As filed with the Securities and Exchange Commission on June 17, 1999
Registration No. 333-77551
- --------------------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Amendment No. 1
To
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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OREGON BAKING COMPANY
(DBA MARSEE BAKING)
(Name of small business issuer in its charter)
OREGON 5812 93-1091480
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) identification No.)
2287 NW PETTYGROVE STREET, PORTLAND, OREGON 97210
(503) 295-4000
(Address and telephone number of registrant's principal executive
offices and principal place of business)
RAYMOND W. LINDSTROM
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Marsee Baking
2287 NW Pettygrove, Portland, Oregon 97210
(503) 295-4000
(Name, address and telephone number
of agent for service)
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Copies to:
THOMAS P. PALMER, ESQ. BERT L. GUSRAE, ESQ.
BRENDAN R. MCDONNELL, ESQ. David A. Carter, P.A.
Tonkon Torp LLP Suite 210, West Tower
888 SW Fifth Avenue, Suite 1600 2300 Glades Road
Portland, Oregon 97204 Boca Raton, Florida 33431
(503) 221-1440 (561) 750-6999
Fax (503) 274-8779 Fax (561) 367-0960
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable following the date on which this Registration Statement becomes
effective.
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o If any of the securities being offered 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. /X/
o 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. / /
__________
o 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. / / __________
o If this Form is a post-effective amendment filed pursuant to Rule 462(d)
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. / / __________
o 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.
================================================================================
[TEXT DELETED]
<PAGE>
PRELIMINARY PROSPECTUS, DATED JUNE 17, 1999
SUBJECT TO COMPLETION
INITIAL PUBLIC OFFERING
PROSPECTUS
MARSEE BAKING
[Marsee Baking logo]
1,750,000 SHARES OF COMMON STOCK
$5.00 PER SHARE
1,750,000 REDEEMABLE COMMON STOCK PURCHASE WARRANTS
$0.125 PER WARRANT
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[TEXT DELETED]
Oregon Baking Company, doing business as Marsee Baking, OWNS AND
OPERATES 18 BAKERY-CAFES IN THE PACIFIC NORTHWEST THAT OFFER A VARIETY OF
ARTISAN-PREPARED SPECIALTY BAKERY PRODUCTS IN A FRIENDLY, NEIGHBORHOOD CAFE
ATMOSPHERE. THIS IS OUR initial public offering AND NO PUBLIC MARKET CURRENTLY
EXISTS for the common stock or the purchase warrants.
-----------
<TABLE>
<CAPTION>
Underwriting
Initial public discount Proceeds to Marsee
offering price and commissions Baking before expenses
-------------- --------------- ----------------------
<S> <C> <C> <C>
Per Share............... $5.00 $0.50 $7,875,000
Per Purchase Warrant.... $0.125 $0.0125 $196,875
Total............. $8,968,750 $896,875 $8,071,875
</TABLE>
THE UNDERWRITER IS OFFERING THE COMMON STOCK AND PURCHASE WARRANTS ON A
FIRM COMMITMENT BASIS. We have granted the underwriter a 45-day option to
purchase up to an additional 262,500 shares of common stock and up to an
additional 262,500 purchase warrants to cover over-allotments. See
"Underwriting."
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INVESTING IN THESE SECURITIES INVOLVES A HIGH DEGREE OF
RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 7.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
BARRON CHASE SECURITIES, INC. [LOGO]
The date of this prospectus is , 1999.
THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PRELIMINARY
PROSPECTUS IS NOT AN OFFER TO SELL NOR DOES IT SEEK AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
[Photos and Captions]
[INSIDE FRONT COVER
THE COMPANY'S LOGO WILL APPEAR ON THE TOP LEFT OF THE PAGE WITH A CAPTION THAT
WILL READ AS FOLLOWS: "MARSEE BAKING OFFERS OVER 100 DIFFERENT VARIETIES OF
PREMIUM QUALITY, ARTISAN-CRAFTED BAKERY PRODUCTS MADE FRESH DAILY IN A CENTRAL
BAKERY IN EACH MARKET."
BELOW THE LOGO, THERE WILL APPEAR SIX PICTURES IN TWO ROWS, THREE IN EACH ROW.
BEGINNING FROM THE TOP ROW AND MOVING LEFT TO RIGHT, THE FIRST PICTURE WILL BE
OF AN INTERIOR OF A BAKERY-CAFE SHOWING SOME OF MARSEE BAKING'S DESIGN ELEMENTS,
SUCH AS THE HAMMERED TIN CEILINGS, SLATE FLOORS, MARBLE BARS, MAHOGANY TRIMMED,
CUSTOM CABINETS AND GLASS DISPLAY CASES. THE NEXT PICTURE WILL SHOW A DISPLAY
CASE WITH THREE ROWS OF MARSEE BAKING'S SPECIALTY CAKES. THE THIRD PICTURE WILL
BE A SHOT OF THE DINING AREA OF THE INTERIOR OF A BAKERY-CAFE. IN THE NEXT ROW,
THE THREE PICTURES WILL ILLUSTRATE THE COMPANY'S PRODUCTION AND DISTRIBUTION
PROCESS. THE FIRST PICTURE WILL SHOW PASTRIES BEING PREPARED BY HAND IN THE
CENTRAL PRODUCTION FACILITY, THE NEXT PICTURE WILL SHOW BAKING TRAYS STACKED IN
A CART READY FOR THE OVEN, AND THE LAST PICTURE WILL SHOW THE COMPANY'S DELIVERY
TRUCKS. BELOW THESE PICTURES WILL BE TEXT STATING THE FOLLOWING: "OUR CUSTOMERS
DINE ON AN AFFORDABLE INDULGENCE IN A UNIQUE NEIGHBORHOOD BAKERY-CAFE SETTING."
ACROSS THE RIGHT SIDE OF THE PAGE, THERE WILL BE DISPLAYED A MAP OF THE PACIFIC
NORTHWEST WITH TWO SPOKE-LIKE SYMBOLS IN AND AROUND THE GREATER SEATTLE AND
PORTLAND METROPOLITAN AREAS TO INDICATE THE MARKETS IN WHICH THE COMPANY
CURRENTLY OPERATES. A PICTURE OF VARIOUS BREADS, BAGELS, PASTRIES AND OTHER
BAKED-GOODS OFFERED BY MARSEE BAKING WILL BE DISPLAYED ACROSS THE BOTTOM OF THE
PAGE.
INSIDE BACK COVER
THE INSIDE BACK COVER OF THE PROSPECTUS WILL HAVE FOUR PICTURES, APPEARING IN
TWO ROWS. THE TOP LEFT PICTURE WILL CONTAIN A BASKET OF BAGELS SURROUNDED BY
COFFEE PRODUCTS AND PLATES WITH PREPARED BAGELS. THE TOP RIGHT PICTURE WILL
CONTAIN VARIOUS COOKIES, AND FRUIT AND CREAM COVERED CAKES. THE BOTTOM LEFT
PICTURE WILL DEPICT A VARIETY OF PASTRIES AND THE BOTTOM RIGHT WILL DISPLAY A
SAMPLE OF MARSEE'S LUNCH OFFERINGS--SOUP, SALAD, SANDWICHES AND FOCACCIA PIZZA.
BELOW THE PICTURES WILL BE A CAPTION WITH THE FOLLOWING TEXT: "OUR KEY PRODUCT
CATEGORIES INCLUDE BAKERY GOODS MADE FRESH DAILY USING ONLY THE FRESHEST NATURAL
INGREDIENTS, MADE-TO-ORDER SANDWICHES, SOUPS AND CAFE BEVERAGES."]
2
<PAGE>
-----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
PROSPECTUS SUMMARY................................5 CERTAIN TRANSACTIONS..........................38
RISK FACTORS......................................7 PRINCIPAL SHAREHOLDERS........................39
USE OF PROCEEDS..................................12 DESCRIPTION OF SECURITIES.....................40
DIVIDEND POLICY..................................12 SHARES ELIGIBLE FOR FUTURE SALE...............46
CAPITALIZATION...................................13 UNDERWRITING..................................48
DILUTION.........................................14 LEGAL MATTERS.................................50
MANAGEMENT'S DISCUSSION AND ANALYSIS OF EXPERTS.......................................50
FINANCIAL CONDITION AND RESULTS OF OPERATIONS...15 WHERE YOU CAN FIND MORE INFORMATION...........50
BUSINESS.........................................23 INDEX TO FINANCIAL STATEMENTS................F-1
MANAGEMENT.......................................31
</TABLE>
---------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS OR
TO WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS PROSPECTUS MAY ONLY BE USED WHERE IT IS
LEGAL TO SELL THE SECURITIES BEING OFFERED. THE INFORMATION IN THIS DOCUMENT MAY
ONLY BE ACCURATE ON THE DATE OF THIS DOCUMENT.
- ---------------------------------------------------
- --------------------------------------------------------------------------------
ATTENTION CALIFORNIA RESIDENTS:
OFFERS AND SALES OF OUR COMMON STOCK AND PURCHASE WARRANTS MADE TO
CALIFORNIA RESIDENTS PURSUANT TO THIS PROSPECTUS ARE RESTRICTED TO INDIVIDUALS
WHO MEET SUITABILITY STANDARDS OF NOT LESS THAN $250,000 OF LIQUID NET WORTH
(NET WORTH EXCLUSIVE OF HOME, HOME FURNISHINGS AND AUTOMOBILES) PLUS $65,000
ANNUAL GROSS INCOME, OR $500,000 OF LIQUID NET WORTH (NET WORTH EXCLUSIVE OF
HOME, HOME FURNISHINGS AND AUTOMOBILES).
FOR NEW JERSEY RESIDENTS:
OFFERS AND SALES IN THIS OFFERING IN NEW JERSEY MAY ONLY BE MADE TO
ACCREDITED INVESTORS AS DEFINED IN RULE 501 UNDER THE SECURITIES ACT OF 1933.
UNDER RULE 501, TO BE AN ACCREDITED INVESTOR AN INDIVIDUAL MUST HAVE (A) A NET
WORTH OR JOINT NET WORTH WITH SUCH INDIVIDUAL'S SPOUSE OF MORE THAN $1,000,000
OR (B) INCOME OF MORE THAN $200,000 IN EACH OF THE TWO MOST RECENT YEARS OR
JOINT INCOME WITH SUCH INDIVIDUAL'S SPOUSE OF MORE THAN $300,000 IN EACH OF
THOSE YEARS AND A REASONABLE EXPECTATION OF REACHING THE SAME INCOME LEVEL IN
THE CURRENT YEAR. OTHER STANDARDS APPLY TO INVESTORS WHO ARE NOT INDIVIDUALS.
THERE WILL BE NO SECONDARY SALES OF THE SECURITIES TO PERSONS IN NEW JERSEY WHO
ARE NOT ACCREDITED INVESTORS FOR 90 DAYS AFTER THE DATE OF THIS OFFERING BY THE
UNDERWRITER AND SELECTED DEALERS.
- --------------------------------------------------------------------------------
- ---------------------------------------------------
[TEXT DELETED]
We are an Oregon corporation. Our principal executive offices are located at
2287 NW Pettygrove Street, Portland, Oregon, 97210, and our telephone number is
(503) 295-4000. In this prospectus, the "company," "Marsee Baking," "we," "us"
and "our" refer to Oregon Baking Company, doing business as Marsee Baking (but
not to the underwriter listed in this prospectus), including the businesses
acquired by us, unless the context otherwise requires. In addition, "common
stock" refers to our common stock with no par value; "purchase warrants" refers
to the redeemable common stock purchase warrants sold in this offering. See
"Description of Securities." The underwriter for this offering is Barron Chase
Securities, Inc.
3
<PAGE>
Marsee Baking -registered trademark- and BagelMax -registered trademark-
are trademarks, registered trademarks, service marks or registered service marks
of Marsee Baking. This prospectus also includes product names, trade names,
trademarks and service marks of other companies.
4
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY MAY NOT CONTAIN ALL THE INFORMATION THAT MAY BE
IMPORTANT TO YOU. BEFORE MAKING AN INVESTMENT DECISION, YOU SHOULD READ THIS
ENTIRE PROSPECTUS. UPON THE COMPLETION OF THIS OFFERING, THE ONLY CLASS OF OUR
CAPITAL STOCK OUTSTANDING WILL BE OUR COMMON STOCK. EXCEPT WHERE OTHERWISE
INDICATED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES (1) THE AUTOMATIC
CONVERSION OF SERIES A, B, C AND D PREFERRED STOCK INTO COMMON STOCK UPON THE
CLOSING OF THIS OFFERING, AND (2) THE UNDERWRITER'S OVER-ALLOTMENT OPTIONS WILL
NOT BE EXERCISED.
THE COMPANY
Marsee Baking owns and operates 18 bakery-cafes in the Pacific Northwest
that offer more than 100 artisan bakery products, as well as made-to-order
sandwiches, soups and salads, in a friendly, neighborhood atmosphere. Each
bakery-cafe operates as a premium bakery, providing a relaxing cafe experience
that addresses the morning, lunch and late-afternoon day-parts. For 1998, the
six bakery-cafes operating in the company's format for more than a year had
average revenues of approximately $790,000 per store. Marsee Baking also
distributes its products and builds brand awareness through its wholesale
operations, providing specialty retailers and other institutions with a complete
line of Marsee Baking products.
[TEXT DELETED]
THE OFFERING
Common stock offered................ 1,750,000 shares of common stock
Warrants offered.................... 1,750,000 purchase warrants
Common stock to be
outstanding after this offering... 5,366,867 shares
Warrants to be outstanding
after this offering............... 2,147,668 warrants
Use of proceeds..................... Retirement of bridge financing,
new store expansion, reduction
of trade payables, payment of
accrued dividends, and working
capital and general corporate
purposes. See "Use of
Proceeds."
Proposed Nasdaq SmallCap Symbols:
Common stock................... MSEE
Purchase warrants.............. MSEEW
Proposed Boston Stock Exchange Symbols:
Common stock................... [____]
Purchase warrants.............. [____W]
The information as to the common stock outstanding presented above is
as of MAY 31, 1999. It ALSO includes 17,684 shares of common stock TO BE ISSUED
TO SERIES D PREFERRED STOCK HOLDERS AS ACCRUED DIVIDENDS UPON THE CLOSING OF
THIS OFFERING. You should also be aware that we may be required to issue up to
1,739,513 additional shares of common stock as a result of the possible future
exercise of stock options and warrants, excluding the purchase warrants sold in
this offering. The information as to the securities outstanding does not include
the underwriter's warrants to purchase up to 175,000 shares of common stock and
up to 175,000 purchase warrants. If and when we issue these shares, the
percentage of our common stock you own may be diluted. PLEASE SEE
"CAPITALIZATION" FOR A DISCUSSION OF THE OUTSTANDING SHARES OF MARSEE BAKING
COMMON STOCK, WARRANTS AND OPTIONS TO PURCHASE COMMON STOCK, "DILUTION" FOR A
DISCUSSION OF THE DILUTION OF YOUR INVESTMENT AS A RESULT OF INVESTING IN THIS
OFFERING, AND "DESCRIPTION OF SECURITIES" FOR A DISCUSSION OF IMPORTANT FEATURES
OF THE COMMON STOCK AND PURCHASE WARRANTS.
5
<PAGE>
SUMMARY FINANCIAL INFORMATION
The summary historical financial information as of and for the years
ended December 31, 1997 and 1998 are derived from our financial statements,
which have been audited by KPMG Peat Marwick LLP, our independent auditors. The
summary statement of operations data for the year ended December 31, 1996 AND
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999, and the balance sheet
information as of December 31, 1996 AND MARCH 31, 1998 were derived from
unaudited financial statements of the company. The unaudited summary historical
financial statements include all adjustments, consisting only of normal
recurring accruals, which, in the opinion of management, are necessary for a
fair presentation of the information. You should read this information together
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations," our audited financial statements and related notes, THE INDEPENDENT
AUDITORS' REPORT, WHICH CONTAINS AN EXPLANATORY PARAGRAPH THAT STATES THAT THE
COMPANY HAS SUFFERED RECURRING LOSSES FROM OPERATIONS THAT RAISE SUBSTANTIAL
DOUBT ABOUT ITS ABILITY TO CONTINUE AS A GOING CONCERN, and the other financial
information which appears elsewhere in this prospectus. THE FINANCIAL STATEMENTS
AND THE SUMMARY FINANCIAL INFORMATION DO NOT INCLUDE ANY ADJUSTMENTS THAT MIGHT
RESULT FROM THE OUTCOME OF THE UNCERTAINTY AS TO THE COMPANY'S ABILITY TO
CONTINUE AS A GOING CONCERN. THE RESULTS OF OPERATIONS FOR THE THREE MONTHS
ENDED MARCH 31, 1999 ARE NOT NECESSARILY INDICATIVE OF THE RESULTS EXPECTED FOR
THE YEAR ENDED DECEMBER 31, 1999.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED
----------------------- ------------------
MARCH 31,
---------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
(UNAUDITED) (UNAUDITED)
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues: Bakery-cafes................... $3,662 $4,140 $9,761 $2,081 $2,328
Wholesale................................ 399 808 2,895 651 610
------- -------- -------- ------- --------
Total revenues....................... 4,061 4,948 12,656 2,732 2,938
Cost of goods sold............................ 2,112 2,887 7,579 1,554 1,721
Store operating expenses...................... 1,248 1,621 5,281 1,312 1,238
Wholesale operating expenses.................. 164 328 599 139 70
Depreciation and amortization................. 84 213 817 119 330
General and administrative expenses........... 563 965 1,959 499 400
Store closure expense......................... -- -- 253 -- --
------- -------- -------- ------- --------
Loss from operations.......................... (110) (1,066) (3,832) (891) (821)
Interest expense.............................. (118) (129) (472) 67 256
------- -------- -------- ------- --------
Net loss...................................... (228) (1,195) (4,304) (958) (1,077)
Cumulative dividends on preferred stock (32) (32) (100) 25 25
series D and A.............................. ------- -------- -------- ------- --------
Net loss attributed to common shares.......... $(260) $(1,227) $(4,404) $ (983) $(1,102)
======= ======== ======== ======= ========
Net loss per common share--basic and diluted.. $(0.30) $(1.41) $(5.07) $(1.13) $(0.97)
Shares used in computing net loss
per common share--basic and diluted......... 868 869 869 869 1,136
DECEMBER 31, MARCH 31,
------------ ---------
1996 1997 1998 1999
---- ---- ---- ----
(UNAUDITED) (UNAUDITED)
BALANCE SHEET DATA:
Cash (including restricted cash).............. $ 687 $ 91 $ 129 $ 129
Working capital (deficit)..................... (27) (1,487) (4,148) (5,213)
Total assets.................................. 2,059 3,007 8,674 8,977
Long-term obligations......................... 388 1,423 2,921 2,731
Total shareholders' equity (deficit).......... 900 (158) 820 5
------- -------- -------- -------
</TABLE>
6
<PAGE>
RISK FACTORS
AN INVESTMENT IN OUR COMMON STOCK AND PURCHASE WARRANTS INVOLVES A HIGH
DEGREE OF RISK. YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW BEFORE
MAKING AN INVESTMENT DECISION. THE RISKS AND UNCERTAINTIES DESCRIBED BELOW ARE
NOT THE ONLY ONES FACING OUR COMPANY. ADDITIONAL RISKS AND UNCERTAINTIES NOT
PRESENTLY KNOWN TO US OR THAT WE CURRENTLY DEEM IMMATERIAL MAY ALSO IMPAIR OUR
BUSINESS OPERATIONS. THESE FACTORS, AMONG OTHERS, MAY CAUSE ACTUAL RESULTS,
EVENTS OR PERFORMANCE TO DIFFER MATERIALLY FROM THOSE EXPRESSED IN ANY
FORWARD-LOOKING STATEMENTS MADE IN THIS PROSPECTUS.
IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCURS, OUR BUSINESS, FINANCIAL
CONDITION OR OPERATING RESULTS COULD BE MATERIALLY AND ADVERSELY AFFECTED. IN
SUCH CASE, THE VALUE OF YOUR INVESTMENT MAY DECLINE AND YOU MAY LOSE ALL OR PART
OF YOUR INVESTMENT.
RISKS RELATED TO THE COMPANY
- ----------------------------
WE HAVE A LIMITED We began operations in 1993. As a result,
OPERATING HISTORY your evaluation of us and our prospects will be
UPON WHICH YOU MAY based on a limited operating history. In addition,
EVALUATE US we have recently recruited a new Chief Executive
Officer and a new Chief Financial Officer, and our
operating model and business strategy are being
revised. Consequently, our historical results of
operations may not give you an accurate indication
of our future results of operation or prospects.
WE HAVE AN We have incurred substantial losses since
ACCUMULATED DEFICIT, inception, and we anticipate that we will continue
AND ANTICIPATE FUTURE to incur substantial losses. As of MARCH 31, 1999
LOSSES we had an accumulated deficit of approximately
$7.6 million. We have experienced significant
losses in connection with our expansion into the
greater Seattle market and with the opening of
in-fill stores in the greater Portland market. We
expect our losses to continue until we can reduce
expenses and can operate the Seattle commissary at
capacity. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--
Liquidity and Capital Resources."
WE MAY CEASE DOING Our audited financial statements have been
BUSINESS WITHOUT THE prepared assuming that we will continue as a going
PROCEEDS OF THE concern. We have suffered recurring losses from
OFFERING operations that raise substantial doubt about our
ability to continue as a going concern. Without the
proceeds of the offering, we may not be able to
continue to operate our business.
WE DO NOT GENERATE At our current level of development, we do
ENOUGH CASH FROM not generate net cash from operations. For the
OPERATIONS TO FUND years ended December 31, 1997 and 1998, we incurred
OUR GROWTH PLAN OR net losses of $1.2 million and $4.3 million,
OUR CONTINUED respectively. WE INCURRED A NET LOSS OF $1.1
OPERATIONS MILLION FOR THE THREE MONTHS ENDED MARCH 31, 1999.
To fund our operations, we require either additional
financing or a substantial increase in the number of
bakery-cafes to generate additional operating
revenue. We have developed a specific liquidity
plan to meet the ongoing liquidity needs of our
operations. See "Management's Discussion and
Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources." There
can be no assurance, however, that our liquidity
goals will be reached in the immediate future, if
ever.
WE HAVE SIGNIFICANT We may need to raise significant additional
FUTURE CAPITAL NEEDS funds BEGINNING IN 2000 TO EXPAND OUR CONCEPT.
WHICH ARE SUBJECT TO ACCORDING TO OUR CURRENT EXPANSION PLAN, WE EXPECT
THE UNCERTAINTY OF TO OPEN AT LEAST FIVE NEW STORES IN THE GREATER
ADDITIONAL FINANCING PORTLAND AND SEATTLE METROPOLITAN MARKETS BY THE END
OF 1999. TO FUND THIS EXPANSION, WE WILL NEED TO
RAISE APPROXIMATELY $500,000 IN THE FORM OF
CAPITALIZED LEASES AND OTHER LANDLORD-RELATED DEBT
FINANCING, OR APPROXIMATELY 25% OF THE TOTAL
ACQUISITION COST FOR EACH NEW STORE OPENING. THE
HISTORICAL COST OF OPENING A NEW BAKERY-CAFE, NET OF
LANDLORD CONTRIBUTIONS, HAS AVERAGED APPROXIMATELY
$350,000 TO $375,000, WITH ADDITIONAL
AVERAGE PRE-OPENING COSTS PER BAKERY-CAFE OF
APPROXIMATELY $25,000. If adequate funds are not
7
<PAGE>
available, on acceptable terms or at all, we may be
unable to complete our expansion program, which
would have a material adverse effect on our
business, results of operations and financial
condition. If additional funds are raised through
the issuance of equity securities, your percentage
ownership in the company's equity will be reduced,
you may experience additional dilution in net book
value per share, and the equity securities may have
rights, preferences or privileges senior to those of
yours.
