the entire
agreement of the parties to this Agreement and supersedes all prior written or
oral and all contemporaneous oral agreements, understandings and negotiations
with respect to the subject matter hereof. This Agreement may be executed in
two or more counterparts, each one of which shall be an original, with the same
effect as if the signatures thereto and hereto were upon the same instrument.
This Agreement may not be amended or modified unless in writing by all of the
parties hereto, and no condition herein (express or implied) may be waived
unless waived in writing by each party whom
27
<PAGE>
the condition is meant to benefit. The Table of Contents and the Section
headings herein are for the convenience of the parties only and shall not affect
the construction or interpretation of this Agreement.
[The remainder of this page has been intentionally left blank.]
28
<PAGE>
If the foregoing is in accordance with your understanding of our agreement,
please sign and return to the Company the enclosed copies hereof, whereupon this
instrument, along with all counterparts hereof, shall become a binding agreement
in accordance with its terms.
Very truly yours,
DIRECTCHEF, INC.
By:
-------------------------------------
[Title]
The foregoing Underwriting Agreement is hereby confirmed and accepted by
the Representatives as of the date first above written.
BANCBOSTON ROBERTSON STEPHENS INC.
THE ROBINSON-HUMPHREY COMPANY
THOMAS WEISEL PARTNERS LLC
On their behalf and on behalf of each of the several underwriters named in
Schedule A hereto.
- ----------
By BANCBOSTON ROBERTSON STEPHENS INC.
By:
----------------------------------
Authorized Signatory
29
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
Number of Firm
Common Shares
Underwriters To be Purchased
<S> <C>
BANCBOSTON ROBERTSON STEPHENS INC./1/........... [___]
THE ROBINSON-HUMPHREY COMPANY................... [___]
THOMAS WEISEL PARTNERS LLC...................... [___]
Total........................................ 6,250,000
</TABLE>
- ------------
/1/ Add BancBoston Robertson Stephens International Limited as follows in
any transaction where there will be a European road show and/or where a European
Prospectus will be prepared and disseminated in Europe:
"BANCBOSTON ROBERTSON STEPHENS INC. AND
BANCBOSTON ROBERTSON STEPHENS INTERNATIONAL LIMITED"
S-A
<PAGE>
(a) Exhibit A
(b) Lock-Up Agreement
BancBoston Robertson Stephens Inc.
The Robinson-Humphrey Company
Thomas Weisel Partners LLC
As Representatives of the several Underwriters
c/o BancBoston Robertson Stephens Inc.
555 California Street, Suite 2600
San Francisco, California 94104
RE: DirectChef, Inc. (the "Company")
Ladies & Gentlemen:
The undersigned is an owner of record or beneficially of certain shares of
Common Stock of the Company ("Common Stock") or securities convertible into or
exchangeable or exercisable for Common Stock. The Company proposes to carry out
a public offering of Common Stock (the "Offering") for which you will act as the
representatives (the "Representatives") of the underwriters. The undersigned
recognizes that the Offering will be of benefit to the undersigned and will
benefit the Company by, among other things, raising additional capital for its
operations. The undersigned acknowledges that you and the other underwriters
are relying on the representations and agreements of the undersigned contained
in this letter in carrying out the Offering and in entering into underwriting
arrangements with the Company with respect to the Offering.