WE HAVE A LIMITED We presently operate 18 retail
BASE OF OPERATIONS bakery-cafes, two central production facilities and
AND A HIGH GEOGRAPHIC a wholesale division, all serving the greater
CONCENTRATION Portland and Seattle metropolitan areas. Because of
our small existing retail base, many events,
including a decline in the profitability of even one
or two stores, the opening of an unsuccessful new
store or delays in the planned opening of new
stores, could materially and adversely affect the
profitability of the entire company. Moreover, the
concentration of our retail bakery-cafes in limited
geographic markets exposes the company to a greater
risk from certain events or conditions, such as a
regional economic downturn, than would be the case
if our stores were not geographically concentrated.
WE RELY ON OPENING Our continued growth depends on our ability
NEW STORES FOR GROWTH to open, acquire or convert new retail bakery-cafes,
WHICH SUBJECTS US TO to operate these stores profitably, and to increase
RISKS same-store sales. This growth is likely to place a
significant strain on our resources and systems.
To manage our growth, we must implement
OUR INABILITY TO systems, and train and manage our employees. We may
MANAGE GROWTH not be able to implement these action items in a
COULD HURT OUR timely manner or at all. Our inability to manage
BUSINESS growth effectively could have a material adverse
effect on our business, operating results and
financial condition. There can be no assurance that
we will achieve our planned expansion goals, convert
acquired stores to the Marsee Baking format, manage
our growth effectively, or operate our existing and
new stores profitably.
NEW STORES MAY The opening of additional stores in current
COMPETE WITH OUR markets could have the effect of competing with
EXISTING STORES certain of our existing stores. The effect of
opening new in-fill stores may be to divert sales
from existing stores, resulting in a decrease in
same-store sales for the previously existing units.
WE FACE SUBSTANTIAL The specialty restaurant industry is
COMPETITION fragmented and highly competitive. The competition
in the retail bakery-cafe segment is increasing. We
compete with other local bakeries, grocery stores,
and bread-only stores that supply high quality baked
MANY COMPETITORS goods, and with other restaurants that seek to use
HAVE SUBSTAINTIALLY quality baked goods to define breakfast, lunch and
GREATER FINANCIAL late-afternoon menus. OTHER potential competitors
AND OTHER RESOURCES include regional and national chains as well as
locally owned companies. Many of our competitors
are well-established and have substantially greater
financial and other resources than we do, which may
place us at a competitive disadvantage in responding
to our competitors' pricing trends, advertising
campaigns and other initiatives. Additional
competition may develop in the future and increased
competition may erode the potential for same-store
sales growth.
[TEXT DELETED]
WE MAY EXPERIENCE We rely on food wholesalers for the bulk of
PRICE VOLATILITY IN our raw ingredients. Our primary raw ingredients
RAW INGREDIENTS include commodity items such as butter, flour, sugar
and chocolate. The prices of these commodities are
subject to volatility. Further, some raw
ingredients such as chocolate are imported, and are
subject to potential exchange rate and supply
volatility. We do not engage in hedging activities
and, with the exception of certain volume purchase
discounts, cannot control the price of our raw
materials. We may experience decreased profit
margins if we are unable to pass any increased cost
of new ingredients on to our customers.
8
<PAGE>
PROVISIONS OF OUR Marsee Baking is an Oregon corporation.
ARTICLES OF Anti-takeover provisions of Oregon law could make it
INCORPORATION, more difficult for a third party to acquire control
BYLAWS, AND OREGON of us, even if such change in control would be
LAW COULD MAKE beneficial to shareholders. In addition, our
ACQUISITION OF US amended and restated articles of incorporation,
DIFFICULT which become effective upon the closing of this
offering, will provide that our Board of Directors
may issue preferred stock without shareholder
approval. Our amended and restated articles of
incorporation will also require a classified board
of directors, with each board member serving a
staggered three-year term. The issuance of
preferred stock and the existence of a classified
board could make it more difficult for a third-party
to acquire us, even if doing so would be beneficial
for our shareholders.
RISKS RELATED TO THE OFFERING
- -----------------------------
THE OFFERING PRICES THE offering PRICES of THE common stock AND
ARE ARBITRARY PURCHASE WARRANTS WERE ARBITRARILY DETERMINED AND
may not bear a direct relationship to Marsee
Baking's assets, earnings, book value, results of
operation or any other objective standard.
YOU WILL EXPERIENCE You will experience immediate and
IMMEDIATE AND substantial dilution. As of MARCH 31, 1999, the
SUBSTANTIAL DILUTION company had an adjusted pro forma net tangible book
value of $0.00 per share derived from the company's
balance sheet as of MARCH 31, 1999 and taking
into account (1) the issuance of stock dividends
and the conversion of preferred stock into shares
of common stock, (2) the private sale of common
stock in a bridge financing in January-April 1999,
and (3) the issuance of common stock in connection
with an agreement to provide a personal guarantee
of our line of credit in April 1999. After giving
effect to the sale of the securities sold in this
offering, and after deducting underwriting discounts
and estimated offering expenses, the adjusted pro
forma net tangible book value will be $1.28 per
share. The result will be an immediate increase in
book value to existing shareholders of $1.28 per
share and an immediate dilution to you of $3.72 per
share. As a result, you will bear most of the risk
of loss since your shares are being purchased at a
cost substantially above the price at which existing
shareholders acquired their shares. See "Dilution"
We also have outstanding a large number of
stock options to purchase common stock with exercise
prices significantly below the estimated initial
public offering price of the common stock. To the
extent these options are exercised, there will be
further dilution. We intend to grant substantial
stock options to our employees in the future.
YOUR PURCHASE If you are acquiring warrants to purchase
WARRANTS ARE SUBJECT our common stock in this offering, your purchase
TO REDEMPTION BY US warrants are subject to redemption by the company on
30-days prior written notice if the daily trading
price for the shares is above $10.00 for at least 30
consecutive trading days ending not more than ten
days before the date of the notice of redemption.
If the purchase warrants are redeemed, you will lose
your right to exercise your purchase warrants except
during the 30-day redemption period. Any redemption
of the purchase warrants by us during the one-year
period following the offering will require the prior
written consent of the underwriter. See
"Description of Securities--Warrants."
WE MUST COMPLY WITH We will be able to issue the shares of
THE FEDERAL common stock upon the exercise of the purchase
REGISTRATION AND warrants only if there is a current prospectus
STATE BLUE SKY relating to the common stock under an effective
REQUIREMENTS TO registration statement filed with the Securities and
PERMIT EXERCISE OF Exchange Commission. In addition, the common stock
YOUR PURCHASE WARRANTS must be qualified for sale or exempt under
applicable state securities laws of the
jurisdictions in which the various holders of
purchase warrants reside.
9
<PAGE>
NON-REGISTRATION IN There can be no assurance that we will be
YOUR STATE OF THE successful in maintaining a current registration
COMMON STOCK statement. The company intends to qualify the sale
UNDERLYING THE of the purchase warrants in a limited number of
PURCHASE WARRANTS AT states, although certain exemptions under certain
THE TIME OF EXERCISE state securities laws may permit the purchase
MAY PREVENT YOU FROM warrants to be transferred to purchasers in states
EXERCISING YOUR other than those in which the purchase warrants were
PURCHASE WARRANTS initially qualified. We can make no assurances that
we will be able to qualify our securities in any
state. If we have not qualified the issuance of the
common stock in the states in which the ultimate
purchasers of the purchase warrants reside and no
exemption from the qualification is available, the
purchase warrants of those purchasers will expire
and have no value if the purchase warrants cannot be
exercised or sold. Accordingly, the market for the
purchase warrants may be limited because of the
company's inability to fulfill these requirements.
See "Description of Securities" and "Underwriting."
A MARKET FOR THE Before this offering, there has been no
SECURITIES DID NOT public market for our common stock or purchase
EXIST BEFORE AND MAY warrants. We cannot predict the extent to which
NOT EXIST IN THE investor interest in Marsee Baking will lead to the
FUTURE development of a trading market or how liquid that
trading market might become. If a trading market
does not develop or is not sustained, it may be
difficult for you to sell your shares of common
stock or purchase warrants at a price that is
attractive to you.
THE NASDAQ FOR CONTINUED LISTING ON THE NASDAQ
MAINTENANCE SMALLCAP MARKET, WE MUST COMPLY WITH CERTAIN LISTING
REQUIREMENTS IMPOSE AND MAINTENANCE REQUIREMENTS. IF WE FAIL TO MEET
RISKS OF DELISTING THESE MAINTENANCE CRITERIA IN THE FUTURE, OUR COMMON
STOCK AND PURCHASE WARRANTS WILL BECOME DELISTED
FROM THE NASDAQ SMALLCAP MARKET. ONCE DELISTED,
TRADING, IF ANY, IN THE COMMON STOCK AND THE
PURCHASE WARRANTS WOULD THEREAFTER BE CONDUCTED IN
THE OVER-THE-COUNTER MARKET IN THE "PINK SHEETS" OR,
IF THEN AVAILABLE, ON THE "ELECTRONIC BULLETIN
BOARD" ADMINISTERED BY THE NATIONAL ASSOCIATION OF
SECURITIES DEALERS, INC. IN SUCH AN EVENT, THE
MARKET PRICE OF THE COMMON STOCK AND THE PURCHASE
WARRANTS MAY BE ADVERSELY AFFECTED. AS A RESULT YOU
MAY FIND IT DIFFICULT TO DISPOSE OF, OR TO OBTAIN
ACCURATE QUOTATIONS AS TO THE MARKET VALUE OF, OUR
COMMON STOCK AND PURCHASE WARRANTS.
LOW-PRICED STOCKS WILL IF OUR COMMON STOCK OR PURCHASE WARRANTS
IMPOSE ADDITIONAL ARE DELISTED FROM NASDAQ, AND NO OTHER EXCLUSION
"PENNY STOCK" FROM THE DEFINITION OF A "PENNY STOCK" UNDER
TRADING REQUIREMENTS APPLICABLE SEC REGULATIONS WERE AVAILABLE, SUCH
SECURITIES WOULD BE SUBJECT TO THE PENNY STOCK
RULES, WHICH IMPOSE ADDITIONAL SALES PRACTICE
REQUIREMENTS ON BROKER-DEALERS WHO SELL SUCH
SECURITIES TO PERSONS OTHER THAN ESTABLISHED
CUSTOMERS AND ACCREDITED INVESTORS. CONSEQUENTLY,
DELISTING FROM NASDAQ COULD AFFECT THE ABILITY OF
BROKER-DEALERS TO SELL OUR SECURITIES AND YOUR
ABILITY TO SELL YOUR SECURITIES IN THE SECONDARY
MARKET.
EXERCISE OF OPTIONS In connection with this offering, we will
MAY HAVE A DILUTIVE issue to the underwriter, for nominal consideration,
EFFECT ON OUR OTHER options to purchase 175,000 shares of common stock
SHAREHOLDERS and 175,000 options to purchase warrants from the
company. These options will be exercisable for a
four-year period beginning one year after this
offering at an exercise price of 165% of the price
at which the common stock and purchase warrants are
sold to the public, subject to adjustment. These
options may have certain dilutive effects because
the holders of the options will be given the
opportunity to profit from a rise in the market
price of the underlying securities with a resulting
dilution in the interests of our other security
holders and future investors.
10
<PAGE>
We have also agreed, at the request of the
holders of the options, under certain circumstances,
that we will register under federal and state
securities laws the options or the securities
underlying the options. Exercise of these
registration rights may involve substantial expense
to us at a time when we may not be able to afford
cash expenditures. Exercise of these registration
rights may also adversely affect the terms upon
which we may obtain additional funding, and may
adversely affect the price of the common stock. See
"Underwriting."
YOU SHOULD NOT RELY ON YOU SHOULD NOT RELY ON FORWARD-LOOKING
FORWARD-LOOKING STATEMENTS IN THIS PROSPECTUS. THIS PROSPECTUS
STATEMENTS BECAUSE CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE
THEY ARE INHERENTLY RISKS AND UNCERTAINTIES. WE USE WORDS SUCH AS
UNCERTAIN "MAY," "WILL," "SHOULD," "EXPECTS," "PLANS,"
"ANTICIPATES," "BELIEVES," "ESTIMATES," "PREDICTS,"
"POTENTIAL" AND "CONTINUE" AND SIMILAR EXPRESSIONS
TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. YOU
SHOULD NOT PLACE UNDUE RELIANCE ON THESE
FORWARD-LOOKING STATEMENTS, WHICH APPLY ONLY AS OF
THE DATE OF THIS PROSPECTUS. OUR ACTUAL RESULTS
COULD DIFFER MATERIALLY FORM THOSE ANTICIPATED IN
THESE FORWARD-LOOKING STATEMENTS FOR MANY REASONS,
INCLUDING THE RISKS FACED BY US DESCRIBED ABOVE AND
ELSEWHERE IN THIS PROSPECTUS. WE DO NOT INTEND TO
UPDATE OR REVISE ANY FORWARD-LOOKING STATEMENTS.
11
<PAGE>
USE OF PROCEEDS
Marsee Baking will receive estimated net proceeds of $7,050,000 from
the sale of 1,750,000 shares of common stock and 1,750,000 purchase warrants at
an assumed initial public offering price of $5.00 per share and $0.125 per
purchase warrant, after deducting underwriting discounts and commissions of
$897,000 and estimated expenses of $1,021,000. If the underwriter's
over-allotment options are exercised in full, we will receive an additional
$1,170,000 from the sale of 262,500 shares of common stock and 262,500 purchase
warrants, after deducting underwriting discounts and commissions.
The following table describes the expected allocation of the net
proceeds of the offering, assuming that the underwriter does not exercise its
over-allotment options:
<TABLE>
<CAPTION>
APPLICATION OF PERCENTAGE OF
NET PROCEEDS NET PROCEEDS
<S> <C> <C>
Retirement of bridge financing............ $2,585,000 36.7%
New store expansion....................... 2,000,000 28.4
Reduction of trade payables............... 1,000,000 14.2
Payment of series A preferred dividends... 107,000 1.5
Working capital and
general corporate purposes.............. 1,358,000 19.2
---------- ------
Total................................. $7,050,000 100.0%
</TABLE>
WE MAY USE AN UNSPECIFIED PORTION OF THE NET PROCEEDS TO ACQUIRE, WHEN
AND IF THE OPPORTUNITY ARISES, SUITABLE BUSINESSES, ASSETS OR RETAIL OUTLETS
CONSISTENT WITH OUR EXPANSION PLAN. WE HAVE NO PRESENT UNDERSTANDINGS,
COMMITMENTS OR AGREEMENTS WITH RESPECT TO ANY SUCH ACQUISITIONS. Pending USE OF
THE NET PROCEEDS FOR THE ABOVE PURPOSES, we intend to invest the net proceeds of
the offering in investment grade, interest-bearing securities.
In a bridge financing completed before this offering, we issued certain
demand notes and sold privately to investors certain units, each unit consisting
of one share of common stock and a promissory note in the principal amount of
$5.00, bearing interest at the rate of 8% per year. The principal and accrued
interest are due and payable nine months after the date of the promissory notes
or the closing of this offering, whichever is earlier. We intend to use
$2,585,000 of the proceeds of this offering to repay the principal and interest
owing under the promissory notes. See "Description of Securities."
DIVIDEND POLICY
Other than cumulative cash dividends to holders of Series A Preferred
Stock and cumulative stock dividends to holders of Series D Preferred Stock,
Marsee Baking has never declared or paid any dividends on shares of its
preferred or common stock. See "Description of Securities" for a description of
the dividends payable on certain series of preferred stock. We intend to retain
any future earnings for future growth and do not anticipate paying any other
cash dividends in the foreseeable future. In addition, the company's loan
agreement with its bank prohibits the payment or declaration of dividends other
than the Series A dividends and stock dividends.
12
<PAGE>
CAPITALIZATION
The table below sets forth the capitalization of the company as
follows:
o Actual as of MARCH 31, 1999, giving effect to the increase in the
number of authorized shares of common stock to 15,000,000 and
preferred stock to 4,000,000, which was approved by the
shareholders in February 1999, AND THE ISSUANCE OF 426,800 SHARES
OF COMMON STOCK AND PROMISSORY NOTES IN A BRIDGE FINANCING
INVOLVING 502,800 SHARES OF COMMON STOCK AND
PROMISSORY NOTES DURING JANUARY THROUGH APRIL, 1999;
o Pro forma, giving effect to the ISSUANCe of 76,000 shares of
common stock and promissory notes in THE bridge financing which
closed on April 27, 1999 (426,800 SHARES WERE ISSUED PRIOR TO
APRIL 1, 1999), and the issuance of 150,000 shares of common stock
in connection with an agreement to provide a personal guarantee of
a line of credit on April 29, 1999; and
o As adjusted, giving effect to the sale of the 1,750,000 shares of
common stock and 1,750,000 purchase warrants sold in this
offering, net of offering expenses; the conversion of Series A, B,
C and D Preferred Stock into 2,077,421 shares of common stock; and
the payment of accrued Series D Preferred Stock dividends by the
issuance of 17,684 shares of common stock.
<TABLE>
<CAPTION>
ACTUAL AS OF
MARCH 31, 1999 Pro Forma As Adjusted
------ --------- -----------
<S> <C> <C> <C>
Long-term liabilities, net of current portion.................... $2,731 $2,731 $2,538
Shareholders' equity
Preferred stock, no par value - 4,000,000 shares
authorized, actual, pro forma and as adjusted:
Cumulative Preferred Stock Series D - 22,507 shares
authorized; 16,667 shares outstanding, actual and pro
forma; no shares outstanding, as adjusted.................... 1,000 1,000 --
Cumulative Preferred Stock Series A - 100,000 shares
authorized; 52,667 shares outstanding, actual and pro
forma; no shares outstanding as adjusted..................... 281 281 --
Preferred Stock Series B - 510,575 shares
authorized; 510,575 shares outstanding, actual and pro
forma; no shares outstanding, as adjusted.................... 1,143 1,143 --
Preferred Stock Series C - 168,000 shares authorized;
129,121 shares outstanding, actual and pro forma; no
shares outstanding, as adjusted.............................. 4,117 4,117 --
Common stock, no par value - 15,000,000 shares authorized,
actual, pro forma and as adjusted; 1,295,761 shares
outstanding, actual; 1,521,761 shares outstanding, pro
forma; 5,366,867 shares outstanding, as adjusted............. 828 939 14,444
Warrants......................................................... 241 241 431
Retained deficit................................................. (7,605) (7,680) (7,680)
--------- -------- --------
Total shareholders' equity.............................. 5 41 7,195
---------- -------- --------
Total capitalization.................. $ 2,736 $ 2,772 $9,733
========== ======== ========
</TABLE>
The outstanding securities information excludes the following:
o The underwriter's warrants to purchase up to 175,000 shares of common
stock and up to 175,000 purchase warrants;
o Currently outstanding warrants to purchase 387,668 shares of common
stock at a per share weighted average exercise price of $1.08; and
o Currently outstanding stock options to purchase 1,341,845 shares of
common stock at a per share weighted average exercise price of $3.82.
13
<PAGE>
DILUTION
When you purchase a share of common stock, you will suffer immediate
per share "dilution" in respect of the share in an amount equal to the
difference between the price you paid per share (less the underwriting discount)
and the net tangible book value per share after the offering. Net tangible book
value per share represents the amount of the company's tangible assets less the
amount of its liabilities divided by the number of shares of common stock
outstanding.
As of MARCH 31, 1999, the net tangible book value of Marsee Baking was
approximately $(33,000) or $(0.01) per share of common stock, giving effect to
the following: (1) the issuance of approximately 17,684 shares of common stock
to holders of Series D Preferred Stock as accrued dividend; and (2) the
conversion of the outstanding Series A, B, C and D Preferred Stock into
2,077,421 shares of common stock.
Giving effect to THE ISSUANCE OF 76,000 SHARES IN the recent private
sale of 502,800 shares of common stock during January through April 1999 AND the
issuance of 150,000 shares of common stock in connection with an agreement to
provide a personal guarantee of a line of credit on April 29, 1999, the net
tangible book value on a pro forma basis, as of MARCH 31, 1999, would have been
approximately $0.00 per share.
Giving effect to the issuance of 1,750,000 shares of common stock
offered by the company at an assumed initial public offering price of $5.00 per
share (after the deduction of estimated underwriting discounts and offering
expenses payable by the company), the net tangible book value of Marsee Baking
on a pro forma basis, as of MARCH 31, 1999, would have been approximately $1.28
per share. This represents an immediate increase in net tangible book value of
$1.28 per share to existing shareholders and an immediate dilution of $3.72 per
share to purchasers of the shares of common stock in this offering.
The following table illustrates this per-share dilution of your equity
as of the closing of this offering in an adjusted pro forma net tangible book
value per share of common stock, and assuming no exercise of the warrants, the
underwriter's over-allotment options or the underwriter's options to purchase
shares of common stock and warrants:
<TABLE>
<CAPTION>
<S> <C> <C>
Assumed initial public offering price per share................... $5.00
Net tangible book value per share as of MARCH 31, 1999.......... $(0.01)
Increase per share attributable to bridge financing AND
LINE OF CREDIT GUARANTEE.................................. 0.01
[Text Deleted]
Increase per share attributable to new investors................ 1.28
----
Adjusted net tangible book value per share after this offering.... 1.28
----
Dilution per share to new investors in this offering.............. $3.72
</TABLE>
The following table shows the number of shares of common stock to be
owned following the offering by existing shareholders and the new investors
(assuming the maximum number of shares of common stock sold in this offering is
purchased):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
<S> <C> <C> <C> <C> <C>
Existing Shareholders....... 3,616,867(1) 67% $7,858,000 47% $2.17
New Investors............... 1,750,000 33 8,750,000 53% 5.00
---------- ---- ----------- ----
Total.............. 5,366,867 100% $16,608,000 100%
========== ==== =========== ====
</TABLE>
-------------------------
1 ASSUMING THE EXERCISE OF ALL CURRENTLY EXERCISABLE OPTIONS AND WARRANTS,
THE NUMBER OF SHARES OF COMMON STOCK HELD BY EXISTING SHAREHOLDERS WILL INCREASE
TO 5,346,380 SHARES OR APPROXIMATELY 75% OF THE TOTAL NUMBER OF SHARES OF
COMMON STOCK OUTSTANDING AFTER THIS OFFERING, AND THE PERCENTAGE HELD BY NEW
INVESTORS WILL DECREASE TO APPROXIMATELY 25% OF THE TOTAL NUMBER OF SHARES OF
COMMON STOCK OUTSTANDING IMMEDIATELY AFTER THIS OFFERING. See
"Management--Employee Benefit Plans."
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
- --------
Since opening its first bakery-cafe in 1993, Marsee Baking has expanded
to become the owner and operator of 18 bakery-cafes and two central commissaries
in the Pacific Northwest. Twelve bakery-cafes are located in Oregon and six in
Washington. In 1998, revenue grew 156% to $12,656,000 as we expanded the number
of retail stores over the prior year from six to eighteen bakery-cafes,
primarily due to the acquisition discussed below. We currently derive
approximately 79% of our revenue from these retail outlets, while the remaining
revenue is derived from wholesale operations. Most baking operations are
conducted at the commissaries, and fresh product is delivered to the retail
stores daily.