In consideration of the foregoing, the undersigned hereby agrees that the
undersigned will not offer to sell, contract to sell, or otherwise sell, dispose
of, loan, pledge or grant any rights with respect to (collectively, a
"Disposition") any shares of Common Stock, any options or warrants to purchase
any shares of Common Stock or any securities convertible into or exchangeable
for shares of Common Stock (collectively, "Securities") now owned or hereafter
acquired directly by such person or with respect to which such person has or
hereafter acquires the power of disposition, otherwise than (i) as a bona fide
gift or gifts, provided the donee or donees thereof agree in writing to be bound
by this restriction, (ii) as a distribution to partners or shareholders of such
person, provided that the distributees thereof agree in writing to be bound by
the terms of this restriction, (iii) with respect to dispositions of Common
Shares acquired on the open market, (iv) with respect to sales or purchases of
Common Stock acquired on the open market or (v) with the prior written consent
of BancBoston Robertson Stephens Inc., for a period commencing on the date
hereof and continuing to a date 180 days after the Registration Statement is
declared effective by the Securities and Exchange Commission (the "Lock-up
Period"). The foregoing restriction has been expressly
A-1
<PAGE>
agreed to preclude the holder of the Securities from engaging in any hedging or
other transaction which is designed to or reasonably expected to lead to or
result in a Disposition of Securities during the Lock-up Period, even if such
Securities would be disposed of by someone other than such holder. Such
prohibited hedging or other transactions would include, without limitation, any
short sale (whether or not against the box) or any purchase, sale or grant of
any right (including, without limitation, any put or call option) with respect
to any Securities or with respect to any security (other than a broad-based
market basket or index) that included, relates to or derives any significant
part of its value from Securities. The undersigned also agrees and consents to
the entry of stop transfer instructions with the Company's transfer agent and
registrar against the transfer of shares of Common Stock or Securities held by
the undersigned except in compliance with the foregoing restrictions.
This agreement is irrevocable and will be binding on the undersigned and
the respective successors, heirs, personal representatives, and assigns of the
undersigned.
Dated:
-----------------------------------------
-----------------------------------------------
Printed Name of Holder
By:
--------------------------------------------
Signature
-----------------------------------------------
Printed Name of Person Signing
(and indicate capacity of person signing if
signing as custodian, trustee, or on behalf
of an entity)
A-2
<PAGE>
Exhibit B
Matters to be Covered in the Opinion of Company Counsel
(i) The Company and [each Significant Subsidiary (as that term is
defined in Regulation S-X of the Act)] has been duly incorporated and is
validly existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation;
(ii) The Company and each Significant Subsidiary has the corporate power
and authority to own, lease and operate its properties and to conduct its
business as described in the Prospectus;
(iii) The Company and each Significant Subsidiary is duly qualified to do
business as a foreign corporation and is in good standing in each
jurisdiction, if any, in which the ownership or leasing of its properties or
the conduct of its business requires such qualification, except where the
failure to be so qualified or be in good standing would not have a Material
Adverse Effect. To such counsel's knowledge, the Company does not own or
control, directly or indirectly, any corporation, association or other
entity other than [list subsidiaries];
(iv) The authorized, issued and outstanding capital stock of the Company
is as set forth in the Prospectus under the caption "Capitalization" as of
the dates stated therein, the issued and outstanding shares of capital stock
of the Company [(including the Selling Stockholder Shares)] have been duly
and validly issued and are fully paid and nonassessable, and, to such
counsel's knowledge, will not have been issued in violation of or subject to
any preemptive right, co-sale right, registration right, right of first
refusal or other similar right;
[(v) All issued and outstanding shares of capital stock of each
Significant Subsidiary of the Company have been duly authorized and validly
issued and are fully paid and nonassessable, and, to such counsel's
knowledge, have not been issued in violation of or subject to any preemptive
right, co-sale right, registration right, right of first refusal or other
similar right and are owned by the Company free and clear of any pledge,
lien, security interest, encumbrance, claim or equitable interest;]
(vi) The Firm Shares or the Option Shares, as the case may be, to be
issued by the Company pursuant to the terms of this Agreement have been duly
authorized and, upon issuance and delivery against payment therefor in
accordance with the terms hereof, will be duly and validly issued and fully
paid and nonassessable, and will not have been issued in violation of or
subject to any preemptive right, co-sale right, registration right, right of
first refusal or other similar right. The Common Shares to be issued in
connection with the Founding Company Acquisitions have been duly authorized
and, upon issuance and delivery against payment therefor in accordance with
the terms of the Merger Agreements, will be duly and validly issued and
fully paid and nonassessable, and will not have been issued in violation of
or subject to any preemptive right, co-sale right, registration right, right
of first refusal or other similar right.
B-1
<PAGE>
(vii) The Company has the corporate power and authority to enter into this
Agreement and to issue, sell and deliver to the Underwriters the Shares to
be issued and sold by it hereunder;
(viii) This Agreement has been duly authorized by all necessary corporate
action on the part of the Company and has been duly executed and delivered
by the Company and, assuming due authorization, execution and delivery by
you, is a valid and binding agreement of the Company, enforceable in
accordance with its terms, except as rights to indemnification hereunder may
be limited by applicable law and except as enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium or similar laws relating
to or affecting creditors' rights generally or by general equitable
principles;
(ix) The Registration Statement has become effective under the Act and,
to such counsel's knowledge, no stop order suspending the effectiveness of
the Registration Statement has been issued and no proceedings for that
purpose have been instituted or are pending or threatened under the
Securities Act;
(x) The 8-A Registration Statement complied as to form in all material
respects with the requirements of the Exchange Act; the 8-A Registration
Statement has become effective under the Exchange Act; and the Firm Shares
or the Option Shares have been validly registered under the Securities Act
and the Rules and Regulations of the Exchange Act and the applicable rules
and regulations of the Commission thereunder;
(xi) The Registration Statement and the Prospectus, and each amendment or
supplement thereto (other than the financial statements (including
supporting schedules) and financial data derived therefrom as to which such
counsel need express no opinion), as of the effective date of the
Registration Statement, complied as to form in all material respects with
the requirements of the Act and the applicable Rules and Regulations;
(xii) The information in the Prospectus under the caption "Description of
Capital Stock," to the extent that it constitutes matters of law or legal
conclusions, has been reviewed by such counsel and is a fair summary of such
matters and conclusions; and the forms of certificates evidencing the Common
Stock and filed as exhibits to the Registration Statement comply with
Delaware law;
(xiii) The description in the Registration Statement and the Prospectus of
the charter and bylaws of the Company and of statutes are accurate and
fairly present the information required to be presented by the Securities
Act;
(xiv) To such counsel's knowledge, there are no agreements, contracts,
leases or documents to which the Company is a party of a character required
to be described or referred to in the Registration Statement or Prospectus
or to be filed as an exhibit to the Registration Statement which are not
described or referred to therein or filed as required;
B-2
<PAGE>
(xv) The performance of this Agreement and the Merger Agreements and the
consummation of the transactions herein and therein contemplated (other than
performance of the Company's indemnification obligations hereunder,
concerning which no opinion need be expressed) will not (a) result in any
violation of the Company's charter or bylaws or (b) to such counsel's
knowledge, result in a material breach or violation of any of the terms and
provisions of, or constitute a default under, any bond, debenture, note or
other evidence of indebtedness, or any lease, contract, indenture, mortgage,
deed of trust, loan agreement, joint venture or other agreement or
instrument known to such counsel to which the Company is a party or by which
its properties are bound, or any applicable statute, rule or regulation
known to such counsel or, to such counsel's knowledge, any order, writ or
decree of any court, government or governmental agency or body having
jurisdiction over the Company or any of its subsidiaries, or over any of
their properties or operations;
(xvi) No consent, approval, authorization or order of or qualification
with any court, government or governmental agency or body having
jurisdiction over the Company or any of its subsidiaries, or over any of
their properties or operations is necessary in connection with the
consummation by the Company of the transactions herein contemplated, except
(i) such as have been obtained under the Securities Act, (ii) such as may be
required under state or other securities or Blue Sky laws in connection with
the purchase and the distribution of the Shares by the Underwriters, (iii)
such as may be required by the National Association of Securities Dealers,
LLC and (iv) such as may be required under the federal or provincial laws of
Canada;
(xvii) To such counsel's knowledge, there are no legal or governmental
proceedings pending or threatened against the Company or any of the Founding
Companies of a character required to be disclosed in the Registration
Statement or the Prospectus by the Securities Act, other than those
described therein;
(xviii) To such counsel's knowledge, neither the Company nor any of the
Founding Companies is presently (a) in material violation of its respective
charter or bylaws, or (b) in material breach of any applicable statute, rule
or regulation known to such counsel or, to such counsel's knowledge, any
order, writ or decree of any court or governmental agency or body having
jurisdiction over the Company or any of the Founding Companies, or over any
of their properties or operations; and
(xix) To such counsel's knowledge, except as set forth in the Registration
Statement and Prospectus, no holders of Company Shares or other securities
of the Company have registration rights with respect to securities of the
Company and, except as set forth in the Registration Statement and
Prospectus, all holders of securities of the Company having rights known to
such counsel to registration of such shares of Company Shares or other
securities, because of the filing of the Registration Statement by the
Company have, with respect to the offering contemplated thereby, waived such
rights or such rights have expired by reason of lapse of time following
notification of the Company's intent to file the Registration Statement or
have included securities in the Registration Statement pursuant to the
exercise of and in full satisfaction of such rights.