Since inception, Marsee Baking has incurred losses in each fiscal year
and had an accumulated deficit of $7,605,000 as of MARCH 31, 1999. The majority
of these losses occurred in the last two years, with losses of $1,195,000 in
1997 and $4,304,000 in 1998. THE LOSS FOR THE FIRST QUARTER OF 1999 WAS
$1,077,000. The losses are attributable primarily to relatively high costs of
goods sold and store labor expenses, exacerbated in 1998 by the operation of ten
newly-acquired stores compared to the operation of only six mature stores during
1997. We have not generated sufficient cash from operations to fund continued
operations or our growth plan, and will require significant additional future
financing.
Since November 1998, we have focused on revising our operating model to
emphasize revenue improvements through better merchandising, significant cost
and expense reductions and the addition of new wholesale customers. We have not
yet had sufficient experience with this operating model to provide any assurance
that it will generate increased revenue or profits in future periods.
Accordingly, it is not yet clear that we have developed an operating strategy
that will accomplish the goal of reducing and eliminating our losses. If we
cannot develop a profitable strategy and losses continue, we will further
deplete our financial resources and shareholders' equity.
ACQUISITION. During the first quarter of 1998, we completed the
acquisition of the assets of a Seattle-based retailer of bagels in exchange for
the issuance of two new series of preferred stock. The assets acquired included
seven retail store locations and a commissary in Washington and three retail
locations in Oregon. The acquisition of ten new retail locations represented a
significant increase in the scale of retail operations, as we operated only four
retail locations at the end of 1996 and six at the end of 1997, and opened three
new stores in 1998. The additional retail locations increased the requirements
placed on our management personnel and operations and financial control systems,
as well as on our ability to train and manage our retail employees. Throughout
1998, we renovated the retail locations we acquired and reopened them under the
Marsee Baking brand at a cost of $2,303,000 above the acquisition cost. We made
an additional capital investment of approximately $538,000 to convert and equip
the Seattle commissary for baking Marsee products. Due to capital constraints,
we were unable to renovate all the acquired stores as quickly as planned or
provide the necessary marketing support in the Seattle market to launch properly
the Marsee Baking brand. As a consequence, neither revenue nor results of
operations met management expectations for 1998.
15
<PAGE>
1999 OPERATING PLAN. In November 1998, we recruited a director of the
company to serve as our new Chief Executive Officer. He has had significant
experience in operating and expanding multi-store bakery concepts. Actions taken
since assumption of his responsibilities as CEO have focused on increasing
revenue while reducing costs. The 1999 operating plan includes:
o Focusing employee efforts on profitable activities,
o Better merchandising of product in the bakery-cafes,
o Improving the speed and quality of customer service,
o Reducing ingredient costs,
o Improving management of daily bakery-cafe waste,
o Expanding the wholesale customer base,
o Implementing better inventory control and management,
o Further developing store operating controls, and
o Improving utilization of existing information systems.
More specifically, the 1999 operating plan targets significant
reductions in ingredient costs and further reductions in commissary labor
expenses to reduce costs of goods sold as a percentage of total revenue to below
45% by year-end 1999. In addition, the 1999 operating plan establishes a target
store-labor-expense to bakery-cafe-revenue ratio of 27.4% for 1999.
As part of these improvements in operations, we closed one bakery-cafe
in the Seattle area, and terminated the leases and the planned build-out of two
new stores in the Portland area in 1999. In addition, we have reduced expenses
associated with the operation of the Seattle commissary by supplying the Seattle
stores with most products from the Portland commissary until an increased volume
of sales in the Seattle market warrants full-scale operation of the Seattle
commissary.
1999 LIQUIDITY PLAN. In view of our accumulated deficit and recurring
losses, our auditors have added an explanatory paragraph to their report on our
financial statements stating that there is substantial doubt about our ability
to continue as a going concern. In this regard, management has adopted a 1999
liquidity plan, the principal features of which include:
o Execution of the 1999 operating plan,
o Reduction of costs and expenses,
o Completion of a bridge financing on April 27, 1999 in the form of
a $2.514 million private placement of units, each unit consisting
of one share of common stock and a $5.00 promissory note bearing
interest at 8%, payable upon the earlier of nine months of the
date of the promissory note or the closing of this offering;
o Increase in the working capital line of credit; and
o Completion of this offering of 1,750,000 shares of common stock
and 1,750,000 purchase warrants.
Although the bridge financing has been completed, there is no assurance that
this offering will be completed or that we will achieve profitable operations.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty. See "Risk Factors," "Use of Proceeds" and
"--Liquidity and Capital Resources."
16
<PAGE>
RESULTS OF OPERATIONS
- ---------------------
[TEXT DELETED]
The following table sets forth the percentage relationship of certain
items to net revenues included in the company's statements of operations:
<TABLE>
<CAPTION>
Year Ended December 31, Three Month Ended March 31,
1997 1998 1998 1999
-------------- -------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenue
Bakery-Cafe......................... 83.7% 77.1% 76.2% 79.2%
Wholesale........................... 16.3 22.9 23.8 20.8
-------------- -------------- ------------ ------------
100.0 100.0 100.0 100.0
Cost of goods sold.................... 58.3 59.9 56.9 58.6
Store operating expenses.............. 32.8 41.7 48.0 42.1
Wholesale operating expenses.......... 6.6 4.7 5.1 2.4
Depreciation and amortization......... 4.3 6.5 4.4 11.2
General and administrative expenses... 19.5 15.5 18.3 13.6
Store closure expenses................ -- 2.0 -- --
Interest expense...................... 2.6 3.7 2.5 8.7
-------------- -------------- ------------ ------------
Loss before provision for taxes....... (24.1) (34.0) (35.1) (36.7)
Provision for income taxes............ -- -- -- --
-------------- -------------- ------------ ------------
Net loss (24.1)% (34.0)% (35.1)% (36.7)%
============== ============= ============ ===========
</TABLE>
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO MARCH 31, 1999. TOTAL
REVENUES INCREASED $206,000, OR 8%, FROM $2,732,000 FOR THE THREE MONTHS ENDED
MARCH 31, 1998 TO $2,938,000 FOR THE THREE MONTHS ENDED MARCH 31, 1999.
BAKERY-CAFE REVENUE INCREASED $247,000, OR 12%, FROM $2,081,000 FOR THE THREE
MONTHS ENDED MARCH 31, 1998 TO $2,328,000 FOR THE THREE MONTHS ENDED
MARCH 31, 1999. THE INCREASE IN BAKERY-CAFE REVENUE IS ATTRIBUTABLE PRIMARILY TO
THE STORES BUILT OR ACQUIRED IN 1998. REVENUE HAS INCREASED AS THESE STORES HAVE
MATURED AND AS A RESULT OF THE TIMING OF CONVERSIONS TO THE MARSEE BRAND
THROUGHOUT 1998.
WHOLESALE REVENUE DECREASED $41,000, OR 6%, FROM $651,000 FOR THE THREE
MONTHS ENDED MARCH 31, 1998 TO $610,000 FOR THE THREE MONTHS ENDED
MARCH 31, 1999. SALES TO THIRD PARTY DISTRIBUTORS WHO ARE RESPONSIBLE FOR
DELIVERY, INVOICING AND CUSTOMER SERVICE DECREASED $137,000, OR 30%, FROM
$457,000 FOR THE THREE MONTHS ENDED MARCH 31, 1998 TO $320,000 FOR THE THREE
MONTHS ENDED MARCH 31, 1999. THE DECREASE IN DISTRIBUTOR SALES RESULTS FROM A
SHIFT AWAY FROM CERTAIN UNPROFITABLE DISTRIBUTOR BUSINESS ACQUIRED IN THE
WASHINGTON ACQUISITION. SALES TO ONE WAREHOUSE RETAILER, COSTCO COMPANIES, INC.
BEGAN IN LATE 1997 IN CERTAIN PORTLAND AND SEATTLE AREA STORES. REVENUE FROM
THIS CUSTOMER INCREASED $94,000, OR 63%, FROM $149,000 FOR THE THREE MONTHS
ENDED MARCH 31, 1998 TO $243,000 FOR THE THREE MONTHS ENDED MARCH 31, 1999.
COST OF GOODS SOLD GREW $167,000, OR 11%, FROM $1,554,000 FOR THE THREE
MONTHS ENDED MARCH 31, 1998 TO $1,721,000 FOR THE THREE MONTHS ENDED
MARCH 31, 1999. AS A PERCENTAGE OF REVENUE, COST OF GOODS SOLD WAS 56.9% OF
REVENUE FOR THE THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO 58.6% FOR THE
THREE MONTHS ENDED MARCH 31, 1999. THE PRINCIPal COMPONENTS OF COST OF GOODS
SOLD ARE INGREDIENTS, COMMISSARY LABOR AND OPERATING EXPENSES. INGREDIENTS, AS A
PERCENTAGE OF REVENUE, WERE 31.4% OF REVENUE FOR THE THREE MONTHS ENDED
MARCH 31, 1998 COMPARED TO 32.1% FOR THE THREE MONTHS ENDED MARCH 31, 1999. AS
VOLUME INCREASED, WE WERE ABLE TO EXPERIENCE COMMISSARY LABOR EFFICIENCIES.
LABOR WAS 18.5% OF REVENUE FOR THE THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO
15.7% FOR THE THREE MONTHS ENDED MARCH 31, 1999.
17
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THE THIRD COMPONENT OF COST OF GOODS SOLD IS COMMISSARY OPERATING
EXPENSES. DURING 1998, THE COMPANY EXPANDED INTO TWO COMMISSARIES AND NOW
OPERATES ONE FACILITY IN PORTLAND AND ONE IN THE SEATTLE AREA, WHICH CONDUCTS
LIMITED ACTIVITIES AT THE PRESENT TIME. AS A RESULT OF THIS DOUBLING OF
CAPACITY, COMMISSARY OPERATING EXPENSES INCREASED FROM $178,000 FOR THE THREE
MONTHS ENDED MARCH 31, 1998 TO $317,000 FOR THE THREE MONTHS ENDED
MARCH 31, 1999. THESE COSTS REPRESENTED 6.5% OF REVENUE FOR THE THREE MONTHS
ENDED MARCH 31, 1998 COMPARED TO 10.8% FOR THE THREE MONTHS ENDED
MARCH 31, 1999. THE PRINCIPAl FACTORS CONTRIBUTING TO THIS INCREASE IN
COMMISSARY OPERATING COST INCLUDED DEPRECIATION, WHICH INCREASED FROM $32,000
FOR THE THREE MONTHS ENDED MARCH 31, 1998 TO $62,000 THE THREE MONTHS ENDED
MARCH 31, 1999, AND TRANSPORTATION EXPENSES RELATING TO THE MOVEMENT OF PRODUCT
BETWEEN THE TWO COMMISSARIES AND THE BAKERY-CAFES, WHICH INCREASED FROM $14,000
FOR THE THREE MONTHS ENDED MARCH 31, 1998 TO $56,000 THE THREE MONTHS ENDED
MARCH 31, 1999.
STORE OPERATING EXPENSES DECREASED $74,000, OR 6%, FROM $1,312,000 FOR
THE THREE MONTHS ENDED MARCH 31, 1998 TO $1,238,000 FOR THE THREE MONTHS ENDED
MARCH 31, 1999. THESE EXPENSES WERE 63.0% OF BAKERY-CAFE REVENUE FOR THE THREE
MONTHS ENDED MARCH 31, 1998 COMPARED TO 53.2% FOR THE THREE MONTHS ENDED
MARCH 31, 1999. THE LARGEST COMPONENT OF STORE OPERATING EXPENSES IS LABOR.
BAKERY-CAFE LABOR DECREASED $33,000, OR 5%, FROM $723,000 FOR THE THREE MONTHS
ENDED MARCH 31, 1998 TO $690,000 FOR THE THREE MONTHS ENDED MARCH 31, 1999. THIS
REPRESENTS 34.7% BAKERY-CAFE REVENUE FOR THE THREE MONTHS ENDED MARCH 31, 1998
COMPARED TO 29.7% FOR THE THREE MONTHS ENDED MARCH 31, 1999. LABOR COST AS A
PERCENTAGE OF BAKERY-CAFE REVENUE IS EXPECTED TO CONTINUE TO DECLINE AS THE
STORES OPENED IN 1998 CONTINUE TO MATURE.
THE NEXT LARGEST COMPONENT OF STORE OPERATING EXPENSES IS OCCUPANCY
EXPENSES, CONSISTING PRIMARILY OF RENT AND UTILITY EXPENSES. THESE EXPENSES
INCREASED $44,000, OR 9%, FROM $489,000 FOR THE THREE MONTHS ENDED
MARCH 31, 1998 TO $533,000 FOR THE THREE MONTHS ENDED MARCH 31, 1999. THIS
INCREASE IS DUE PRIMARILY TO THE NEW STORES.
DEPRECIATION INCREASED $211,000, OR 77%, FROM $119,000 FOR THE THREE
MONTHS ENDED MARCH 31, 1998 TO $330,000 FOR THE THREE MONTHS ENDED
MARCH 31, 1999. THIS SIGNIFICANT INCREASE RELATES TO DEPRECIATION ON CAPITAL
EXPENDITURES MADE TO ACQUIRE, RENOVATE AND FURNISH NEW RETAIL AS WELL AS
COMMISSARY FACILITIES.
GENERAL AND ADMINISTRATIVE EXPENSES DECREASED $99,000, OR 20%, FROM
$499,000 FOR THE THREE MONTHS ENDED MARCH 31, 1998 TO $400,000 FOR THE THREE
MONTHS ENDED MARCH 31, 1999. THE DECREASE IS PRIMARILY A RESULT OF REDUCTIONS IN
ADMINISTRATIVE SALARIES AND THE RECOGNITION OF A BAD DEBT LOSS OF NEARLY $70,000
IN THE PERIOD ENDED MARCH 31, 1998.
INTEREST EXPENSE INCREASED $189,000, OR 282%, FROM $67,000 FOR THE
THREE MONTHS ENDED MARCH 31, 1998 TO $256,000 FOR THE THREE MONTHS ENDED
MARCH 31, 1999. THIS SIGNIFICANT INCREASE RELATES TO $124,000 OF INTEREST
EXPENSE RELATED TO THE 1999 BRIDGE FINANCING, WITH THE REMAINDER RELATED TO
INCREASED DEBT ASSUMED TO RENOVATE NEW STORES AND THE WASHINGTON COMMISSARY.
DUE TO LOSSES BEFORE THE PROVISION FOR INCOME TAXES, THERE WAS NO
PROVISION FOR FEDERAL AND STATE INCOME TAXES FOR EITHER OF THE THREE MONTH
PERIODS ENDED MARCH 31, 1998 OR 1999.
MARSEE BAKING LOST $958,000 FOR THE THREE MONTHS ENDED MARCH 31, 1998
COMPARED TO $1,077,000 FOR THE THREE MONTHS ENDED MARCH 31, 1999, DUE PRIMARILY
TO INCREASED COMMISSARY OPERATING EXPENSES AND DEPRECIATION EXPENSE AS A RESULT
OF THE EXPANSION INTO WASHINGTON STATE, AND INCREASED INTEREST EXPENSE AS A
RESULT OF THE BRIDGE FINANCING.
YEAR 1997 COMPARED TO 1998. Total revenues increased $7,708,000, or
156%, from $4,948,000 in 1997 to $12,656,000 in 1998. Bakery-Cafe revenue
increased $5,621,000, or 136%, from $4,140,000 in 1997 to $9,761,000 in 1998.
The increase in bakery-cafe revenue is attributable primarily to the increase in
the number of store locations. Stores opened in 1998 totaled thirteen, ten of
which were acquired. Total revenue for the new stores accounted for $5,018,000
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of the increase in bakery-cafe sales. Capital constraints prevented the
immediate renovation of the stores acquired, and six of the ten stores were not
renovated until the third quarter of 1998. As a result of this delay and our
inability to market cost-effectively the Marsee Baking brand in the Seattle
market, the seven bakery-cafes in Washington did not meet management's revenue
expectations in 1998. We closed one underperforming store in this market in
February 1999.
Revenue for the four retail locations open for the entire year during
both 1997 and 1998 decreased 3.1% from $3,740,000 in 1997 to $3,624,000 in 1998.
We attribute such decrease primarily to the diversion of sales from existing
stores as a result of opening three new bakery-cafes in the downtown Portland
area. The two stores opened in the second half of 1997 contributed revenue of
$400,000 in 1997 and $1,119,000 in 1998.
Wholesale revenue grew $2,087,000, or 258%, from $808,000 in 1997 to
$2,895,000 in 1998. The major reason for the growth was our expansion into
Washington, which contributed $830,000 in wholesale revenue in 1998. Sales to
third party distributors grew $924,000, or 142%, from $652,000 in 1997 to
$1,576,000 in 1998. These distributors, who are responsible for delivery,
invoicing and customer service, contributed 81% of wholesale revenue in 1997
compared to 54% in 1998. The other principal component of wholesale revenue in
1998 was derived from $1,071,000 in sales to one warehouse retailer, Costco
Companies Inc.
Cost of goods sold grew $4,692,000, or 162%, from $2,887,000 in 1997 to
$7,579,000 in 1998. Ingredients, as a percentage of total revenue, were 31.7% in
1997 and 32.4% in 1998. As volume increased, we were able to experience labor
efficiencies. Commissary labor was 20.0% of total revenue in 1997 compared to
18.7% in 1998. As a result of this doubling of capacity, commissary operating
expenses increased from $329,000 in 1997 to $1,104,000 in 1998. These costs
represented 6.6% of total revenue in 1997 and 8.7% in 1998. The principal
factors contributing to this increase in commissary operating expenses in 1998
included depreciation, which increased from $52,000 in 1997 to $224,000 in 1998;
rent, which increased from $47,000 in 1997 to $190,000 in 1998; and
transportation expenses related to the movement of product between the two
commissaries and the bakery-cafes, which increased from $5,000 in 1997 to
$112,000 in 1998.
As a percentage of revenue, cost of goods sold was 58.3% of revenue in
1997 compared to 59.9% in 1998. The percentage increase is due in part to the
revenue mix between retail and wholesale revenue. Wholesale activities increased
from 16.3% of revenue in 1997 to 22.9% in 1998, but do not command the higher
profit margin of retail activities.
Store operating expenses increased $3,660,000, or 226%, from $1,621,000
in 1997 to $5,281,000 in 1998. Store operating expenses were 39.1% of
bakery-cafe revenue in 1997, compared to 54.1% in 1998. The largest component of
store operating expenses is labor. Bakery-cafe labor increased $2,046,000, or
210%, from $971,000 in 1997 to $3,017,000 in 1998. Bakery-cafe labor was 23.4%
of bakery-cafe revenue in 1997 compared to 30.9% in 1998. This significant
percentage increase in store labor expense is due primarily to the opening of 13
new stores in 1998. For the 13 stores opened in 1998, labor was 36.9% of
bakery-cafe revenue, while for established stores it was 24.6%. New stores
require a base level of labor to operate. The sales from the stores acquired in
Washington did not meet expectations as discussed above and, therefore, fixed
labor costs were higher as a percentage of bakery-cafe revenue.
OCCUPANCY expenses increased $947,000, or 356%, from $266,000 in 1997
to $1,213,000 in 1998. This increase is due to the number of new stores. While
we believe we can manage these expenses in the Washington operations in the
future, we need retail store revenue growth to substantially reduce occupancy
expense ratios to acceptable levels.
Marketing expenses are included in store operating expenses and were
$27,000 in 1997 compared to $184,000 in 1998. The 1998 marketing expenses
primarily related to media advertising for new store openings, a logo redesign
and related paper goods repackaging effort, a holiday catalog and store signage.
The company utilized an outside consultant to coordinate these efforts. The
remainder of store operating expenses grew proportionally in relation to
revenue.
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General and administrative expenses increased $994,000, or 103%, from
$965,000 in 1997 to $1,959,000 in 1998, primarily as a result of increases in
general business activity. These expenses represented 19.5% of total revenue in
1997 compared to 15.5% in 1998. General and administrative salaries increased
$568,000, or 105%, from $543,000 in 1997 to $1,111,000 in 1998, as additional
personnel were added to support the growth in wholesale and retail activities.
Employee expenses related to managing two geographic areas grew from $21,000 in
1997 to $100,000 in 1998. Professional fees and service grew $240,000, from
$123,000 in 1997 to $364,000 in 1998.
Interest expense increased from $129,000 in 1997 to $472,000 in 1998,
primarily as a result of loans obtained to renovate new stores and the
Washington commissary.
In the fourth quarter of 1998, we had $253,000 of
accelerated-depreciation expenses related to the closure of one bakery-cafe in
Washington and costs related to the abandoned efforts to open two new stores in
the Portland area due to financial constraints. In addition, in 1998 we
recognized additional compensation expenses related to the issuance of options
and warrants of $199,000, and severance benefits payable to former employees of
$130,000.
Due to our losses before the provision for income taxes in each year,
there has been no provision for federal and state income taxes for the years
ended December 31, 1997 and 1998. We have deferred tax assets totaling $575,000
and $2,218,000 as of December 31, 1997 and 1998, respectively, for which we have
recorded a full valuation allowance.
Marsee Baking lost $1,227,000 in 1997 compared to a loss of $4,404,00
in 1998. The principal reason for the increased operating losses in 1998 was the
addition of 13 new stores which in their initial years of operation have
relatively high costs and expenses compared to mature stores.
LIQUIDITY AND CAPITAL RESOURCES
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LIQUIDITY. We had negative working capital of $1,487,000 at December
31, 1997 compared to negative working capital of $4,148,000 at December 31, 1998
AND $5,213,000 AT MARCH 31, 1999. CASH USED BY OPERATING ACTIVITIES TOTALED
$253,000 FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND $1,231,000 FOR THE THREE
MONTHS ENDED MARCH 31, 1999.
FOR THE THREE MONTHS ENDED MARCH 31, 1999, CASH WAS PRINCIPALLY USED TO
FUND $1,077,000 IN LOSSES SUSTAINED DURING THE QUARTER, OFFSET BY NON-CASH
CHARGES FROM DEPRECIATION AND AMORTIZATION OF $391,000. WE USED $374,000 OF CASH
TO REDUCE TRADE VENDOR PAYABLES DURING THE FIRST QUARTER OF 1999. COSTS RELATED
TO THE OTHER CHANGES IN CURRENT ACCOUNTS SINCE YEAR-END MAKE UP THE DIFFERENCE
IN CASH USED BY OPERATIONS.
Cash used by operating activities for 1998 totaled $1,412,000. This use
of cash resulted primarily from the $4,304,000 in losses sustained during the
year, offset principally by non-cash charges of $1,295,000 from depreciation and
$1,335,000 from trade vendors due to increases in volume and extended terms. In
1997, cash used by operating activities was $239,000. Other changes in current
accounts between the two years make up the difference in cash used by
operations. Accounts receivable increased from $54,000 at year-end 1997 to
$253,000 at year-end 1998 due to the increase in wholesale sales. Inventories
were $64,000 at December 31, 1997 and $269,000 at December 31,1998. This
increase was due to inventory requirements to cover increases in baking volume
and bakery-cafe inventory increases due to the number of new stores. Prepaid
expenses also increased from $46,000 at December 31, 1997 to $134,000 at
December 31, 1998 as a result of lease deposits and prepaid rent on new stores.