B-3
<PAGE>
(xx) The Company is not and, after giving effect to the offering and the
sale of the Shares and the application of the proceeds thereof as described
in the Prospectus, will not be, an "investment company" as such term is
defined in the Investment Company Act of 1940, as amended.
(xxi) To such counsel's knowledge, the Company owns or possesses
sufficient trademarks, trade names, patent rights, copyrights, licenses,
approvals, trade secrets and other similar rights (collectively,
"Intellectual Property Rights") reasonably necessary to conduct their
business as now conducted; and the expected expiration of any such
Intellectual Property Rights would not result in a Material Adverse Effect.
The Company has not received any notice of infringement or conflict with
asserted Intellectual Property Rights of others, which infringement or
conflict, if the subject of an unfavorable decision, would result in a
Material Adverse Effect. To such counsel's knowledge, the Company's
discoveries, inventions, products, or processes referred to in the
Registration Statement or Prospectus do not infringe or conflict with any
right or patent which is the subject of a patent application known to the
Company.
(xxii) Each of the Merger Agreements has been duly authorized, executed and
delivered by, and is a valid and binding agreement of, the Company in
accordance with its terms and, to the knowledge of such counsel, the Company
is not in default in any respect thereunder; the Certificates or Articles of
Merger referred to in the Merger Agreements, assuming the due filing thereof
with the appropriate regulatory authorities, will cause the statutory merger
of each of the Founding Companies with the Company.
(xxiii) Upon the filing of the appropriate documents with the appropriate
governmental entities, the Founding Company Acquisitions will become
effective pursuant to the Merger Agreements and applicable state law.
In addition, such counsel shall state that such counsel has participated in
conferences with officials and other representatives of the Company, the
Representatives, Underwriters' Counsel and the independent certified public
accountants of the Company, at which such conferences the contents of the
Registration Statement and Prospectus and related matters were discussed, and
although they have not verified the accuracy or completeness of the statements
contained in the Registration Statement or the Prospectus, nothing has come to
the attention of such counsel which leads them to believe that, at the time the
Registration Statement became effective and at all times subsequent thereto up
to and on the First Closing Date or Second Closing Date, as the case may be, the
Registration Statement and any amendment or supplement, when such documents
became effective or were filed with the Commission (other than the financial
statements including supporting schedules and other financial and statistical
information derived therefrom, as to which such counsel need express no comment)
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading, or at the First Closing
B-4
<PAGE>
Date or the Second Closing Date, as the case may be, the Registration Statement,
the Prospectus and any amendment or supplement thereto (except as aforesaid)
contained any untrue statement of a material fact or omitted to state a material
fact necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading.
B-5
<PAGE>
Exhibit C
Matters to be Covered in the Opinion of Underwriters' Counsel
(i) The [Firm Shares] [Shares to be issued by the Company] [Option
Shares] have been duly authorized and, upon issuance and delivery and
payment therefor in accordance with the terms of the Underwriting Agreement,
will be validly issued, fully paid and non-assessable.
(ii) The Registration Statement complied as to form in all material
respects with the requirements of the Act; the Registration Statement has
become effective under the Act and, to such counsel's knowledge, no stop
order proceedings with respect thereto have been instituted or threatened or
are pending under the Act.
(iii) The 8-A Registration Statement complied as to form in all material
respects with the requirements of the Exchange Act; the 8-A Registration
Statement has become effective under the Exchange Act; and the Firm Shares
or the Option Shares have been validly registered under the Securities Act
and the Rules and Regulations of the Exchange Act and the applicable rules
and regulations of the Commission thereunder;
(iv) The Underwriting Agreement has been duly authorized, executed and
delivered by the Company.