Accounts payable increased from $915,000 at December 31, 1997 to
$2,250,000 at December 31, 1998. This increase is due in part to increased
volume as well as cash flow difficulties in meeting current terms with vendors.
Since December 31, 1998, we have continued to obtain additional debt financing,
with the proceeds in part being used to bring trade vendors closer to normal
payment terms. Accrued liabilities increased from $232,000 at December 31, 1997
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to $735,000 at December 31, 1998. This increase results from increases in, and
the timing of, payments for payroll liabilities, primarily as a result of
increased headcount and vacation accruals.
Our independent auditors have included in their audit report an
explanatory paragraph which states that our recurring losses from operations
raise substantial doubt as to our ability to continue as a going concern. Our
working capital requirements for the next twelve months consist primarily of
funding operating losses until break-even is realized. See "Risk Factors."
CAPITAL RESOURCES. Prior to completion of the bridge financing
described below, our primary sources of funds were shareholder loans, private
placements of stock and equipment financing, and to a lesser extent cash
provided by operating activities and a bank line of credit. The increased amount
of our outstanding payables in 1998 also served as an additional source of
interim financing.
Net cash provided by financing activities FOR THE YEARS ENDED DECEMBER
31, 1997 AND 1998 AND THE THREE MONTHS ENDED MARCH 31, 1999 WAS $1,021,000,
$3,604,000 AND $1,597,000, respectively. During 1998, the company paid down debt
obligations of $528,000 while incurring $227,000 of long-term debt and issuing
$3,027,000 in preferred stock.
During November and December 1998, we issued $525,000 in demand notes.
Subsequent to the end of the year, we issued an additional $95,000 in demand
notes, and on April 27, 1999, we completed a bridge financing in the form of a
private placement of units, each unit consisting of one share of common stock
and a $5.00 promissory note bearing interest at 8%, payable upon the earlier of
nine months from the date of the promissory notes or the closing of this
offering. See "Description of Securities." After expenses, the notes have an
effective rate of interest of 22%. The previously issued demand notes were
subsequently combined with the 1999 bridge financing, AND AT MARCH 31, 1999 THE
BRIDGE FINANCING TOTALED $2,314,000. ON APRIL 27, 1999 THE BRIDGE FINANCING WAS
CLOSED AT an aggregate offering of $2,514,000.
Our bank line of credit was fully utilized at $250,000 AS OF
December 31, 1997 and 1998, AND AS OF MARCH 31, 1999. ON APRIL 29, 1999 WE
OBTAINED AN EXPANSION OF OUR EXISTING LINE OF CREDIT BY AN ADDITIONAL $500,000
IN CONNECTION WITH AN AGREEMENT BY A DIRECTOR TO PROVIDE A PERSONAL GUARANTEE TO
THE BANK.
We have not generated sufficient cash from operations to fund continued
operations or our growth plan, and will require significant additional future
funding. We believe that our 1999 operating and financing plans will, if carried
out successfully, be sufficient to meet our liquidity needs for the balance of
1999, based on our current expense calculations and our current and anticipated
revenue streams, including the proceeds of this offering. The operating and
financing plans assume certain same-store growth projections can be met, our
costs can be reduced as a percentage of revenue, and our overall cost structure
remains stable, of which there can be no assurance. There also can be no
assurance that our liquidity goals will be reached in the near future, if ever.
In the event that additional capital is required, we may seek to raise that
capital through private or public equity financing. Future financing
transactions may dilute the value of your investment in this offering. There can
be no assurance that such capital will be available on favorable terms, if at
all.
CAPITAL EXPENDITURES. Additions to property and equipment were
$1,638,000 in 1997, $6,127,000 in 1998, AND $56,000 FOR THE THREE MONTHS ENDED
MARCH 31, 1999. Additions relate directly to the number of new stores opened in
each year. In 1997, most capital expenditures were funded through general
financing activities. In 1998, capital expenditures were funded by $2,139,000
from a preferred stock financing, $2,066,000 from capital leases and notes
payable assumed, and $1,922,000 from an acquisition paid for primarily by
issuance of preferred stock.
During 1997, we invested in the construction of four new stores, two of
which began operation in 1997 and two of which opened in January of 1998. In
addition, we upgraded our point of purchase systems in all stores.
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In addition to opening one new store and adding to its computer systems
capability, the majority of 1998 capital expenditures relate to the purchase and
renovation of properties acquired in the acquisition of the assets of the
Seattle-based bagel retailer. Throughout 1998, the retail locations were
renovated and reopened under the Marsee Baking name at a cost of $2,303,000
above the acquisition cost. Additional capital investments of approximately
$538,000 were made to convert and equip the Seattle commissary for baking Marsee
products.
Although no assurances can be given, we believe that proceeds from this
offering will be sufficient to fund certain planned capital expenditures,
including ongoing maintenance and renovation of existing bakery-cafes, and the
addition of five new bakery-cafes in the greater Portland and Seattle
metropolitan area markets. The cost to acquire and renovate a new store is
estimated at approximately $400,000 per location. See "Business--Unit
Economics." There are presently no material commitments for capital expenditures
in 1999.
OTHER COMMITMENTS. In connection with the issuance of the Series A
Preferred Stock in 1995, the company is obligated to pay cumulative dividends
which accrue at the rate of $0.60 per share per year. At December 31, 1998,
these dividends were accrued and aggregated approximately $101,000. The amount
of accrued dividends at June 30, 1999 is estimated to be approximately $115,000
and are to be paid with proceeds from this offering.
We lease retail stores, office and commissary facilities under
operating leases expiring through the year 2007. These leases contain renewal
options and rent escalation clauses. Commitments under these operating leases
aggregate $5,382,000, the current portion of which is $1,009,000.
Subsequent to the end of the year, the company entered into an
agreement with its principal supplier providing for the payment of approximately
$250,000 in respect of past due accounts payable on or before June 30, 1999. The
company plans to make such payment from the proceeds of this offering. See "Use
of Proceeds."
YEAR 2000 COMPLIANCE
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We depend on our networked computer systems to process point of sale
transactions, collect transaction data, manage inventory and accounts
receivable, and process other financial data on a timely basis. In addition, we
use several desktop personal computers in our headquarters office and
commissaries. The production equipment in our commissaries is generally not
computer or microprocessor controlled.
We are in the process of assessing the Year 2000 readiness of our
internal computer systems. Our retail reporting software is not Year 2000
compliant and the process of upgrading our system will begin in June 1999 at an
aggregate cost of approximately $5,000. The required software upgrade is readily
available from the system vendor and is expected to be installed in all stores
by August 31, 1999. Our general ledger and inventory control systems have been
tested and are Year 2000 compliant. In addition, we are in the process of
completing our inventory and assessment of our desktop personal computers and
will use standard "off the shelf" vendor-supplied upgrades as required. As a
result of these activities, we presently believe our internal computer systems
will be Year 2000 compliant in a timely manner, but undetected errors may
remain. In addition, we cannot be certain that any of the remedial measures
adopted will prevent the occurrence of Year 2000 problems, which could have a
material adverse affect on our business, financial condition or results of
operations.
We do not employ an electronic order interface with any of our
third-party suppliers, and we have initiated communications with our other major
suppliers to identify and resolve issues involving Year 2000 compliance. While
we expect we will be able to resolve any significant problems with our
suppliers, any failure of third parties to resolve any difficulties that arise
could have a material adverse effect on our business, financial condition or
results of operations.
No Year 2000 compliance expenses have been incurred to date. All future
compliance expenses will be funded from general working capital. Although there
can be no assurance, we do not expect the cost of these efforts to be material
to our results of operations.
We currently do not have any contingency plans and have not determined
our most reasonably likely worst-case scenario with respect to Year 2000
compliance. We are determining what contingency plans, if any, will be
appropriate subsequent to the expected upgrading and testing of all internal
systems by August 31, 1999. We are considering contingency plans to address
possible business interruptions, including temporary use of manual point of sale
devices. We expect any necessary contingency plans to be completed by October
1999. If we are required to implement a contingency plan, such plan could have a
material adverse effect on our business, financial condition or results of
operations.
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BUSINESS
Marsee Baking owns and operates 18 bakery-cafes in the Pacific
Northwest that offer more than 100 artisan bakery products, as well as
made-to-order sandwiches, soups and salads, in a friendly, neighborhood
atmosphere. Each bakery-cafe operates as a premium bakery, providing a relaxing
cafe experience that addresses the morning, lunch and late-afternoon day-parts.
For 1998, the six bakery-cafes operating in the company's format for more than a
year had average revenue of approximately $790,000 per store. Marsee Baking also
distributes its products and builds brand awareness through its wholesale
operations, providing specialty retailers and other institutions with a complete
line of Marsee Baking products.
Marsee Baking, which began with one Portland bakery-cafe in 1993, grew
to eight bakery-cafes before acquiring additional stores in the greater Portland
and Seattle metropolitan areas through an acquisition in early 1998. Nine of the
stores acquired were converted to the Marsee Baking concept during 1998 and have
been integrated into Marsee Baking's operations. Marsee Baking operates a
commissary in each of its two markets that serves as a central production and
distribution facility. The commissaries together produce a full line of
artisan-baked goods based on authentic recipes for daily distribution to each of
the bakery-cafes.
Marsee Baking believes that it can expand its presence in its current
areas of operation and replicate the Marsee Baking concept in other metropolitan
areas for the following reasons:
WE OFFER A WIDE o Marsee Baking differentiates itself in the
VARIETY OF PREMIUM bakery-cafe segment of the specialty restaurant
QUALITY, ARTISAN industry by offering over 100 different varieties of
BAKERY PRODUCTS. premium quality, artisan-crafted products based on
authentic recipes for eat-in or take-out dining. We
strive to make every item "stand alone" in quality
such that any bakery item by itself might be the
product line of a successful bakery or cafe. Marsee
Baking's diverse product line includes complex
products such as delicate, hand-crafted pastries,
slowly fermented breads and gourmet European tortes
to satisfy not only varying consumer tastes but also
to address different day parts. We believe that a
diverse and evolving product menu engenders customer
loyalty and encourages repeat business. Our broad
range of products creates a competitive advantage
over other stores offering a single product line
(such as bagels) and over bakeries or cafes that
focus only on a single day-part.
OUR CENTRAL o Marsee Baking's commissaries, which are
PRODUCTION FACILITIES strategically located in each market, serve as
SERVE MULTIPLE central production facilities to Marsee Baking's
OUTLETS AND PROMOTE bakery-cafes. The use of central production
COST EFFICIENCIES, facilities permits better quality control, maximum
PRODUCT QUALITY AND labor efficiency and higher-volume production of
CONSISTENCY. baked goods, using modern processes, while adhering
to traditional artisan-style baking techniques.
Marsee Baking's fresh artisan-baked goods, based on
traditional European and American recipes, are
provided daily by Marsee Baking's commissaries to
all of its bakery-cafes for selected on-site baking
(bagels and cookies), for use in a variety of menu
items (soups and sandwiches), and for immediate
sale. Marsee Baking believes that it will be able
to replicate the central commissary concept in other
markets.
WE HAVE CREATED A o We seek to create an authentic neighborhood cafe
DISTINCTIVE atmosphere with upscale decor and uniform interior
DESTINATION THAT designs that are unique to the Marsee Baking
SUPPORTS OUR BRAND concept. Design elements, which may include
IMAGE. hammered tin ceilings, slate floors, marble bars,
mahogany trim, custom designed cabinetry and display
cases, are selected to evoke the charm and elegance
of a grand cafe. Items consumed on premises are
served on china or glass plates. We believe that
our retail bakery-cafes and wholesale distribution
work together to reinforce our image as a provider
of high quality, artisan-baked goods. The wholesale
operation provides Marsee Baking's complete line of
baked goods to quality grocery stores, specialty
retailers, hotels and fine restaurants to promote
our local bakery-cafes and to create brand
recognition associated with premium quality baked
goods in our markets.
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WE HAVE RECRUITED A o We have recently recruited a new Chief Executive
NEW, EXPERIENCED Officer and a new Chief Financial Officer. Mr.
MANAGEMENT TEAM. Raymond W. Lindstrom, the company's New Chief
Executive Officer, has over 25 years' experience in
the specialty restaurant industry, beginning with
his role as one of the founders of Restaurants
Unlimited, Inc., where he oversaw the rapid-growth
of upscale dinner house restaurants. Mr. Lindstrom
later joined Cinnabon, a subsidiary of Restaurants
Unlimited, Inc., where he led the development of
the Cinnabon concept nationwide.
In addition, we have also recently recruited a new
Chief Financial Officer, Mr. Stephen A. Aanderud,
who has experience in the management of rapid-
growth manufacturing companies. Mr. Aanderud was
the President and Chief Executive Officer of
ThrustMaster, Inc., a sophisticated computer toy
and accessory manufacturing company, which he
helped take public in 1995.
The core competencies of the new management team
are reinforced by the working knowledge of the
founders who remain active in Marsee Baking's
operations.
THE MARSEE BAKING o We believe that our concept complements today's
CONCEPT COMPLEMENTS consumer lifestyles and preferences. The
TODAY'S CONSUMER bakery-cafe offers a shopping destination for
LIFESTYLE AND gourmet breads and special occasion cakes, a place
PREFERENCE FOR A for a light lunch or a relaxing spot for an
HASSLE-FREE, afternoon cappuccino. The bakery-cafe's atmosphere
CONVENIENT AND is intended to be suitable for takeout or eat-in
AFFORDABLE DINING dining in a variety of meal occasions. By offering
EXPERIENCE. high quality, artisan-made food, a distinctive
atmosphere and superior service, Marsee Baking is
able to provide customers with a more authentic
dining experience than may be available from other
quick-service restaurants in the specialty
restaurant industry, without substantially higher
prices. Our bakery-cafes provide hassle-free
convenience and an affordable indulgence for our
customers.
THE MARSEE BAKING o Our broad line of complex products, central baking
CONCEPT HAS facilities and the high "stand-alone" product
SIGNIFICANT BUILT-IN quality create barriers to entry to competing
BARRIERS TO ENTRY. bakery-cafe concepts. Marsee Baking's complex
product line is diverse and difficult to duplicate,
in whole or by individual item. The central baking
facility requires a significant capital investment
and a sufficient critical mass of bakery-cafes to
support its operation. Unlike many specialty
restaurants, the Marsee Baking concept creates and
delivers high quality products on a consistent
basis to more stores than is possible through
alternative methods. Marsee Baking is also able to
stay competitive throughout the day by addressing
four sub-businesses: the morning, lunch and
late-afternoon day parts, and the specialty
take-out segment.
UNIT ECONOMICS
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We introduced the Marsee Baking concept to the Portland market in 1993
and then to the greater Seattle market in 1998. The operating model, which is
based on a central production and multiple outlet model, is intended to be
capable of rapid expansion through proven unit economics. In the company's
experience, the more mature stores typically have higher unit revenues. For
1998, the six mature Portland-based bakery-cafes had average revenues of
approximately $790,000 per unit, average sales of $458 per square foot and an
average check of $4.19. The four bakery-cafes that have been in operation for
more than 18 months had average revenues of approximately $906,000 per unit,
average sales of $610 per square foot and an average check of $4.20 in 1998.
Company-wide average revenues for all stores open in 1998, including revenue
from the ten newly-acquired stores both before and after conversion to the
Marsee Baking format, were $513,730 per unit, average sales were $254 per square
foot and the average check was $4.46.
24
<PAGE>
Our approach to opening new bakery-cafes has been to minimize our
required investment by leasing all of our locations. Our bakery-cafes range in
size from 360 square feet to 3,600 square feet. Since 1993, our total investment
per bakery-cafe, net of landlord contributions, has averaged approximately
$350,000 to $375,000, with additional average pre-opening costs per bakery-cafe
of approximately $25,000. We expect that most of our planned future bakery-cafes
will range in size from 1,500 to 2,200 square feet and that our total investment
and pre-opening costs per bakery-cafe will be similar to these historical
averages.
EXPANSION STRATEGY AND SITE SELECTION
- -------------------------------------
Marsee Baking intends to continue to expand its operations in both
existing and new geographic markets. We have already invested the necessary
capital in the commissaries that serve the greater Portland and Seattle
metropolitan areas. In addition to serving Marsee Baking's wholesale operations,
the Portland commissary is able to serve up to approximately 20 bakery-cafes and
the Seattle commissary is able to serve approximately 35 bakery-cafes. We plan
to open additional bakery-cafes in the greater Portland and Seattle metropolitan
areas to fully utilize the capacities of the central baking facilities. Our
expansion plans for 1999 include the opening of up to five new stores in the
greater Portland and Seattle metropolitan markets, if adequate financing can be
obtained. We expect that new bakery-cafes will be profitable within two months
of their opening based on their earnings before interest, taxes, depreciation
and amortization.
Our expansion strategy is to enter a new market with a significant
critical mass of stores and wholesale business sufficient to support our central
commissary for that market. This expansion strategy presumes that we will
quickly become the dominant operator in our niche in the markets we enter.
Management will evaluate the company's ability to establish a dominant presence
within a particular area to create entry barriers to other bakery-cafe
competitors.
We believe that the location of each bakery-cafe is critical to our
long-term success and devote significant effort to finding appropriate sites.
Our site selection strategy takes into account a variety of local factors,
including anticipated demand and consumer preferences, competition, availability
of suitable locations and personnel, local demographics and household income
levels, as well as specific site characteristics, such as visibility,
accessibility and traffic volume. The "look" of the bakery-cafe is designed to
be suitable for any locality, and to provide the perception of an urban
neighborhood cafe experience, wherever its actual location. Many of the
company's bakery-cafes also feature outdoor cafe seating. The general site
location criteria for a neighborhood bakery-cafe are as follows:
o 1,500-2,200 square feet,
o Adequate configuration for retail bakery and cafe use,
o Location on morning commute side of major street,
o Substantial visibility to vehicular and pedestrian traffic,
o Easy in and out access,
o Neighborhood setting in residential/commercial area,
o Strong weekday lunch business potential (adequate commercial
density),
o Strong weekend business potential,
o Adequate parking,
o 50,000-70,000 population within a three-mile radius with adequate
household incomes, and
o Adequate labor pool.
Our success in implementing our expansion plans will depend, in each case,
on our ability to effectively address a number of risks. There can be no
assurance that we will be able to open all of our new operations on a timely
basis, if at all, or, if opened, that those operations will be operated
profitably. See "Risk Factors."
25
<PAGE>
WHOLESALE OPERATIONS
- --------------------
In addition to our retail operations, we sell a complete line of our
products in baked form through wholesale distributors that service specialty
grocers, restaurants, and institutions. The wholesale distribution arrangement
requires the distributor to provide invoicing, collection, customer service and
marketing, in addition to daily deliveries and inventory management. By
contracting with independent distributors, we have been able to limit wholesale
inventory management, additional investment in secondary distribution equipment,
and a wholesale marketing and managerial structure to oversee the wholesale
accounts, allowing us to focus our managerial and financial resources on growing
our retail operations through the bakery-cafes. In addition, we wholesale bagels
in frozen, boxed form to major regional food distributors under the Marsee
Baking -registered trademark- name and logo, and other brand names.
In October 1997, we reached an agreement with a warehouse discount
chain for the introduction of portable Marsee Baking booths in its discount
warehouse stores which are near a Marsee Baking bakery-cafe. These "bread fairs"
last four to seven days and are rotated weekly among six store locations in
Portland and Seattle. The company hopes to increase brand awareness and to
promote the nearby bakery-cafe through the "bread fair" demonstrations. The
initial capital investment per traveling booth was approximately $6,000. Annual
sales from the bread fairs were $1,071,000 in 1998, which sales are included in
our wholesale revenue.
PRODUCTS
- --------
The key product groups are fresh baked goods, made-to-order sandwiches,
soups and cafe beverages. Marsee Baking's commissaries supply the bakery-cafes
with approximately 100 varieties of fresh baked goods from a selection of more
than 200 recipes. These products include the following:
DANISH AND PASTRIES:
MERENDINE BUN o Marsee Baking's signature pastry, a flaky butter
bun infused with high quality Mexican vanilla
APPLE CANOE AND o Flaky butter puff pastries, filled with pastry
CHERRY FAZOLETTIS cream and fresh Granny Smith apples or tart sour
cherries
CROISSANTS o Traditional slow rising, Parisian-style butter
croissants in plain, almond- or chocolate-filled
flavors
DANISH o Breakfast buns and daytime treats based on
delicate danish dough, including orange-glazed
blackberry buns, pecan sticky buns and classic
cinnamon twists
ARTISAN-CRAFTED BREADS:
CALABRESE o A moist porous Italian white bread with a crunchy
crust, made with slow rising starters
OLIVE PUGLIESE o An Italian bread infused with Kalamata olives and
olive oil
FOCACCIA o An Italian "pizza bread" infused with extra
virgin olive oil, and topped with roasted red
peppers, roma tomatoes, artichoke hearts and
other toppings
WHOLE WHEAT WALNUT o A sourdough whole wheat bread enhanced with
toasted walnuts and a hint of malt
STRUAN o A Scottish multigrain bread enhanced with
buttermilk, brown rice, wheat berries, and
polenta
SAVORY ONION RYE o A slow fermented rye bread with caramelized
BREAD onions and exotic Chernuska seeds
BAGELS: o Varieties of bagels include traditional flavors
of plain, poppy seed, sesame seed and cinnamon
raisin, as well as more exotic flavors of orange
cranberry, pesto, jalepeno, multigrain, chocolate
chip and corn-rye
26
<PAGE>
CAKES AND DESSERTS:
MARJOLINE CAKES o A French classic made of four layers of
hazelnut-almond meringue cake separated with one
layer of velvety chocolate ganache, a layer of
praline whipped cream, and a final layer of
vanilla whipped cream
CARROT CAKES o An old-fashioned American spice cake full of
freshly grated carrots, fresh pineapple,
toasted walnuts, coconut and currants, iced with
a smooth cream cheese icing and decorated with
handmade miniature marzipan carrots
GATEAU OPERA o Four layers of French almond biscuit cake soaked
in espresso syrup, layered with coffee
buttercream, and chocolate ganache, then covered
with a thin layer of chocolate glaze, and
decorated with chocolate espresso beans
DOLCE FRAGOLE o An Italian strawberry cake with layers of vanilla
genoise filled with berry cream and fresh cut
strawberries, and decorated with toasted almonds
and glazed strawberries
COOKIES: o Classic chocolate chip, Treasure Islands, black
and whites, chocolate-dipped coconut macaroons,
lemon bars and ginger snaps
Daily assortments also include seasonal scones, muffins, seasonal fresh fruit
tarts, petite eclairs and cream puffs. Marsee Baking also has a line of reduced
fat and all-natural, sugar-free products for health-conscious customers.
We also offer light lunch and dinner items, including deli sandwiches,
focaccia, Italian-style pannini sandwiches, green salads, pasta salads, and
homemade-style soups. Generally, the deli sandwiches are prepared by hand at the
bakery-cafe based on the customer's selection, using fresh deli meats and our
bread and bagel products. In certain locations, due to space and time
constraints, the sandwiches are pre-made. The soups and salads are made fresh
from scratch by a gourmet food company and delivered directly to store locations
where they are prepared for sale the same day.
Our bakery-cafes offer most typical espresso drinks, including lattes,
mochas, cappuccinos, and americanos. In addition, Marsee Baking offers fruit
smoothies and a selection of premium teas, premium juices and other soft drinks.
We regularly review and revise our product offerings to respond to changing
customer preferences, seasonal opportunities, and to maintain customer interest
among our target customer groups.
PRODUCTION AND PRODUCTION FACILITIES
- ------------------------------------
The central commissary is designed to provide efficiencies in
production and distribution, to ensure product quality and consistency, and to
be expandable as the demand for our products grows. The central facilities
permit the company to employ modern processes, which enhance quality and
consistency, while maintaining the Marsee Baking commitment to artisan breads
and other specialty baked goods. Our commissaries operate seven days a week and
produce 80 to 120 varieties of baked goods daily based on a recipe book
containing more than 200 regional European and American recipes. Recipes are
standardized to ensure consistency.
Marsee Baking seeks to obtain ingredients of high quality at
competitive prices from reliable sources. To ensure freshness and quality,
maintain low inventory levels and facilitate the preparation of individual menu
items, We purchase most of our ingredients in an unprocessed state. To maintain
the high quality of our bakery products, we also maintain strict criteria for
our recipe ingredients, which often requires importing certain specialty
ingredients from distant places, including foreign sources. For example, we
import seedless raspberry preserves from France, gourmet chocolate from Belgium
and France, natural fruit compounds FROM GERMANY, vanilla from Mexico. Our
purchasing specialist seeks to obtain the lowest possible prices available to us
without compromising on quality by negotiating bulk purchasing contracts for a
number of the ingredients we use.
Each stage of the production process is managed by a separate team to
increase productivity and protect against the conversion of our proprietary
recipes. These stages include weighing, mixing, shaping and baking. The
production staff consists of a production manager and team leaders. The
production manager carries responsibility for day-to-day results of production.
27
<PAGE>
Each production manager and team leader is required to have significant bakery
experience in his or her respective areas of expertise, in addition to other
general baking and management skills.
Most of the baked goods sold at the bakery-cafes are baked at the
commissary. Some items, such as bagels and cookies, are baked on the store
premises from dough supplied by the commissary. These items are baked in the
bakery-cafes to foster the "fresh-baked" concept and create the atmosphere and
aroma of an authentic neighborhood bakery. We are currently supplying the
Seattle-area stores from the Portland commissary for products other than bagels.
After opening additional stores in the Seattle area, we plan to operate the
Seattle commissary at full capacity. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
We maintain a small fleet of vehicles for delivery of our products to
our neighborhood bakery-cafes. All products are packed and delivered before
store openings every day to all bakery-cafe locations to provide fresh-baked
products for sale and consumption that day.
MANAGEMENT INFORMATION SYSTEMS
- ------------------------------
Each bakery-cafe has computerized cash registers to collect
point-of-sale transaction data. Our systems include a MICROS point of sale
system and a MAS 90 financial and inventory control system. Our computer-based
cash register system is also designed to assist in labor scheduling and
production management, to provide corporate and retail operations management
quick access to retail data and to reduce store managers' administrative time.
We use this data to generate daily consolidated reports regarding sales and
other trends, as well as detailed profit and loss statements for each
bakery-cafe. Additionally, we monitor the average check, customer count, product
mix, unused inventory and waste. We continue to assess the Year 2000 readiness
of our computer systems. See "Management's Discussion and Analyses of Financial
Condition and Results of Operations--Year 2000 Compliance."
MARKETING
- ---------
To date, we have not attempted to create brand awareness through
extensive advertising; rather, we rely on location, word of mouth, customer
satisfaction and promotional sampling programs to encourage trial by new
customers and to make existing customers aware of new menu offerings. We have
employed an outside marketing consultant to develop a brand image for Marsee
Baking by creating a distinctive logo, a characteristic "look" for our
bakery-cafes and a uniform product packaging and labeling system. We have
produced from time-to-time a colorful "HOLIDAY ORDER GUIDE" for special orders
for Thanksgiving, Christmas and Hanukah celebrations, and for gift baskets and
specialty cakes during the holiday season. We also attempt to increase our
per-location sales through menu development, promotions and by sponsorship of
local community, charitable and business organizations.
COMPETITION
- -----------
Our bakery-cafes compete with other local bakeries, grocery stores, and
bread-only stores that supply high quality baked goods, and with other
restaurants that seek to use quality baked goods to define breakfast, lunch and
late-afternoon menus. While we believe that our products and bakery-cafes are
distinctive in design and operating concept, other companies may develop
restaurants and bakeries that operate with similar concepts. There are, in
addition, many well-established regional and national competitors with
substantially greater financial, marketing, personnel and other resources than
we do, which may provide additional competition for us as we attempt to expand
into other geographic locations. Marsee Baking also competes for leased space in
desirable locations.
Despite the presence of these competitors, we are not aware of any
Pacific Northwest competitor that is similar to Marsee Baking in terms of the
overall concept. We compete primarily with respect to food quality, price-value
relationships, ambiance, service and location. We believe that we compete on the
basis of value-added experience rather than on price, and that we distinguish
28
<PAGE>
ourselves from our other competitors in terms of the quality and variety of
baked goods we provide. Management believes that the company's broad and complex
product line, the high "stand alone" quality of our products, our central
production facilities, and our ability to address multiple day parts create
barriers to entry. However, there can be no assurance that the proliferation of
non-direct competitors will not have a negative effect on our comparable-store
sales growth, product sales mix, or profitability. Competition may have a
material adverse effect on us.
The specialty restaurant business is often affected by changes in
consumer tastes, national, regional or local economic conditions, demographic
trends, consumer confidence in the economy, discretionary spending priorities,
the weather, tourist travel, traffic patterns, and the type, number and location
of competing restaurants. Changes in these factors could also have a material
adverse effect on our business, financial condition and results of operations.
See "Risk Factors."
GOVERNMENT REGULATION
- ---------------------
Each bakery-cafe is subject to licensing and regulation by state and
local health, sanitation, safety, fire, and other departments. Additionally, the
specialty restaurant industry in general is subject to extensive federal, state
and local government regulations relating to the development and operation of
food service outlets, including laws and regulations relating to building and
seating requirements, the preparation and sale of food, cleanliness, safety in
the work place and accommodations for the disabled. Difficulties in obtaining or
failure to obtain the required licenses or approvals could adversely affect
currently operating bakery-cafes and could delay or prevent the development of a
new bakery-cafe in a particular area or location. Our Portland and Seattle
commissaries are subject to various federal, state and local environmental
regulations, and the operation of our trucks is subject to Department of
Transportation regulations. To date, compliance with applicable environmental
regulations and Department of Transportation regulations has not had any
material effect on our capital expenditures, earnings or competitive position.
We are also subject to state and federal labor laws that govern our
relationship with our employees, such as minimum wage requirements, overtime and
working conditions, citizenship requirements and prohibitions against
discrimination. Significant numbers of our food service and commissary personnel
are paid at rates governed by the state minimum wage laws. Accordingly, further
increases in the minimum wage will increase our labor costs.
The development and construction of additional commissaries and
bakery-cafes will be subject to compliance with applicable zoning, land use and
environmental regulations. There can be no assurance that we will be able to
obtain necessary licenses or other approvals on a cost effective and timely
basis to construct and develop commissaries and bakeries in the future.
TRADEMARKS
- ----------
The "Marsee Baking" name is of material importance to us, and we have
registered the name and our logo as a trademark with the United States Patent
and Trademark Office. We also own the "BagelMax" trademark. We regard our
trademarks and related rights as having substantial value and as being an
important factor in the marketing of Marsee Baking bakery-cafes and branded
items.
EMPLOYEES
- ---------
As at MAY 31, 1999 we had 333 employees, of whom 17 were employed in
general and administrative functions principally at or from our executive
offices in Portland, Oregon; approximately 82 of whom were employed in
PRODUCTION AND DISTRIBUTION; and approximately 234 of whom were employed in the
retail and wholesale operations. A significant number of employees at the retail
outlets work part-time. The full-time equivalent number of employees working in
THE RETAIL AND WHOLESALE operations is 143. None of our employees is represented
by a labor union. We consider our employee relations to be good.
29
<PAGE>
PROPERTIES
- ----------
All bakery-cafes are located in leased premises with typical lease
terms ranging from five to seven years, with one or two five-year renewal
options. Current leases in force expire between December 31, 1999 and December
31, 2007. The leases typically have a minimum base occupancy charge, as well as
charges for a proportionate share of building operating expenses and real estate
taxes. We do not anticipate any difficulties renewing existing leases as they
expire. However, there can be no assurance that we will be able to renew any
leases on favorable terms, if at all. Our inability to renew a particular lease
or closure of a facility subject to a long-term non-cancelable lease could have
a material adverse effect on our business, financial condition and results of
operations.
In 1995, we established our Portland commissary and headquarters in
Northwest Portland. The executive offices occupy approximately 2,000 square feet
and the commissary occupies approximately 8,800 square feet, including 1,600 of
additional office space. The headquarters lease expires in 2000 and the
commissary lease expires, assuming exercise of renewal options, in 2005. We
assumed a lease for 13,000 square feet for the Seattle commissary. The lease
term expires in January 2002.
The following table provides certain information about our bakery-cafe
locations as of MAY 31, 1999.
<TABLE>
<CAPTION>
SIZE
LOCATION CITY MONTH/YEAR OPENED (SQ. FT.)
----------------------------------------------------------------------------------------------------
Oregon
------
<S> <C> <C> <C>
NW 23rd Portland January 1993 2,800
Pioneer Tower Portland January 1994 360
SE Bybee Street Portland November 1994 1,479
Portland International Airport Portland October 1995 1,300
A Street Lake Oswego July 1997 2,188
SW Alder Street Portland October 1997 2,224
SW Pine Street Portland January 1998 1,543
NE Broadway Portland January 1998 3,600
Tanasbourne Town Center Hillsboro March 1998 2,000
City Hall Portland April 1998 633
Sherwood Market Center Sherwood May 1998* 2,361
Liberty Plaza Salem July 1998* 2,146
Washington
----------
Main Street Market Place Bellevue April 1998* 1,600
NE 10th Bellevue May 1998* 2,482
Crossroads Shopping Center Bellevue August 1998* 2,000
Factoria Plaza Bellevue August 1998* 2,461
Commons at Issaquah Issaquah September 1998* 2,200
Five Corners Shopping Center Burien September 1998* 2,600
-------
Total 35,977
</TABLE>
------------------------------------------------------
*Date converted to Marsee Baking format.
We consider our physical properties to be in good operating condition
and suitable for the purposes for which they are used.
30
<PAGE>
MANAGEMENT
The following table sets forth certain information with respect to our
executive officers and directors as of the date of this prospectus.
<TABLE>
<CAPTION>
DIRECTORS AND EXECUTIVE OFFICERS
- --------------------------------
<S> <C> <C>
Name Age Position
---- --- --------
Raymond W. Lindstrom 56 Chairman of the Board, President and Chief Executive Officer
Stephen A. Aanderud 50 Chief Financial Officer and Assistant Secretary
Howard J. Wasserteil 49 Executive Vice President, Secretary, Director and Founder
Joann E. Vazquez 37 Vice President of Product Development and Founder
Karlin M. Conklin 41 Vice President of Bakery Operations
Robert E. Schneider, PhD 51 Director and Founder
Gerald W. Frank 75 Director
Joseph F. Tanous 50 Director
Raymond Zimmerman 66 Director
</TABLE>
All directors hold office until the next annual meeting of shareholders
or until their successors have been duly elected and qualified. With the
exception of Mr. Lindstrom, Mr. Aanderud, Mr. Wasserteil and Ms. Vazquez, who
have employment agreements with the company, our executive officers are
appointed and serve at the discretion of the Board of Directors. There are no
family relationships among any of our directors, executive officers, or key
personnel.
RAYMOND W. LINDSTROM has served as Marsee Baking's Chairman of the
Board and Chief Executive Officer since November 1998 and as President since
January 1999. From January 1997 to present, Mr. Lindstrom has served as a member
of our Board of Directors. He served as President of Coachmaster International
from NOVEMBER 1996 to November 1998. From January 1994 to June 1996, Mr.
Lindstrom served as President and Chief Executive Officer of Restaurants
Unlimited, Inc., which operated the Cinnabon concept.
STEPHEN A. AANDERUD has served as Chief Financial Officer and Assistant
Secretary of the company since April 1, 1999 and previously served as a
financial consultant to the company since January 1999. From 1994 to 1998, he
served as President, Chief Executive Officer and Director of ThrustMaster, Inc.,
a computer toy and accessories manufacturing company. From 1993 to 1994, he also
served as Vice President, Chief Financial Officer and Secretary of ThrustMaster.
HOWARD J. WASSERTEIL is a co-founder of the company and has served as
our Secretary and a director since our founding in June 1992. He has served as
Executive Vice President since February 1997. He has also served as President of
the company from June 1995 to February 1997 and as Vice President from June 1992
to June 1995
31
<PAGE>
JOANN E. VAZQUEZ is a co-founder of the company and has served as our
Vice President of Product Development since January 1995. Before that, she
served as our lead baker and production manager from January 1993 to January
1995. Ms. Vazquez graduated from San Francisco City College of Hotel and
Restaurant Management and continued her education as a bakery apprentice in
Florence, Italy, at the II Fornaio Bakery. She helped open the first bakeries
for that company in the United States, and was a contributing author to its
cookbook, THE II FORNAIO BAKING BOOK. She served as head pastry chef for several
hotels and specialty bakeries in the San Francisco area before joining Marsee
Baking.
KARLIN M. CONKLIN has served as our Vice President of Bakery Operations
since September 1997. Before joining Marsee Baking, Ms. Conklin served as
business improvement manager IN THE PORTLAND DIVISION OF Stream/R.R. Donnelley,
overseeing operations and customer service from February 1996 to September 1997.
During 1995, she served as general manager of Nor' Wester Brewing Company. From
1992 to 1994, Ms. Conklin served as director of the University of Oregon
Lundquist Center for Entrepreneurship.
ROBERT E. SCHNEIDER, PH.D. is a co-founder of the company and has
served as a director since our founding in June 1992. From February 1997 to
December 1998, he was our Executive Vice President of Quality Assurance, Product
Development and Retail Merchandise and, from June 1992 to December 1998, he
served as our Chairman of the Board. From June 1995 to February 1997, Dr.
Schneider served as our Chief Executive Officer. From June 1992 to June 1995, he
served as our President. Dr. Schneider is a practicing psychologist.
GERALD W. FRANK has served on the company's Board of Directors since
January 1997. He currently serves as chairman of the Oregon Tourism Commission,
a post he has held since 1996, and as a director of The Coast Airways, since
1997. Mr. Frank is also the president of Gerry's Frankly Speaking, Inc., and a
co-owner of Gerry Frank's Konditorei restaurant since 1982. Mr. Frank has
previously served on the board of directors of U.S. Bancorp from 1960 to 1994
and on the board of directors of Standard Insurance Company from 1962 to 1995.
JOSEPH F. TANOUS has been a member of our Board of Directors since
February 1999. He has served as chairman of the board of Templex, Inc., a
telecommunications equipment company, since August 1997. He is also a director
of Infinite Pictures, Inc., a position he has served since September 1997, and a
director of Cascade Oncogenics, a position he has held since June 1996. Mr.
Tanous is also a partner in Bison Ventures, a venture capital fund, which he
co-founded in 1993.
RAYMOND ZIMMERMAN has served on our Board of Directors since May 1998.
Mr. Zimmerman served as Chairman of Service Merchandise Co., Inc., a national
merchandising business, from 1981 to April 1998, and from January 1999 to date.
He was also its Chief Executive Officer from 1984 until April 1997. Mr.
Zimmerman is also currently a director of The Limited, Inc.
BOARD COMMITTEES
- ----------------
Our Board of Directors has established an Audit Committee and a
Compensation Committee. The Audit Committee reviews the internal accounting
procedures of the company and consults with and reviews the services provided by
our independent accountants. The Compensation Committee reviews and recommends
to the Board of Directors the compensation and benefits of all officers of the
company, and will establish and review general policies relating to compensation
and benefits of our employees. The members of the Audit Committee are Mr. Tanous
and Dr. Schneider. The members of the Compensation Committee are Messrs. Tanous,
Frank and Zimmerman.
DIRECTOR COMPENSATION
- ---------------------
We reimburse each member of our Board of Directors for out-of-pocket
expenses incurred in connection with attending board meetings. No member of our
Board of Directors currently receives any additional cash compensation.
32
<PAGE>
In consideration for their services as directors, in March 1998, we
granted to each of Messrs. Frank and Lindstrom options to purchase 20,000 shares
of common stock and to each of Dr. Schneider and Messrs. Tanous and Wasserteil
options to purchase 10,000 shares of common stock. These options have an
exercise price of $1.00 per share. The shares underlying these options vest over
a four-year period commencing on the date the director joined the board. In
December 1998, contingent upon their continued service as directors (or the
commencement of service in the case of Mr. Tanous), we granted to Messrs.
Tanous, Wasserteil and Zimmerman, and Dr. Schneider non-qualified stock options
to purchase the following number of shares of common stock: Tanous (30,000
shares), Wasserteil, (10,000 shares), Zimmerman, (10,000 shares), and Dr.
Schneider (2,500 shares). These options are fully vested upon grant and have an
exercise price of $1.00 per share. Mr. Lindstrom received additional stock
options under the 1997 and 1998 Plans in connection with his employment as
President and Chief Executive Officer. See "--Executive Compensation."
LIMITATIONS ON LIABILITY AND INDEMNIFICATION MATTERS
- ----------------------------------------------------
We have adopted provisions in our articles of incorporation and bylaws
that will limit the liability of our directors to the fullest extent permitted
by the Oregon Business Corporation Act. Pursuant to such provisions, no director
will be liable to the company or its shareholders for monetary damages for
breaches of certain fiduciary duties as a director of the company. The
limitation of liability will not affect a director's liability for a breach of
the director's duty of loyalty to the company or its shareholders, an act or
omission not in good faith or that involves intentional misconduct or a knowing
violation of the law, any unlawful distributions, or a transaction from which
the director receives an improper personal benefit. The limitation of liability
also will not affect the availability of equitable remedies such as injunctive
relief or rescission.
Our articles of incorporation will permit and our bylaws will require
us to indemnify officers and directors to the fullest extent permitted by law.
We have also entered into agreements to indemnify our directors and executive
officers, in addition to indemnification provided for in our bylaws. These
agreements, among other things, indemnify our directors and executive officers
for certain expenses, judgments, fines and settlement amounts incurred by them
in any action or proceeding, including any action by or in the right of the
company, arising out of the person's services as a director or executive officer
of the company or any other company or enterprise to which the person provides
services at our request. We believe that these provisions and agreements are
necessary to attract and retain qualified directors and executive officers.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to our directors, officers and controlling persons based on
the foregoing provisions, we have been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
and is, therefore, unenforceable.
33
<PAGE>
EXECUTIVE COMPENSATION
- ----------------------
The following table sets forth information concerning the compensation we
paid during the year ended December 31, 1998 to Mr. Lindstrom, our current
Chairman, President and Chief Executive Officer, and Mr. Barnett, our former
President and Chief Executive Officer (collectively, the "Named Executive
Officers "):
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION
------------------- ----------------------
AWARDS
------
Securities Underlying All other
Salary Options/SARs compensation
Name and Principal Position Year ($) (#) ($)
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Raymond W. Lindstrom,
Chairman, President and
Chief Executive Officer 1998 $ 18,750(1) 540,000 $450(2)
Brad K. Barnett,
former President and
Chief Executive Officer 1998 122,243 161,666(3) --
</TABLE>
-------------------------
1 Reflects $150,000 annualized salary of Mr. Lindstrom, whose
employment with the company began on November 15, 1998.
2 Reflects a monthly car allowance of $300 for 1 1/2 months of service.
3 Subsequent to year end, the company and Mr. Barnett agreed to replace
100,000 of these options with new options to purchase 60,000 shares of
common stock at $1.00 per share as part of Mr. Barnett's separation
from the company.
The following table sets forth information concerning the individual
grants of stock options made during the year ended December 31, 1998 to the
Named Executive Officers:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES PERCENT OF TOTAL OPTIONS
UNDERLYING OPTIONS GRANTED TO EMPLOYEES IN EXERCISE EXPIRATION
NAME GRANTED (#) FISCAL YEAR ($/SH) DATE
---- ----------- ----------- ------ ----
<S> <C> <C> <C> <C>
Raymond W. Lindstrom 140,000 12% $1.00 12/17/08
200,000 17 7.00 12/17/08
200,000 17 11.00 12/17/08
</TABLE>
EMPLOYEE BENEFIT PLANS
- ----------------------
1993 PLAN. In 1993, we adopted a Non-Qualified Stock Option Plan to
grant non-qualified options to our key employees, directors, officers and
consultants to acquire up to 100,000 shares of our common stock. The 1993 Plan
was amended in 1996 to increase the number of shares available from 100,000 to
150,000 shares of common stock. Options to purchase 96,908 shares of common
stock were granted under the 1993 Plan before its termination on February 4,
1997. The options outstanding under the 1993 Plan at the time of its termination
remain outstanding and exercisable by the optionees until the expiration of the
specific option term. The Board cannot make new grants under the 1993 Plan.
34
<PAGE>
1997 PLAN. On February 4, 1997, our Board of Directors adopted a more
comprehensive plan called the 1997 Stock Option/Issuance Plan. The Board adopted
the 1997 Plan to allow the company to grant incentive stock options as well as
non-qualified stock options. ISOs are entitled to provide a more favorable
treatment under federal and state tax laws. As originally adopted, the 1997 Plan
reserved 400,000 shares of common stock for issuance under it, subject to
shareholder approval. The Board amended the Plan, again subject to shareholder
approval, on November 5, 1997 (the "Plan Amendment") to increase the number of
shares available under the 1997 Plan from 400,000 to 700,000 shares. Our
shareholders approved the 1997 Plan and the Plan Amendment at the annual
shareholders meeting held on January 22, 1998.
The 1997 Plan provides for the issuance of stock options or shares to
eligible participants. Eligible participants include officers, directors, key
employees of or consultants to the company. The 1997 Plan is administered by the
Board of Directors, or in its discretion, by a committee of not less than two
directors. The board established the terms and conditions of options granted
under the 1997 Plan, including the number of shares subject to the options, the
exercise price of the options, and the time at which these options become
exercisable. Options granted under the 1997 Plan are not transferable by the
optionee other than by will or the laws of descent and distribution, and are
exercisable during the lifetime of the optionee only by the optionee. The terms
of options issued under the 1997 Plan may not exceed 10 years. As of the date of
this prospectus, options to purchase up to 479,187 shares of common stock have
been granted under the 1997 Plan at an exercise price of $1.00 per share. All of
the options are immediately exercisable, but the option shares, once acquired,
are subject to repurchase by the company at the exercise price paid per share.
Our repurchase right lapses with respect to a portion of the option shares
according to the optionee's vesting schedule. Most of these options are subject
to three-, four- or five-year vesting provisions.
1998 PLAN. In December 1998, we adopted the 1998 Nonqualified Stock
Option Plan. The purpose of the 1998 Plan is to promote the interests of the
company by providing eligible employees, directors, officers, consultants,
agents, advisors, and independent contractors of the company with the
opportunity to participate in its growth and success, through ownership of
equity interests in the company. The Board of Directors has reserved a total of
one million shares of common stock under the 1998 Plan. The 1998 Plan is
administered by the Board of Directors, or in its discretion, by a committee of
not less than two directors. The Board established the terms and conditions of
options granted under the 1998 Plan, including the number of shares subject to
the options, the exercise price of the options, and the time at which the
options become exercisable. Options granted under the 1998 Plan are not
transferable by the optionee other than by will or the laws of descent and
distribution, and are exercisable during the lifetime of the optionee only by
the optionee. The terms of options issued under the 1998 Plan may not exceed 10
years. As of the date of this prospectus, options to purchase up to 765,750
shares of the company's common stock have been granted under the 1998 Plan at
exercise prices of $1.00, $3.00, $6.00, $7.00 and $11.00 per share. All of the
options are immediately exercisable and some are subject to a repurchase right
by the company that lapses with respect to a portion of the option shares
according to the optionee's vesting schedule. Most of these options are subject
to three-, four- or five-year vesting provisions.
CORPORATE TRANSACTIONS. In the event of certain corporate transactions,
such as a merger or sale of the company, each option outstanding under the 1993,
1997 and 1998 Plans will terminate upon the consummation of the corporate
transaction and cease to be exercisable, unless assumed by the successor
corporation or parent of the company. In connection with any corporate
transaction, the Board of Directors may, at its discretion, (1) accelerate each
or any outstanding option under the 1993, 1997 and 1998 Plans so that each
option shall become fully exercisable, (2) arrange for each or any outstanding
option to be assumed by the successor corporation or parent of the company, (3)
arrange for the option to be replaced by a comparable cash incentive program of
the successor corporation or (4) take none of the actions described in clauses
(1), (2) or (3) above and allow the option to terminate.
401(K) PLAN. Marsee Baking maintains a 401(k) tax-qualified employee
savings and retirement plan covering all employees who satisfy certain
eligibility requirements relating to minimum age and length of service. Based on
the terms of the 401(k) Plan, eligible employees may elect to reduce their
current compensation by up to the lesser of 15% of their annual compensation or
the statutorily prescribed annual limit and have the amount of the reduction
contributed to the 401(k) Plan. The 401(k) Plan is intended to qualify under
Section 401 of the Internal Revenue Code so that contributions to the 401(k)
Plan, and income earned on the 401(k) Plan contributions, are not taxable until
35
<PAGE>
withdrawn. The 401(k) Plan is available to our executive officers on terms not
more favorable than those offered to other employees.
EMPLOYMENT AGREEMENTS
- ---------------------
We have entered into an employment agreement, effective as of
January 1, 1999, with Raymond W. Lindstrom for a two-year term. The agreement
provides for the continued employment of Mr. Lindstrom as our President and
Chief Executive Officer at a base salary of $150,000 per year. Mr. Lindstrom is
also provided with an automobile expense allowance of $300 per month. Up to 50%
of his base salary may be deferred at Mr. Lindstrom's sole discretion until the
earlier of the company obtaining equity financing of $1,000,000 or more,
including this offering, or October 1, 1999. The base salary will increase to
$200,000 per year on the earlier of (1) two consecutive months during which the
company achieves earnings before interest, taxes, depreciation and amortization
of 10% or more of gross revenues, or (2) October 1, 1999.
As further compensation, the agreement provides Mr. Lindstrom with the
following stock options:
o An incentive stock option to purchase up to 140,000 shares of common
stock at an exercise price equal to the fair market value of the
common stock at the time of grant ("Grant I");
o A nonqualified Stock option to purchase up to 200,000 shares of
common stock at an exercise price of $7.00 per share ("Grant II"),
o A nonqualified stock option to purchase up to 200,000 shares of
common stock at an exercise price of $11.00 per share ("Grant III");
and
o A nonqualified stock option to purchase up to 100,000 shares of
common stock upon the company achieving EBITDA of 10% of gross
revenues or more for three consecutive months during 1999 or 2000,
at an exercise price equal to the fair market value at the time the
option is earned ("Grant IV").
Grants I, II and III will vest over a 48-month period. Grant IV will
vest fully as of the date it is earned. Mr. Lindstrom is also eligible for a
cash incentive bonus equal to 40% of his base salary upon meeting performance
goals to be determined by the Board of Directors. If we terminate Mr.
Lindstrom's employment without cause, the option shares underlying Grants I, II
and III will become vested through the end of the two-year term of his
employment agreement.
We have also entered into an employment agreement with Howard
Wasserteil for a three-year term ending July 12, 1999. Under the agreement, Mr.
Wasserteil will continue his full-time employment as our Executive Vice
President at an annual salary of $86,400. In addition to cash compensation, Mr.
Wasserteil received a stock option to purchase up to 10,000 shares of the
company's common stock on each of December 31, 1996 and December 31, 1997 at an
exercise price of $1.00 per share.
Other material terms of the Wasserteil employment agreement include:
o Our agreement to consider paying cash bonuses, granting additional
stock options and increasing the salary payable to Mr. Wasserteil if
certain financial performance goals (to be agreed upon) are met;
o Payment of six months severance to Mr. Wasserteil if he is
terminated by us without "cause" (as defined in the agreement) after
the three-year term;
o In the event of Mr. Wasserteil's death or permanent disability or
upon his termination without cause, the payment of his salary
through the end of the three-year term and an additional six months
of severance pay;
o Our right to terminate the employment agreement if Mr. Wasserteil is
terminated for "cause" and to pay only his accrued salary and
benefits through the termination date; and
o Our agreement to carry life and disability insurance policies on Mr.
Wasserteil in sufficient amounts to meet the obligations described
above.
We are a party to an Amended Employment and Stock Grant Agreement with
Joann Vazquez, Vice President of Product Development, dated April 9, 1999. In
the agreement, Ms. Vazquez has granted to the company an irrevocable, perpetual
36
<PAGE>
royalty-free license to use her proprietary recipes which she owned prior to her
employment with us. All recipes, processes and techniques developed by Ms.
Vazquez during her employment will become the property of the company. The
agreement prohibits Ms. Vazquez from engaging in the following conduct for a
period of two years following her termination if we terminate her employment for
"cause" (as defined in the agreement):
o Competing with the company, directly or indirectly;
o Making disparaging statements about the company or its products; and
o Soliciting any employee of the company for employment elsewhere.
In addition, Ms. Vazquez is prohibited from engaging in the following
conduct, regardless of time restrictions or whether the termination is with or
without cause:
o Disclosing any of our proprietary and confidential information (as
defined in the agreement); and
o Using our proprietary and confidential information.
Effective December 31, 1998, Mr. Barnett resigned from his position as
our President and Chief Executive Officer. We and Mr. Barnett entered into a
Separation Agreement and Release, dated March 12, 1999, in which, in exchange
for a release of all claims by Mr. Barnett, we agreed to pay his semi-monthly
salary of $5,208 for a period of six months or until he begins employment
elsewhere, whichever is earlier. The Separation Agreement also terminates his
existing stock options to purchase 100,000 shares of common stock and replaces
them with fully vested stock options to purchase 60,000 shares of common stock
under the 1998 Plan at an exercise price of $1.00 per share.
37
<PAGE>
CERTAIN TRANSACTIONS
SHAREHOLDER LOANS
- -----------------
As of December 31, 1998, we owed certain directors, officers and their
family members a total of approximately $229,000 for sums advanced to the
company over the past several years. Most of the loans were made to finance new
stores and to provide for general corporate purposes. The following table sets
forth the names of the lenders who have made loans to the company in excess of
$60,000 in the aggregate, the balance owing as of December 31, 1998, the
interest rates and their maturity dates.
BALANCE AS OF MATURITY
LENDER DECEMBER 31, 1998 INTEREST DATE
------ ------------------ --------- ----
Howard J. Wasserteil 92,601 20.42% June 30, 1999
36,682 * May 31, 1999
Robert E. Schneider 34,957 17.50 June 30, 1999
38,947 * Demand
------------------------------------
*These promissory notes, which secure the payment of certain credit card
debts incurred by Mr. Wasserteil and Dr. Schneider on behalf of the
company, have varying interest rates based on the agreements with the
credit card companies. We are required to make monthly payments of
principal and interest directly to these credit card companies.
We believe that all of the transactions described above were made on
terms no less favorable to the company than could have been obtained from
unaffiliated third parties. Any future transactions between the company and its
officers, directors, and principal shareholders and their affiliates will be
approved by a majority of the Board of Directors, including a majority of the
independent and disinterested directors, and will be on terms no less favorable
to the company than could be obtained from unaffiliated third parties.
WARRANT GRANTS FOR BANK LINE AND LETTER OF CREDIT GUARANTEES
- ------------------------------------------------------------
In October 1997, we arranged for a working capital line of credit of
$250,000 with a domestic bank. To secure the line of credit, John Durbetaki, a
former director, and Joseph Tanous, a current director, guaranteed the line of
credit. As consideration for providing the guarantees, we granted to each of
Messrs. Durbetaki and Tanous a warrant to purchase up to 5,000 shares of common
stock at an exercise price of $1.00 per share. The warrants expire on
November 4, 2004. In addition, we entered into a Contribution and Indemnity
Agreement with the guarantors that provides for the sharing of liability between
guarantors if the bank elects to enforce the guarantees. Further, we have agreed
based on the agreement (1) to indemnify the guarantors against any losses,
liability and expenses resulting from the collection on the guarantees by the
bank, and (2) to use our best efforts to remove the guarantees by November 1,
2000. On April 29, 1999, Mr. Tanous agreed to personally guarantee an increase
in the amount of our working capital line of credit up to $750,000, for which he
received 150,000 shares of common stock.
In May 1998, we obtained equipment lease financing secured by a letter
of credit. The letter of credit is, in turn, secured by the personal guarantees
of Messrs. Durbetaki and Tanous and by $108,000 in restricted cash provided by a
shareholder. In consideration for the cash, the shareholder received 3,323
shares of Series C Preferred Stock and, in April 1998, he received a warrant to
purchase 5,000 shares of common stock at an exercise price of $3.00 per share.
As consideration for the personal guarantees, in April 1999, Messrs. Durbetaki
and Tanous each received a warrant to purchase 5,000 shares of common stock at
an exercise price of $3.00 per share. The warrants expire on November 1, 2004.
WARRANT GRANTS FOR LEASE GUARANTEES
- -----------------------------------
Mr. Howard J. Wasserteil and Dr. Robert E. Schneider, and their
respective spouses, have personally guaranteed certain real property leases and
corporate loans to the company. In consideration for these personal guarantees,
Mr. Wasserteil and Dr. Schneider received warrants to purchase 48,235 and 44,230
shares of the company's common stock, respectively, at an exercise price of
$1.00 per share. The warrants expire on November 1, 2004.
38
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth, as of MAY 31, 1999, the number and
percentage of outstanding shares of common stock beneficially owned by all
persons that own beneficially more than 5% of the company's common stock, by
each director and executive officer of the company individually and by all
directors and executive officers of the company as a group, and as adjusted to
reflect the sale of all of the shares of common stock sold in this offering
(assuming that none of the shares are purchased by these persons).
<TABLE>
<CAPTION>
BEFORE OFFERING AFTER OFFERING
--------------- --------------
NAME AND ADDRESS OF BENEFICIAL SHARES BENEFICIALLY % OF COMMON SHARES BENEFICIALLY % OF COMMON
OWNER OR IDENTITY OF GROUP(1) OWNED(2) STOCK OUTSTANDING(3) OWNED(2) STOCK OUTSTANDING(4)
- --------------------------- -------- -------------------- -------- --------------------
<S> <C> <C> <C> <C>
Raymond W. Lindstrom(5) 461,666 23.3% 461,666 7.9%
Howard J. Wasserteil(6) 426,401 25.9 432,737 7.4
Robert E. Schneider, Ph.D.(7) 418,396 25.8 418,396 7.2
Joseph F. Tanous(8) 285,000 17.4 388,743 6.9
Raymond Zimmerman(9) 10,000 * 348,981 6.5
Gerald W. Frank(10) 24,333 1.6 27,469 *
Gary S. Holmes(11) 10,000 * 348,932 6.5
Roitenberg Investments, Inc.(12) 10,000 * 349,004 6.5
All executive officers and 1,901,368 75.3% 2,353,564 32.4
directors as a group (9 persons)
</TABLE>
- ----------------------------
1 All of the executive officers and directors can be reached at the address
of the company: 2287 NW Pettygrove, Portland, Oregon 97210. The address for Mr.
Holmes is 2575 University Avenue West, St. Paul, Minnesota 55114-1024, and for
Roitenberg Investments is 5500 Wayzata Blvd., #1065, Minneapolis, Minnesota
55416.
2 Beneficially owned shares include shares which may be acquired (i.e.,
through exercise of warrants or options) within 60 days of MAY 31, 1999.
3 The percentage ownership before the offering is based on 1,521,761 shares
of common stock outstanding.
4 The percentage of ownership after the offering is calculated based on
5,366,470 shares outstanding, which includes the 1,750,000 shares of common
stock sold in this offering, the conversion of all Series A, B, C and D
Preferred Stock into 2,077,421 shares of common stock, and the payment of
accrued Series D Preferred Stock dividends by the issuance of 17,684 shares of
common stock.
5 Mr. Lindstrom is the beneficial owner of options to purchase 561,666 shares
of common stock.
6 Mr. Wasserteil is the beneficial owner of options and warrants to purchase
112,900 shares of common stock.
7 Dr. Schneider is the beneficial owner of options and warrants to purchase
98,396 shares of common stock.
8 Upon the closing of the offering, Mr. Tanous will receive approximately
98,743 shares of common stock from the conversion of his Series B and Series C
Preferred Stock. Mr. Tanous is also the beneficial owner of options and warrants
to purchase 120,000 shares of common stock.
9 Upon the closing of the offering, Mr. Zimmerman will receive approximately
333,828 shares of common stock from the conversion of his Series C and D
Preferred Stock and 5,186 shares of common stock as Series D Preferred Stock
dividend. Mr. Zimmerman is also the beneficial owner of options to purchase
10,000 shares of common stock.
10 Mr. Frank is the beneficial owner of options to purchase 24,333 shares of
common stock. Upon the closing of the offering, Mr. Frank will receive 3,163
shares of common stock from the conversion of his Series C Preferred Stock.
11 Upon the closing of the offering, Mr. Holmes will receive approximately
333,746 shares of common stock from the conversion of his Series C and D
Preferred Stock and 5,186 shares of common stock as Series D Preferred Stock
dividend. Mr. Holmes is also the beneficial owner of options to purchase 10,000
shares of common stock.
12 Upon the closing of the offering, Roitenberg Investments, Inc. will
receive approximately 333,818 shares of common stock from the conversion of its
Series C and D Preferred Stock and 5,186 shares of common stock as Series D
Preferred Stock dividend. It is also the beneficial owner of options to purchase
10,000 shares of common stock.
39
<PAGE>
DESCRIPTION OF SECURITIES
The authorized capital stock of the company is 19,000,000 shares,
consisting of 15,000,000 shares of common stock, no par value, and 4,000,000
shares of preferred stock, no par value. Upon the closing of the offering, all
shares of Series A, B, C and D Preferred Stock currently outstanding will be
converted to common stock, and no shares of preferred stock will be outstanding.
COMMON STOCK
- ------------
As of MAY 31, 1999, there were 1,521,761 shares of common stock
outstanding. Following this offering, 5,366,867 shares of common stock will be
issued and outstanding. See "Capitalization." Holders of common stock are
entitled to one vote per share on all matters on which shareholders are entitled
to vote. Because holders of common stock do not have cumulative voting rights or
other preemptive or subscription rights, the holders of a majority of the shares
of common stock can elect all of the members of the Board of Directors. The
common stock is not redeemable by the company. Holders of shares of common stock
are entitled to any dividends as may be declared by the Board of Directors out
of legally available funds. If the company is liquidated, dissolved or wound up,
the holders of the common stock are entitled to receive pro rata of all of the
company's assets available for distribution to its shareholders after payment of
liquidation preferences of any outstanding shares of preferred stock. All of the
outstanding shares of common stock are fully paid and non-assessable.
PREFERRED STOCK
- ---------------
OUTSTANDING PREFERRED STOCK. The rights, designations, preferences,
privileges, qualifications and restrictions of the currently outstanding shares
of Series A, B, C and D Preferred Stock are described in our articles of
incorporation and certificates of designations, as amended, which documents have
been filed as exhibits to the registration statement of which this prospectus is
a part. Effective upon the closing of the offering, all outstanding shares of
Series A, B, C and D Preferred Stock will be automatically converted into the
number of shares of common stock required by their respective conversion ratios
(after giving effect to anti-dilution adjustments) set forth below, and no
shares of preferred stock of any series will be outstanding upon the closing of
the offering.
<TABLE>
<CAPTION>
Authorized Shares Conversion Shares of common stock
Designation shares outstanding ratio issuable upon conversion
---------- ------ ----------- ----- ------------------------
<S> <C> <C> <C> <C>
Series A 100,000 52,667 1:1 52,667
Series B 510,575 510,575 1:1.02396 522,808
Series C 168,000 129,121 1:10.30227 1,330,239
Series D 22,507 16,667 1:10.30227 171,707
</TABLE>
The conversion of the outstanding series of preferred stock into common
stock IS MANDATORY UPON THE CLOSING OF THIS OFFERING WITHOUT ANY FURTHER ACTION
BY THE HOLDERS OF THE PREFERRED STOCK. ITS EFFECT is to reduce the proportionate
interest in the company held by the holders of the outstanding shares of common
stock prior to the offering. See "Dilution."
BLANK CHECK PREFERRED STOCK. Subject to the provisions of the amended
and restated articles of incorporation, which will become effective upon the
closing of the offering, and to the limitations prescribed by law, the Board of
Directors will have the authority, without further action by the shareholders,
to issue up to 4,000,000 shares of preferred stock in one or more series. The
Board of Directors will have the power and authority to fix the rights,
designations, preferences, privileges, qualifications and restrictions of the
preferred stock, including the number of shares, dividend rights, conversion
rights, voting rights, terms of redemption, liquidation preferences and sinking
40
<PAGE>
fund terms, any or all of which may be greater than the rights of the common
stock. THE COMPANY WILL NOT ISSUE ANY SHARES OF PREFERRED STOCK UNLESS:
o THE ISSUANCE OF THE PREFERRED STOCK IS APPROVED BY A MAJORITY OF THE
DISINTERESTED AND INDEPENDENT DIRECTORS WHO WILL HAVE ACCESS, AT THE
COMPANY'S EXPENSE, TO THE COMPANY'S LEGAL COUNSEL OR TO AN
INDEPENDENT LEGAL COUNSEL;
o THE PREFERRED STOCK IS OFFERED TO PROMOTERS ON THE SAME TERMS AS
THOSE OFFERED TO EXISTING SHAREHOLDERS OR TO NEW SHAREHOLDERS; AND
o THE ISSUANCE, IF IT OCCURS WITHIN THREE YEARS OF THIS OFFERING, IS
APPROVED BY THE UNDERWRITER BY PRIOR WRITTEN CONSENT, WHICH CONSENT
WILL NOT BE UNREASONABLY WITHHELD.
The company has no present plans to issue any shares of preferred stock.
One of the effects of the existence of undesignated preferred stock is
to enable the Board of Directors to render more difficult or to discourage a
third party's attempt to obtain control of Marsee Baking by means of a tender
offer, proxy contest, merger, or otherwise, which thereby protects the
continuity of our management. The issuance of shares of preferred stock may also
discourage a party from making a bid for the common stock because the issuance
may adversely affect the rights of the holders of common stock. For example,
preferred stock issued by the company may rank prior to the common stock as to
dividend rights, liquidation preference, or both, 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 or delay bids for the
common stock or may otherwise adversely affect the market price of the common
stock.
WARRANTS
- --------
PURCHASE WARRANTS SOLD IN THIS OFFERING. The following is a brief
summary of certain provisions of the purchase warrants, but the summary does not
purport to be complete and is qualified in all respects by reference to the
actual text of the purchase warrant agreement between the company and
ChaseMellon Shareholder Services, Inc., the transfer agent. A copy of the
purchase warrant agreement has been filed as an exhibit to the registration
statement of which this prospectus is a part. You are urged to read the purchase
warrant agreement in its entirety. See "Where You Can Find More Information."
Exercise Price and Terms. Each purchase warrant entitles its holder to
purchase, at any time from the closing date of this offering through the fifth
anniversary of this offering, one share of common stock of the company at a
price of $5.50 per share, subject to adjustment according to the antidilution
and other provisions referred to below. The purchase warrants will expire on the
fifth anniversary of this offering.
The holder of a purchase warrant may exercise the purchase warrant by
surrendering the certificate representing the purchase warrant to the transfer
agent, with the subscription form on the reverse side of the certificate
properly completed and executed, together with payment of the exercise price.
Subject to prior redemption as described below, the purchase warrants may be
exercised at any time in whole or in part at the applicable exercise price until
expiration of the purchase warrants. No fractional shares will be issued upon
the exercise of the purchase warrants.
If a market for the purchase warrants develops, the holder may sell the
purchase warrants instead of exercising them. There can be no assurance,
however, that a market for the purchase warrants will develop or continue. If
the company is unable to qualify for sale in particular states the common stock
underlying the purchase warrants, holders of the purchase warrants residing in
such states and desiring to exercise the purchase warrants will have no choice
but to sell such purchase warrants or allow them to expire. See "Risk Factors."
After the offering, the purchase warrants are subject to redemption by
the company upon 30 days' prior written notice at $0.25 per purchase warrant if
the closing bid price of the common stock, as reported on the Nasdaq SmallCap
Market or as reported on a national or regional securities exchange, for 30
consecutive trading days ending within ten days of the notice of redemption,
averages in excess of $10.00 per share, subject to adjustment. The company is
required to maintain an effective registration statement with respect to the
common stock underlying the purchase warrants as a condition to redemption of
the purchase warrants. Before the first anniversary of the closing date of the
offering, the purchase warrants will not be redeemable by the company without
the written consent of the underwriter. If the company exercises the right to
redeem the purchase warrants, the purchase warrants will be exercisable until
the close of business on the date for redemption fixed in the notice. In that
event, any purchase warrant holder may either (1) exercise the purchase warrants
and pay the exercise price at a time when it may be less advantageous
economically to do so, or (2) accept the redemption price in consideration for
cancellation of the purchase warrant, which could be substantially less than the
market value of the purchase warrant at the time of redemption.
41
<PAGE>
The exercise price of the purchase warrants bears no relation to any
objective criteria of value and should in no event be regarded as an indication
of any future market price of the securities offered hereby.
The company has authorized and reserved for issuance a sufficient
number of shares of common stock to accommodate the exercise of all purchase
warrants to be issued in this offering. All shares of common stock issued upon
exercise of the purchase warrants, if exercised according to their terms, will
be fully paid and nonassessable.
ADJUSTMENTS. The exercise price and the number of shares of common
stock purchasable upon exercise of the purchase warrants are subject to
adjustment upon the occurrence of certain events, including stock dividends,
stock splits, combinations or reclassification of the common stock, or sale by
the company of shares of its common stock (or other securities convertible into
or exercisable for common stock) at a price per share or share equivalent below
the then-applicable exercise price of the purchase warrants or the then-current
market price of the common stock. Additionally, an adjustment would be made in
the case of a reclassification or exchange of common stock, consolidation or
merger of the company with or into another corporation, or sale of substantially
all of the assets of the company, to enable purchase warrant holders to acquire
the kind and number of shares of stock or other securities or property
receivable in that event by a holder of that number of shares of common stock
that would have been issued upon exercise of the purchase warrant immediately
before that event. No adjustments will be made until the cumulative adjustments
in the exercise price per share amount to $0.05 or more. No adjustments to the
exercise price of the purchase warrants will be made for dividends (other than
stock dividends) paid on the common stock or upon exercise of the purchase
warrants, the underwriter's warrant or any other options or warrants outstanding
as of the date of this prospectus.
WARRANT HOLDER NOT A SHAREHOLDER. The purchase warrants do not confer
upon their holders any dividend, voting, preemption or any other rights as
shareholders of the company.
OUTSTANDING WARRANTS. As of MAY 31, 1999, there were outstanding 14
warrants to purchase an aggregate of 382,215 shares of common stock of the
company at exercise prices ranging from $1.00 to $3.00 per share. Each warrant
entitles its holder to purchase shares of common stock in the number and price
as specified in the warrant. The exercise price and number of shares are subject
to adjustment proportionately for any increase or decrease in the number of
issued shares of common stock resulting from a subdivision or consolidation of
shares of common stock or the payment of stock dividends or any other increase
or decrease in the number of issued shares of common stock effected without
receipt of consideration by the company. The company will not be required to
issue fractional shares upon exercise of a warrant. The holder of a warrant does
not possess any rights as a shareholder of the company until the holder
exercises the warrant.
In addition, in connection with an equipment lease financing, the
company has issued to the financing company a warrant to purchase up to 1,500
shares of Series C Preferred Stock at a price of $32.50 per share. The holder
may, at its option, elect to purchase shares of common stock into which the
shares of Series C Preferred Stock are then convertible, at a purchase price as
adjusted according to a specified conversion rate. Upon the closing, the holder
will be entitled to purchase up to 15,453 shares of common stock at an exercise
price of $3.135. If the fair market value of our common stock is greater than
the exercise price then in effect, then the warrant will be deemed automatically
exercised. The number of shares subject to the warrant and the warrant price are
subject to adjustment upon reclassification or merger, subdivision or
combination of shares or the payment of stock dividends to the holders of Series
C Preferred Stock or any other increase or decrease in the number of issued
shares of common stock effected without receipt of consideration by the company.
CASH AND STOCK DIVIDENDS TO CURRENT HOLDERS OF PREFERRED STOCK
- --------------------------------------------------------------
CASH DIVIDENDS TO HOLDERS OF SERIES A PREFERRED STOCK. The holders of
Series A Preferred Stock are entitled to receive dividends at the rate of $0.60
per share per year, which accrue from day-to-day, whether or not earned or
declared. The holders of Series A Preferred Stock will be entitled to receive an
aggregate of approximately $115,000 in accrued dividends, assuming a closing
date of June 30, 1999 for this offering. The company intends to pay the full
amount of the accrued dividends upon the closing of the offering.
42
<PAGE>
STOCK DIVIDENDS TO HOLDERS OF SERIES D PREFERRED STOCK. The holders of
Series D Preferred Stock are entitled to receive dividends at the rate of $4.20
per share per year, which accrue day to day, whether or not earned or declared.
These accrued dividends are payable in shares of Series D Preferred Stock at an
assumed value of $60.00 per share. The stock dividend will become payable in
shares of common stock at the election of the company upon the closing of the
offering. The holders of Series D Preferred Stock are entitled to receive
approximately 17,684 shares of common stock, assuming a closing date of
June 30, 1999 for this offering.
BRIDGE FINANCING OF PROMISSORY NOTES AND COMMON STOCK
- -----------------------------------------------------
During January 1998 through April 1999, the company sold 502,8000 units
of securities at a price of $5.00 per unit, each unit consisting of one share of
common stock and a promissory note in the principal amount of $5.00 and bearing
interest at a rate of eight percent per year. The principal and accrued interest
on the note are due and payable within nine months of the date of the promissory
note or upon the closing of a public offering of the common stock, whichever is
earlier.
REGISTRATION RIGHTS
- -------------------
After the offering, the current holders of 129,121 shares of Series C
Preferred Stock and 16,667 shares of Series D Preferred Stock may be entitled,
upon expiration of lock-up agreements with underwriter, to certain rights with
respect to registration under the Securities Act of 1,501,946 shares of common
stock into which the shares of Series C and Series D Preferred Stock will be
converted at the closing of this offering. Under the terms of an investors
rights agreement between the company and the holders of these securities, if the
company proposes to register any of its securities under the Securities Act,
either for its own account or for the account of other security holders
exercising registration rights, the holders are entitled to notice of the
registration and are entitled to include their shares of common stock in the
registration statement. Further, holders may require the company to file
registration statements on Form S-3 at the company's expense when the form
becomes available for use to the company. All registration rights are subject to
certain conditions and limitations, including the right of the underwriter of an
offering to limit the number of shares to be included in the registration.
The holder of the warrant to purchase Series C Preferred Stock is also
entitled to notice of a proposed registration of securities by the company, and
may require the company to include in the registration the holder's securities.
The company will bear all expenses of the registration and reimburse the holder
for its reasonable fees (not exceeding $2,500 for each registration) and
disbursement expenses of one counsel chosen by the holder.
The company entered into a consulting agreement dated January 12, 1999
with two parties to act as financial consultants and advisors to the company. In
connection with the engagement, the company granted to each party a five-year
warrant to purchase up to 125,000 shares of common stock at an exercise price of
$1.00 per share. The shares underlying these warrants have "piggyback"
registration rights on the same terms and conditions granted to the holders of
Series C and Series D Preferred Stock, as described above.
The underwriter has certain registration rights in connection with the
shares of common stock underlying the underwriter's warrants. See
"Underwriting."
CERTAIN ANTITAKEOVER EFFECTS OF OUR ARTICLES OF INCORPORATION, BYLAWS AND
- -------------------------------------------------------------------------
PROVISIONS OF OREGON LAW
- ------------------------
ARTICLES OF INCORPORATION AND BYLAWS. Our amended and restated articles
and bylaws that will become effective upon the closing of this offering will
contain provisions that may have the effect of delaying, deferring or preventing
a change in control. These provisions include:
o The ability of the Board of Directors, without further shareholder
approval, to issue up to 4,000,000 shares of preferred stock;
43
<PAGE>
o The requirement of a classified board whenever there are six or more
directors, with each class containing as nearly as possible
one-third of the total number of directors and the members of each
class serving for staggered three-year terms;
o The prohibition of cumulative voting for the election of directors;
and
o The requirement of no less than 60 days' advance notice with respect
to nominations of directors or other matters to be voted on by
shareholders other than by or at the direction of the board of
directors.
OREGON CONTROL SHARE AND BUSINESS COMBINATION STATUTES. Oregon law may
restrict the ability of significant shareholders of the company to exercise
voting rights. The law generally applies to a person who acquires voting stock
of an Oregon corporation in a transaction that results in such person holding
more than 20%, 33 1/3% or 50% of the total voting power of the corporation. If
such a transaction occurs, the person cannot vote the shares unless voting
rights are restored to those shares by:
o A majority of the outstanding voting shares, including the acquired
shares, and
o The holders of a majority of the outstanding voting shares,
excluding the acquired shares and shares held by the corporation's
officers and inside directors.
This law is construed broadly and may apply to persons acting as a group.
The restricted shareholder may, but is not required to, submit to the
company a statement setting forth information about itself and its plans with
respect to the company. The statement may request that the company call a
special meeting of shareholders to determine whether voting rights will be
granted to the shares acquired. If a special meeting of shareholders is not
requested, the issue of voting rights of the acquired shares will be considered
at the next annual or special meeting of shareholders. If the acquired shares
are granted voting rights and they represent a majority of all voting power,
shareholders who do not vote in favor of granting such voting rights will have
the right to receive the appraised fair value of their shares. The appraised
fair value will, at a minimum, be equal to the highest price paid per share by
the person for the shares acquired in a transaction subject to this law.
The company is also subject to provisions of Oregon law that govern
business combinations between corporations and interested shareholders. These
provisions generally prohibit a corporation from entering into a business
combination transaction with a person, or affiliate of such person, for a period
of three years from the date such person acquires 15% or more of the voting
stock of the corporation. For the purpose of this law, the prohibition generally
applies to the following:
o A merger or plan of share exchange;
o Any sale, lease, mortgage or other disposition of 10% or more of the
assets of the company; and
o Transactions that result in the issuance of capital stock of the
company to the 15% shareholder.
However, the general prohibition does not apply if:
o The 15% shareholder, as a result of the transaction in which such
person acquired 15% of the shares, owns at least 85% of the
outstanding voting stock of the corporation;
o The board of directors approves the share acquisition or business
combination before the shareholder acquired 15% or more of the
company's outstanding voting stock; or
o The board of directors and the holders of at least two-thirds of the
outstanding voting stock of the company, excluding shares owned by
the 15% shareholder, approve the transaction after the shareholder
acquires 15% or more of the company's voting stock.
44
<PAGE>
NASDAQ AND EXCHANGE LISTINGS
- ----------------------------
We have applied to list the common stock and the purchase warrants for
quotation on the Nasdaq SmallCap Market under the trading symbols "MSEE" and
"MSEEW." We have also applied to list the common stock and purchase warrants on
the Boston Stock Exchange under the trading symbols of [________] and [______]W.
TRANSFER AGENT AND REGISTRAR
- ----------------------------
We have appointed ChaseMellon Shareholder Services, Inc. of Seattle,
Washington as the transfer and warrant agent and as registrar for the common
stock and purchase warrants.
45
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
SHARES ELIGIBLE
- ---------------
Upon completion of the offering, we will have outstanding an aggregate
of 5,366,867 shares of common stock, assuming no exercise of the underwriter's
over-allotment option and no exercise of outstanding warrants, including the
purchase warrants, and no exercise of employee stock options. Of these shares,
the 1,750,000 shares sold in the offering will be freely tradable without
restriction or further registration under the Securities Act, except that any
shares held by our "affiliates," as that term is defined in Rule 144 of the
Securities Act, may generally be sold only in compliance with the limitations of
Rule 144 described below. The remaining 3,616,867 shares of common stock are
"restricted securities" as that term is defined in Rule 144. Restricted
securities may be sold in the public market only if registered or if they
qualify for an exemption from registration under the Securities Act, as
described below.
LOCKUP AGREEMENTS
- -----------------
A number of holders of currently outstanding common stock, options and
warrants, and all executive officers and directors of the company, have agreed
that they will not offer, sell or otherwise dispose of any shares of common
stock, options or warrants to acquire shares of common stock or securities
exchangeable for or convertible into common stock, for a period of six months,
fourteen months and twenty-four months after the date of this prospectus. The
lock-up period and the number of securities subject to the lock-up, stated in
terms of common stock equivalents, are set forth below:
LOCK-UP PERIOD COMMON STOCK OPTIONS WARRANTS
-------------- ------------ ------- ---------
6 months 295,581 -- --
14 months 948,572 -- 125,000
24 months 2,351,047 1,335,613 257,215
Not covered by lock-up 21,667 6,232 15,453
The underwriter, in its sole discretion, may release these persons from
their lock-up agreements at any time without notice. See "Underwriting."
SALE OF RESTRICTED SECURITIES UNDER RULE 144
- --------------------------------------------
IN GENERAL. The 3,616,867 restricted shares may be sold in the public
market only if registered or if they qualify for an exemption from registration
under the Securities Act. Due to contractual restrictions, the lock-up
agreements described above and the provisions of the Securities Act, additional
shares will be available for sale under Rule 144 in the public market as
follows:
o 295,581 shares of common stock that have been held for more than one
year will be eligible for sale upon the expiration of the lock-up
agreements expiring six months after the date of the final
prospectus prepared in this offering;
o An additional 21,667 shares of common stock (plus 6,232 shares
issuable upon exercise of stock options and 15,453 shares issuable
upon exercise of warrants) will be eligible for sale upon the
expiration of the applicable one-year holding period;
o An additional 948,572 shares of common stock (plus 125,000 shares
issuable upon exercise of warrants) will be eligible for sale upon
the expiration of the lock-up agreements expiring 14 months after
the date of the final prospectus; and
o An additional 2,351,047 shares of common stock (plus 1,335,613
shares issuable upon exercise of stock options and 257,215 shares
issuable upon exercise of warrants) will be eligible for sale upon
expiration of the lock-up agreements expiring 24 months after the
date of the final prospectus.
46
<PAGE>
SALE OF RESTRICTED SHARES UNDER RULE 144. In general, under Rule 144, a
person (or persons whose shares are aggregated), including an affiliate, who has
beneficially owned shares for at least one year can sell, within any three-month
period, beginning after the date of the prospectus, a number of shares of common
stock that does not exceed the greater of
(1) 1% of the then-outstanding shares of common stock (about 53,669
shares immediately after the offering), or
(2) the average weekly trading volume of the common stock during the
four calendar weeks before the notice of the Rule 144 sale is
filed.
Sales under Rule 144 are also subject to certain requirements as to the manner
and notice of sale and the availability of public information about the company.
In addition, any person not deemed to have been our affiliate at any
time during the 90 days before a sale and who has beneficially owned the shares
proposed to be sold for at least two years may sell those shares under Rule
144(k) without regard to the volume limitations described above.
REGISTRATION OF RESTRICTED SHARES IN THE FUTURE. After the closing of
the offering, the holders of approximately 1,767,399 shares of common stock,
including approximately 265,453 shares of common stock issuable upon exercise of
outstanding warrants, will be entitled to certain rights with respect to the
registration of the shares under the Securities Act. See "Description of
Securities--Registration Rights Agreement." The underwriter also has certain
registration rights in connection with the shares of common stock underlying the
underwriter's warrants. In addition, we may file a registration statement under
the Securities Act to register shares of common stock reserved for issuance
under our stock option plans after 24 months from the date of this prospectus.
As of MAY 31, 1999, options to purchase approximately 1,341,845 shares of common
stock were outstanding under these stock option plans. The effect of filing
registration statements for these shares is that non-affiliates may resell the
registered shares in the public market without restriction under the Securities
Act.
EFFECT OF SALES OF SHARES
- -------------------------
Before this offering, there has been no market for the common stock,
and no precise prediction can be made about any effect that market sales of
common stock or the availability for sale of the common stock will have on the
market price of the common stock. Nevertheless, sales of substantial amounts of
common stock in the public market could adversely affect the market price and
could impair our future ability to raise additional capital through the sale of
our equity securities.
47
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement,
Barron Chase Securities, Inc., the underwriter, has agreed to purchase from the
company an aggregate of 1,750,000 shares of common stock and 1,750,000 purchase
warrants. These securities are offered by the underwriter subject to prior sale,
when, as and if delivered to and accepted by the underwriter and subject to
approval of certain legal matters by counsel and certain other conditions. The
underwriter is committed to purchase all of the securities offered by this
prospectus, if any are purchased (other than those covered by the over-allotment
option described below).
The company has been advised by the underwriter that the underwriter
proposes to offer the securities to the public at the offering prices set forth
on the cover page of this prospectus. The underwriter has advised the company
that the underwriter proposes to offer the securities through members of the
National Association of securities Dealers, Inc. ("NASD"), and may allow
concessions, in its discretion, to certain selected dealers who are members of
the NASD and who agree to sell the securities in conformity with the NASD's
Conduct Rules. Such concessions will not exceed the amount of the underwriting
discount that the underwriter is to receive.
The company has granted to the underwriter an over-allotment option,
exercisable for 45 days from the date the registration statement becomes
effective, to purchase up to an additional 262,500 shares of common stock and an
additional 262,500 purchase warrants at the respective public offering prices
less the underwriting discounts set forth on the cover page of this prospectus.
Officers and directors of the company may introduce the underwriter to
persons to consider this offering and to purchase securities either through the
underwriter or through participating dealers. In this connection, no securities
have been reserved for those purchases, and officers and directors will not
receive any commissions or any other compensation.
The company has agreed to pay to the underwriter a commission of 10% of
the gross proceeds of this offering as the underwriting discount, including the
gross proceeds from the sale of the over-allotment option, if exercised. In
addition, the company has agreed to pay to the underwriter a non-accountable
expense allowance of three percent of the gross proceeds of this offering,
including proceeds from any securities purchased through the over-allotment
option. The company has paid to the underwriter a $50,000 advance in respect of
the non-accountable expense allowance. The underwriter's expenses in excess of
the non-accountable expense allowance will be paid by the underwriter. If the
expenses of the underwriter are less than the amount of the non-accountable
expense allowance received, then the excess will be deemed to be additional
compensation to the underwriter. The underwriter has informed the company that
it does not expect sales to discretionary accounts to exceed five percent of the
total number of securities offered by the company in this offering.
The company has agreed to engage the underwriter as a financial advisor
at a fee of $108,000, which is payable to the underwriter on the closing date of
this offering. Pursuant to the terms of a financial advisory agreement, the
underwriter has agreed to provide, at the company's request, advice to the
company concerning potential merger and acquisition and financing proposals,
whether by public financing or otherwise. The company has also agreed that if
the company participates in any transaction which the underwriter has introduced
to the company during a period of five years after the closing (including
mergers, acquisitions, joint ventures and any other business transaction for the
company introduced by the underwriter), and which is consummated after the
closing (including an acquisition of assets or stock for which it pays, in whole
or in part, with shares or other securities of the company), or if the company
retains the services of the underwriter in connection with any such transaction,
then the company will pay for the underwriter's services an amount equal to five
percent of up to one million dollars of value paid or received in the
transaction, four percent of the next million of such value, three percent of
the next million of such value, two percent of the next million of such value,
and one percent of the next million dollars of such value and of all such value
above $4 million.
Prior to this offering, there has been no public market for the shares
of common stock or the purchase warrants. Consequently, the initial public
offering prices for the securities, and the terms of the purchase warrants
(including the exercise price of the purchase warrants), have been determined by
negotiation
48
<PAGE>
between the company and the underwriter. Among the factors considered in
determining the public offering prices were the history of, and the prospects
for, the company's business, an assessment of the company's management, the
company's past and present operations, its development and the general condition
of the securities market at the time of this offering. The initial public
offering prices do not necessarily bear any relationship to the company's
assets, book value, earnings, or other established criteria of value. These
prices are subject to change as a result of market conditions and other factors,
and no assurance can be given that a public market for the common stock or the
purchase warrants will develop after the offering, or if a public market in fact
develops, that such public market will be sustained, or that the common stock or
the purchase warrants can be resold at any time at the offering or any other
price. See "Risk Factors."
At the closing, the company will issue to the underwriter and/or
persons related to the underwriter, for nominal consideration, common stock
underwriter warrants to purchase up to 175,000 shares of common stock and
warrant underwriter warrants to purchase up to 175,000 warrants. The common
stock underwriter warrants and the warrant underwriter warrants are sometimes
referred to in this prospectus as the "underwriter warrants". The underwriter
warrants and the securities underlying the underwriter warrants are registered
pursuant to this registration statement. The underwriter warrants will be
exercisable for a five-year period commencing on the effective date of the
registration statement. The initial exercise price of each common stock
underwriter warrant shall be $8.25 per underlying share (165% of the public
offering price). The initial exercise price of each warrant underwriter warrant
shall be $0.20625 per underlying warrant (165% of the public offering price).
The underwriter warrants will be restricted from sale, transfer, assignment or
hypothecation for a period of twelve months from the effective date by the
holder, except (1) to officers of the underwriter and members of the selling
group and officers and partners thereof; (2) by will; or (3) by operation of
law.
The underwriter warrants contain provisions providing for appropriate
adjustment in the event of any merger, consolidation, recapitalization,
reclassification, stock dividend, stock split or similar transaction. The
underwriter warrants contain net issuance provisions permitting the holders
thereof to elect to exercise the underwriter warrants in whole or in part and
instruct the company to withhold from the securities issuable upon exercise, a
number of securities, valued at the current fair market value on the date of
exercise, to pay the exercise price. The net exercise provision has the effect
of requiring the company to issue shares of common stock without a corresponding
increase in capital. A net exercise of the underwriter warrants will have the
same dilutive effect on the interests of the company's shareholders as will a
cash exercise. The underwriter warrants do not entitle the holders of the
underwriter warrants to any rights as shareholders of the company until the
underwriter warrants are exercised and shares of common stock are purchased
thereunder.
The underwriter warrants and the securities issuable thereunder may not
be offered for sale except in compliance with the applicable provisions of the
Securities Act of 1933. The company has agreed that if it causes a
post-effective amendment, a new registration statement, or similar offering
document to be filed with the Securities and Exchange Commission, the holders
will have the right, for seven years from the effective date, to include in the
registration statement or offering statement the underwriter warrants or the
securities issuable upon their exercise at no expense to the holders.
Additionally, the company has agreed that, upon request by the holders of fifty
percent or more of the underwriter warrants during the period commencing one
year from the effective date and expiring four years thereafter, the company
will, under certain circumstances, register the underwriter warrants and/or any
of the securities issuable upon their exercise.
In order to facilitate the offering of the common stock and purchase
warrants, the underwriter may engage in transactions that stabilize, maintain or
otherwise affect the price of the common stock and purchase warrants.
Specifically, the underwriter may overallot in connection with the offering,
creating a short position in the common stock and purchase warrants for its own
account. In addition, to cover overallotments or to stabilize the price of the
common stock and purchase warrants, the underwriter may bid for, and purchase,
shares of common stock and purchase warrants in the open market. Finally, the
underwriter may reclaim selling concessions allowed to a dealer for distributing
the common stock and purchase warrant in the offering, if the underwriter
repurchases previously distributed common stock or purchase warrants in
transactions to cover the underwriter's short position, in stabilization
transactions or otherwise. Any of these activities may stabilize or maintain the
market price of the common stock and purchase warrants above independent market
49
<PAGE>
levels. The underwriter is not required to engage in these activities, and may
end any of these activities at any time.
The company has agreed to indemnify the underwriter against any costs
or liabilities incurred by the underwriter by reason of misstatements or
omissions to state material facts in connection with the statements made in the
registration statement and this prospectus filed by the company with the
Securities and Exchange Commission. The underwriter has in turn agreed to
indemnify the company against any costs or liabilities by reason of
misstatements or omissions to state material facts in connection with the
statements made in the registration statement and this prospectus, based on
information relating to the underwriter and furnished in writing by the
underwriter. To the extent that these provisions may purport to provide
exculpation from possible liabilities arising under the federal securities laws,
in the opinion of the SEC, such indemnification is contrary to public policy and
therefore unenforceable.
The discussion above is merely a summary of the principal terms of the
agreements mentioned above, and does not purport to be complete. You should
review each of the referenced documents which have been filed as exhibits to the
registration statement. See "Where You Can Find More Information."
LEGAL MATTERS
The validity of the common stock and purchase warrants offered hereby
will be passed upon for the company by Tonkon Torp LLP, Portland, Oregon.
Certain legal matters will be passed upon for the underwriter by David A.
Carter, P.A., Boca Raton, Florida.
EXPERTS
The financial statements of Oregon Baking Company dba Marsee Baking as
of December 31, 1997 and 1998, and for the years then ended, have been included
herein and in the registration statement in reliance upon the report of KPMG
Peat Marwick LLP, independent certified public accountants, appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing. The report of KPMG Peat Marwick LLP covering the December 31, 1998
financial statements contains an explanatory paragraph that states that the
company's recurring losses from operations raise substantial doubt about the
entity's ability to continue as a going concern. The financial statements do not
include any adjustments that might result from the outcome of THE uncertainty AS
TO THE COMPANY'S ABILITY TO CONTINUE AS A GOING CONCERN.
WHERE YOU CAN FIND MORE INFORMATION
We have filed a Registration Statement on Form SB-2 relating to the
common stock and purchase warrants being offered for sale through this offering
with the Securities and Exchange Commission. As permitted by the rules and
regulations of the SEC, this prospectus does not contain all the information
described in the registration statement. For further information about the
company and its securities, you should read our registration statement,
including the exhibits and schedules. In addition, we will be subject to the
requirements of the Securities Exchange Act of 1934 following this offering and
thus will file annual, quarterly and special reports, proxy statements and other
information with the SEC. These SEC filings and the registration statement are
available to you over the Internet at the SEC's web site at http://www.sec.gov.
You may also read and copy any document we file with the SEC at the SEC's public
reference rooms in Washington, D.C., New York, New York and Chicago, Illinois.
Please call the SEC at 1-800-SEC-0330 for further information about the public
reference rooms. Statements contained in this prospectus as to the contents of
any contract or other document are not necessarily complete and, in each
instance, you should review the contract or document which has been filed as an
exhibit to the registration statement.
We intend to furnish our shareholders with annual reports containing
audited financial statements.
50
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report.................................................F-2
Balance Sheets as of December 31, 1997 and 1998,
AND MARCH 31, 1999 (UNAUDITED)............................................F-3
Statements of Operations for the years ENDED
December 31, 1997 and 1998, AND THE THREE MONTHS
ENDED MARCH 31, 1999 AND 1999 (UNAUDITED).................................F-4
Statements of Shareholders' (Deficit) Equity
for the years ended December 31, 1997 and 1998,
AND THE THREE MONTHS ENDED MARCH 31, 1999 (UNAUDITED).....................F-5
Statements of Cash Flows for the years ended
December 31, 1997 and 1998, AND THE THREE MONTHS
ENDED MARCH 31, 1998 AND 1999 (UNAUDITED).................................F-6
Notes to Financial Statements................................................F-7
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Oregon Baking Company
dba Marsee Baking:
We have audited the accompanying balance sheets of Oregon Baking Company dba
Marsee Baking (the Company) as of December 31, 1997 and 1998, and the related
statements of operations, shareholders' (deficit) 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 the significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe 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 Oregon Baking Company dba
Marsee Baking as of December 31, 1997 and 1998, and results of its operations
and its cash flows for the years then ended in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in note 2 to the
financial statements, the Company has suffered recurring losses from operations
that raise substantial doubt about its ability to continue as a going concern.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
/s/ KPMG Peat Marwick LLP
Portland, Oregon
February 23, 1999
F-2
<PAGE>
OREGON BAKING COMPANY
DBA MARSEE BAKING
Balance Sheets
(Dollars in Thousands, Except Share and Per Share Data)
<TABLE>
<CAPTION>
December 31, MARCH 31,
-------------------------------- ---------------
Assets 1997 1998 1999
-------------- -------------- ---------------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash $ 91 $ 21 $ 21
Restricted cash -- 108 108
Accounts receivable 54 253 235
Inventories 64 269 207
Prepaid and other assets 46 134 457
-------------- -------------- ---------------
Total current assets 255 785 1,028
Property and equipment, net 2,634 7,511 7,180
Other assets, net 118 378 769
-------------- -------------- ---------------
Total assets $ 3,007 $ 8,674 $ 8,977
============== ============== ===============
LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Line of credit $ 250 $ 250 $ 250
Accounts payable 915 2,250 1,876
Accrued liabilities 232 735 807
Notes payable -- 525 2,134
Current portion of capital lease obligations 88 574 589
Current portion of long-term debt 168 370 364
Current portion of long-term debt to related parties 89 229 221
-------------- -------------- ---------------
Total current liabilities 1,742 4,933 6,241
Capital lease obligations, net of current portion 221 1,019 866
Long-term debt, net of current portion 1,006 1,544 1,482
Long-term debt to related parties, net of current portion 128 190 190
Cumulative dividends payable on preferred stock series D and A 68 168 193
-------------- -------------- ---------------
Total liabilities 3,165 7,854 8,972
-------------- -------------- ---------------
Commitments and contingencies
Shareholders' (deficit) equity:
Preferred stock, authorized 4,000,000 shares (liquidation preference
of $6,541):
Cumulative preferred stock series D, no par value; authorized
22,507 shares, -0-, 16,667 and 16,667 issued outstanding at
December 31, 1997 and 1998, AND MARCH 31, 1999 (UNAUDITED),
respectively -- 1,000 1,000
Cumulative preferred stock series A, no par value; authorized
100,000 shares; 52,667 issued and outstanding at
December 31, 1997 and 1998, AND MARCH 31, 1999 (UNAUDITED),
respectively 281 281 281
Preferred stock series B, no par value; authorized 510,575 shares,
510,575 issued and outstanding at December 31, 1997 and 1998,
AND MARCH 31, 1999 (UNAUDITED), respectively 1,143 1,143 1,143
Preferred stock series C, no par value; authorized 168,000 shares,
-0-, 129,121 and 129,121 issued and outstanding at
December 31, 1997 and 1998, AND MARCH 31, 1999 (UNAUDITED),
respectively -- 4,117 4,117
Common stock, no par value; authorized 15,000,000 shares, 868,961,
868,961 AND 1,295,761 issued and outstanding at December 31, 1997
and 1998, AND MARCH 31, 1999 (UNAUDITED), respectively 476 626 828
Warrants 41 156 241
Accumulated deficit (2,099) (6,503) (7,605)
-------------- -------------- ---------------
Total shareholders' (deficit) equity (158) 820 5
-------------- -------------- ---------------
Total liabilities and shareholders' (deficit) equity $ 3,007 $ 8,674 $ 8,977
============== ============== ===============
See accompanying notes to financial statements.
</TABLE>
F-3
<PAGE>
OREGON BAKING COMPANY
DBA MARSEE BAKING
Statements of Operations
(Dollars in Thousands, Except Share and Per Share Data)
<TABLE>
<CAPTION>
Years ended December 31, THREE MONTHS ENDED MARCH 31,
------------------------------------ ------------------------------
1997 1998 1998 1999
------------------ --------------- -------------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Bakery-Cafes $ 4,140 $ 9,761 $ 2,081 $ 2,328
Wholesale 808 2,895 651 610
------------------ --------------- -------------- ------------
Total revenues 4,948 12,656 2,732 2,938
------------------ --------------- -------------- ------------
Cost of goods sold 2,887 7,579 1,554 1,721
Store operating expenses 1,621 5,281 1,312 1,238
Wholesale operating expenses 328 599 139 70
Depreciation and amortization 213 817 119 330
General and administrative expenses 965 1,959 499 400
Store closure expenses -- 253 -- --
------------------ --------------- -------------- ------------
Loss from operations (1,066) (3,832) (891) (821)
Interest expense (interest expense to
related parties of $20, $23, $5 AND $42) 129 472 67 256
------------------ --------------- -------------- ------------
Loss before provision for income taxes (1,195) (4,304) (958) (1,077)
Provision for income taxes -- -- -- --
------------------ --------------- -------------- ------------
Net loss (1,195) (4,304) (958) (1,077)
Cumulative dividends on preferred stock series D and A 32 100 25 25
------------------ --------------- -------------- ------------
Net loss attributed to common shareholders $ (1,227) $ (4,404) $ (983) $ (1,102)
================== =============== ============== ============
Net loss per common share - basic and diluted $ (1.41) $ (5.07) $ (1.13) $ (0.97)
Shares used in computing net loss per common 868,961 1,136,348
share - basic and diluted 868,588 868,961
See accompanying notes to financial statements.
</TABLE>
F-4
<PAGE>
OREGON BAKING COMPANY
DBA MARSEE BAKING
Statements of Shareholders' (Deficit) Equity
(Dollars in Thousands, Except Share and Per Share Data)
<TABLE>
<CAPTION>
CUMULATIVE PREFERRED CUMULATIVE PREFERRED PREFERRED STOCK PREFERRED STOCK
STOCK SERIES D STOCK SERIES A SERIES B SERIES C
--------------------- --------------------- --------------------- ------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- --------- --------- ---------- --------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 -- $ -- 52,667 $ 281 442,032 $ 1,020 -- $ --
Issuance of common stock -- -- -- -- -- -- -- --
Issuance of preferred stock -- -- -- -- 68,543 123 -- --
Consulting expense on stock
option grants -- -- -- -- -- -- -- --
Warrants issued in
connection with acquisition
loan and guarantees -- -- -- -- -- -- -- --
Cumulative dividends on
preferred stock series A -- -- -- -- -- -- -- --
Net loss -- -- -- -- -- -- -- --
---------- --------- --------- ---------- --------- ----------- -------- -----------
Balance, December 31, 1997 -- -- 52,667 281 510,575 1,143 -- --
Issuance of preferred stock
net of offering costs of $79 -- -- -- -- -- -- 95,583 3,027
Issuance of preferred stock
in connection with
acquisition 16,667 1,000 -- -- -- -- 33,538 1,090
Compensation and consulting
expense on stock option
grants -- -- -- -- -- -- -- --
Warrants issued in connection
with acquisition
and debt financing -- -- -- -- -- -- -- --
Cumulative dividends on
preferred stock series D
and A -- -- -- -- -- -- -- --
Net loss -- -- -- -- -- -- -- --
---------- --------- --------- ---------- --------- ----------- --------- -----------
Balance, December 31, 1998 16,667 $ 1,000 52,667 $ 281 510,575 $ 1,143 129,121 $ 4,117
========== ========= ========= ========== ========= =========== ========= ===========
ISSUANCE OF COMMON STOCK -- -- -- -- -- -- -- --
(UNAUDITED)
WARRANTS ISSUED IN CONNECTION
WITH DEBT FINANCING -- -- -- -- -- -- -- --
(UNAUDITED)
CUMULATIVE DIVIDENDS ON
PREFERRED STOCK SERIES D -- -- -- -- -- -- -- --
AND A (UNAUDITED)
NET LOSS (UNAUDITED) -- -- -- -- -- -- -- --
---------- --------- --------- ---------- --------- ----------- --------- -----------
BALANCE, MARCH 31, 1999 16,667 $ 1,000 52,667 $ 281 510,575 $ 1,143 129,121 $ 4,117
(UNAUDITED) ========== ========= ========= ========== ========= =========== ========= ===========
See accompanying notes to financial statements.
<PAGE>
<CAPTION>
COMMON STOCK ACCUMULATED
--------------------
SHARES AMOUNT WARRANTS DEFICIT TOTAL
------ ------ -------- ------- -----
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996 867,961 $ 471 -- $ (872) $ 900
Issuance of common stock 1,000 2 -- -- 2
Issuance of preferred stock -- -- -- -- 123
Consulting expense on stock
option grants -- 3 -- -- 3
Warrants issued in
connection with acquisition
loan and guarantees -- -- 41 -- 41
Cumulative dividends on
preferred stock series A -- -- -- (32) (32)
Net loss -- -- -- (1,195) (1,195)
Balance, December 31, 1997 868,961 476 41 (2,099) (158)
Issuance of preferred stock
net of offering costs of $79 -- -- -- -- 3,027
Issuance of preferred stock
in connection with
acquisition -- -- -- -- 2,090
Compensation and consulting
expense on stock option
grants -- 150 -- -- 150
Warrants issued in connection
with acquisition
and debt financing -- -- 115 -- 115
Cumulative dividends on
preferred stock series D
and A -- -- -- (100) (100)
Net loss -- -- -- (4,304) (4,304)
Balance, December 31, 1998 868,961 $ 626 156 $ (6,503) $ 820
========== ========= ========= ========== =========
Issuance of common stock 426,800 202 -- -- 202
(unaudited)
Warrants issued in connection
with debt financing -- -- 85 -- 85
(unaudited)
Cumulative dividends on
preferred stock series D -- -- -- (25) (25)
and A (unaudited)
Net loss (unaudited) -- -- -- (1,077) (1,077)
---------- --------- --------- ---------- ---------
BALANCE, MARCH 31, 1999 129,121 $ 828 241 (7,605) 5
(UNAUDITED) ========== ========= ========= ========== =========
</TABLE>
F-5
<PAGE>
OREGON BAKING COMPANY
DBA MARSEE BAKING
Statements of Cash Flows
(Dollars in Thousands, Except Share and Per Share Data)
<TABLE>
<CAPTION>
Years ended December 31, THREE MONTHS ENDED MARCH 31,
----------------------------- ----------------------------
1997 1998 1998 1999
-------------- ------------- ------------ -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (1,195) $ (4,304) $ (958) $ (1,077)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 265 1,295 174 391
Compensation and consulting expense on stock option 5 113 -- --
grants
Warrants issued in connection with debt financing 21 86 -- --
Change in assets and liabilities, excluding acquisition:
Accounts receivable (33) (199) (185) 18
Inventories (45) (100) 12 62
Prepaid and other assets (70) (59) (23) (323)
Accounts payable 743 1,335 412 (374)
Accrued liabilities 70 421 315 72
-------------- ------------- ------------ -------------
Net cash used in operating activities (239) (1,412) (253) (1,231)
-------------- ------------- ------------ -------------
Cash flows related to investing activities:
Purchases of property and equipment (1,377) (2,139) (852) (56)
Increase in other assets -- (123) (28) (310)
-------------- ------------- ------------ -------------
Net cash used in investing activities (1,377) (2,262) (880) (366)
-------------- ------------- ------------ -------------
Cash flows related to financing activities:
Principal payments on long-term debt to related parties (39) (25) (7) (8)
Proceeds from long-term debt to related parties -- 227 7 --
Principal payments on capital lease obligations (107) (285) (15) (138)
Principal payments on notes payable and long-term debt (62) (218) (37) (68)
Proceeds from notes payable and long-term debt 856 986 106 1,609
Borrowing on line of credit, net 250 -- -- --
Restricted cash -- (108) -- --
Issuance of ^ common stock, net of offering costs -- -- -- 202
Issuance of preferred stock, net of offering costs 123 3,027 1,005 --
-------------- ------------- ------------ -------------
Net cash provided by financing activities 1,021 3,604 1,059 1,597
-------------- ------------- ------------ -------------
Net decrease in cash (595) (70) (74) --
Cash, beginning of year 686 91 91 21
-------------- ------------- ------------ -------------
Cash, end of year $ 91 $ 21 $ 17 $ 21
============== ============= ============ =============
Supplemental cash flow information:
Cash paid for:
Interest $ 115 $ 362 $ 52 $ 129
Income taxes -- -- -- --
Non-cash activities:
Property and equipment acquired under capital lease 261 1,569 40 --
obligations
Property and equipment acquired by assumption of note -- 497 -- --
payable
Warrants issued in connection with loan guarantees -- 29 -- 85
Other assets acquired by issuance of common stock -- 23 -- --
Cumulative dividends payable on preferred stock series D 32 100 25 25
and A
Assets acquired and liabilities assumed in connection
with acquisitions:
Property and equipment -- 1,922 1,922 --
Inventories -- 105 105 --
Goodwill 23 159 159 --
Accrued liabilities -- 82 82 --
Equity issued for purchase of goodwill relating to 3 -- -- --
business acquired
Issuance of preferred stock series C -- 1,090 1,090 --
Issuance of cumulative preferred stock series D -- 1,000 1,000 --
Granted options 20 -- -- --
Warrants issued -- 14 14 --
See accompanying notes to financial statements.
</TABLE>
F-6
<PAGE>
OREGON BAKING COMPANY
DBA MARSEE BAKING
Notes to Financial Statements
December 31, 1997 and 1998
(Dollars in Thousands, Except Share and Per Share Data)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) DESCRIPTION OF BUSINESS
Oregon Baking Company dba Marsee Baking (Marsee Baking or the
Company), an Oregon corporation, owns and operates 18 bakery-cafe's
in the Pacific Northwest. Marsee Baking also distributes its products
through its wholesale operations, providing specialty retailers and
other institutions with a complete line of the Company's products.
(B) UNAUDITED QUARTERLY INFORMATION
THE FINANCIAL INFORMATION INCLUDED HEREIN FOR THE THREE-MONTH PERIODS
ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED; HOWEVER, SUCH INFORMATION
REFLECTS ALL ADJUSTMENTS CONSISTING ONLY OF NORMAL RECURRING
ADJUSTMENTS WHICH ARE, IN THE OPINION OF MANAGEMENT, NECESSARY FOR A
FAIR PRESENTATION OF THE FINANCIAL POSITION, RESULTS OF OPERATIONS
AND CASH FLOWS FOR THE INTERIM PERIODS. THE INTERIM FINANCIAL
STATEMENTS SHOULD BE READ IN CONJUNCTION WITH THE NOTES INCLUDED IN
THE FINANCIAL STATEMENTS. THE RESULTS OF OPERATIONS FOR THE INTERIM
PERIOD PRESENTED ARE NOT NECESSARILY INDICATIVE OF THE RESULTS TO BE
EXPECTED FOR THE FULL YEAR.
(C) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and 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.
(D) SEGMENT REPORTING
The Company adopted SFAS No. 131, "DISCLOSURE ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION." SFAS 131 requires public
companies to report certain information about their operating
segments in a complete set of financial statements to shareholders.
It also requires reporting of certain enterprise-wide information
about the Company's products and services, its activities in
different geographic areas and its reliance on major customers. The
basis for determining the Company's operating segments is the manner
in which management operates the business. The Company operates one
segment as defined by SFAS No. 131.
(E) FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash, accounts
receivable, accounts payable and debt instruments. At December 31,
1997 and 1998, the fair value of the Company's receivables and debt
and capital lease obligations approximated carry value.
(F) ADVERTISING
Advertising costs are expensed as incurred. For the years ended
December 31, 1997 and 1998, advertising costs were approximately $43
and $241, respectively.
(G) ACCOUNTS RECEIVABLE
The accounts receivable balance is made up of trade receivables net
of allowance for doubtful accounts. As of December 31, 1997 and 1998,
the allowance for doubtful accounts was $60 and $10, respectively.
(H) INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or
market, and consists primarily of raw ingredients, deli products and
finished bakery products.
F-7
<PAGE>
OREGON BAKING COMPANY
DBA MARSEE BAKING
Notes to Financial Statements, Continued
(Dollars in Thousands, Except Share and Per Share Data)
(I) PROPERTY AND EQUIPMENT
Property and equipment is carried at cost less accumulated
depreciation and amortization. Depreciation of property and
equipment, which includes amortization of assets under capital
leases, is provided on the straight-line method over estimated useful
lives or the life of the lease, whichever is shorter, generally
ranging from 3 to 12 years.
Leasehold improvements are amortized over the shorter of their
estimated useful lives or the related life of the lease, generally 10
years. The portion of depreciation expense related to production and
distribution facilities is included in cost of goods sold.
When facts and circumstances indicate that the cost of long-lived
assets may be impaired, an evaluation of recoverability is performed
by comparing the carrying value of the asset to projected future cash
flows. Upon indication that the carrying value of such assets may not
be recoverable the Company recognizes an impairment loss by a charge
against current operations. For the years ended December 31, 1997 and
1998, there were no impairment losses.
Maintenance and repairs are charged to expense as incurred. Major
repairs and improvements are capitalized.
(J) OTHER ASSETS
Other assets consists primarily of goodwill, security deposits and
last months rent required under certain operating lease agreements.
Goodwill as of December 31, 1997 and 1998 was $33 and $192,
respectively. Amortization of goodwill is computed on the
straight-line basis over a period of 18 months to 10 years.
Accumulated amortization as of December 31, 1997 and 1998 was $2 and
$47, respectively.
Management's policy is to review the ongoing value of the goodwill on
a periodic basis by comparing undiscounted future projected earnings
to the carrying value of goodwill. Any difference would be recorded
as an impairment adjustment. Management is of the opinion that there
has been no decline in the value assigned to goodwill.
(K) STORE OPENING COSTS
Costs incurred in connection with start-up and promotion of new store
openings are expensed as incurred.
(L) DEFERRED RENT
Certain of the Company's lease agreements provide for scheduled rent
increases during the lease term, or for rental payments commencing
at a date other than the date of initial occupancy. Rent expenses are
recognized on a straight-line basis over the terms of the leases.
Deferred rent has been included in accrued liabilities in the
accompanying financial statements.
(M) INCOME TAXES
The Company accounts for income taxes using the asset and liability
method. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the future tax consequences
attributable to differences between financial statements carrying
amounts of existing assets and liabilities and their respective tax
F-8
<PAGE>
OREGON BAKING COMPANY
DBA MARSEE BAKING
Notes to Financial Statements, Continued
(Dollars in Thousands, Except Share and Per Share Data)
bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the
enactment date. Valuation allowances are established to reduce
deferred tax assets to the amount expected to be realized.
(N) STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation using Statement of
Financial Accounting Standards No. 123 (SFAS 123), ACCOUNTING FOR
STOCK-BASED COMPENSATION. This statement permits a company to choose
either a fair-value based method of accounting for its stock-based
compensation arrangements or to comply with the current Accounting
Principles Board Opinion 25 (APB Opinion 25) intrinsic-value-based
method adding pro-forma disclosures of net loss computed as if the
fair-value-based method had been applied in the financial statements.
The Company applies SFAS 123 by retaining the APB Opinion 25 method
of accounting for stock-based compensation for employees with annual
pro-forma disclosures of net loss. Stock-based compensation for
non-employees is accounted for using the fair-value-based method.
(O) NET LOSS PER COMMON SHARE
In 1997, the Financial Accounting Standards Board issued Statement
No. 128, EARNINGS PER SHARE (SFAS 128). SFAS 128 replaced the
calculation of primary and fully diluted earnings (loss) per share
with basic and diluted earnings (loss) per share. Unlike primary and
fully diluted earnings (loss) per share, outstanding nonvested shares
are not included in the computations of basic and diluted earnings
(loss) per share until the time-based vesting restriction has lapsed.
Basic earnings (loss) per share also excludes any dilutive effects of
options, warrants and convertible securities. Diluted earnings (loss)
per share is very similar to the previously reported fully diluted
earnings (loss) per share. The Company's common stock equivalents
were antidilutive and therefore were not included in the computation
of weighted average shares used in computing diluted loss per common
share.
(P) RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard No. 133 (SFAS 133),
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. SFAS
133 establishes accounting and reporting standards requiring that
every derivative instrument be recorded in the balance sheet as
either an asset or liability at its fair value. The standard also
requires that changes in the derivatives' fair value be recognized
currently in the results of operations unless specific hedge
accounting criteria are met. SFAS 133 is effective for fiscal years
beginning after June 15, 1999. The Company does not expect SFAS 133
to have a material impact on its financial statements.
F-9
<PAGE>
OREGON BAKING COMPANY
DBA MARSEE BAKING
Notes to Financial Statements, Continued
(Dollars in Thousands, Except Share and Per Share Data)
(2) LIQUIDITY
To meet the cash flow needs of the Company in 1999, the Company will need
to issue additional equity securities, borrow additional funds, or obtain
other financing. The Company has no commitments for additional financing,
other than financing obtained subsequent to year end as described in note
14, and there can be no assurance that further financing will be
available on satisfactory terms, if at all. The accompanying financial
statements have been prepared on the basis that the Company will be able
to meet its cash needs and continue as a going concern.
(3) ACQUISITIONS
During May 1997, the Company acquired the recipes, trademark, customer
list, and copyrights on advertising and promotional items of a bakery
located in Portland, Oregon. The purchase price of $33 was paid in cash,
issuance of common stock and common stock warrants. The acquisition was
accounted for using the purchase method of accounting. The excess of the
total acquisition costs over the fair value of the net assets acquired is
being amortized over eighteen months using the straight-line method. The
results of operations of the acquired company have been included in the
financial statements of the Company since the date of acquisition.
During the first quarter of 1998, the Company acquired certain assets
consisting of property and equipment for 10 stores (the Acquired Stores)
and a commissary located in Washington (the Commissary). The Company also
assumed certain operating lease obligations. The acquisition was
accounted for using the purchase method of accounting. The results of the
operations