Such counsel shall state that such counsel has reviewed the opinions
addressed to the Representatives from [list each set of counsel that has
provided an opinion], each dated the date hereof, and furnished to you in
accordance with the provisions of the Underwriting Agreement. Such opinions
appear on their face to be appropriately responsive to the requirements of the
Underwriting Agreement.
In addition, such counsel shall state that such counsel has participated in
conferences with officials and other representatives of the Company, the
Representatives, Underwriters' Counsel and the independent certified public
accountants of the Company, at which such conferences the contents of the
Registration Statement and Prospectus and related matters were discussed, and
although they have not verified the accuracy or completeness of the statements
contained in the Registration Statement or the Prospectus, nothing has come to
the attention of such counsel which leads them to believe that, at the time the
Registration Statement became effective and at all times subsequent thereto up
to and on the First Closing Date or Second Closing Date, as the case may be, the
Registration Statement and any amendment or supplement, when such documents
became effective or were filed with the Commission (other than the financial
statements including supporting schedules and other financial and statistical
information derived therefrom, as to which such counsel need express no comment)
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading, or at the First Closing Date or the Second Closing Date, as the
case may be, the Registration Statement, the Prospectus and any amendment or
supplement thereto (except as aforesaid) contained any untrue statement of a
material fact or omitted to state a material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.
<PAGE>
COMMON STOCK COMMON STOCK
PAR VALUE $.001 PAR VALUE $.001
DirectChef, Inc.
CUSIP 25456X 10 3
SEE REVERSE FOR CERTAIN DEFINITIONS
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
THIS CERTIFIES THAT
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK, PAR VALUE $.001 PER
SHARE, OF
----------------------- -----------------------
----------------------- DirectChef, Inc. -----------------------
----------------------- -----------------------
(herein called the "Corporation") transferable on the books of the Corporation
by the holder hereof, in person or by duly authorized attorney upon surrender of
this certificate properly endorsed. This certificate is not valid until
countersigned by the Transfer Agent and registered by the Registrar.
Witness the facsimile seal of the Corporation and facsimile signatures of
its duly authorized officers.
Dated:
COUNTERSIGNED AND REGISTERED:
<TABLE>
<S> <C> <C>
AMERICAN STOCK TRANSFER & TRUST COMPANY, NEW YORK [SEAL APPEARS HERE]
TRANSFER AGENT AND REGISTRAR
BY:
/s/ [SIGNATURE ILLEGIBLE]^^ /s/ [SIGNATURE ILLEGIBLE]^^
AUTHORIZED OFFICER SECRETARY PRESIDENT
</TABLE>
<PAGE>
DIRECTCHEF, INC.
The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT - ___________ Custodian ___________
(Cust) (Minor)
under Uniform Gifts to Minors Act
TEN ENT - as tenants by the entireties
JT TEN - as joint tenants with right of
_________________________________
survivorship and not as tenants (State)
in common
</TABLE>
Additional abbreviations may also be used though not in the above list.
The Corporation will furnish without charge to each stockholder who so
requests a statement of the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock or series
thereof and the qualifications, limitations or restrictions of such preferences
and/or rights.
For Value received hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- ---------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(NAME AND ADDRESS OF TRANSFEREE SHOULD BE PRINTED OR TYPEWRITTEN)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- ------------------------------------------------------------------------- Shares
of the Common Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
_______________________________________________________________________ Attorney
to transfer the said stock on the books of the within-named Corporation with
full power of substitution in the promises.
Dated _______________________________
____________________________
Signature
SIGNATURE(S) GUARANTEED
By ____________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED
BY AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND LOAN
ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE
GUARANTEE MEDALLION PROGRAM), PURSUANT
TO S.E.C. RULE 17Ad-15
NOTICE: THE SIGNATURE OF THIS ASSIGNMENT MUST CORRESPOND WITH NAME(S) AS WRITTEN
UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATEVER
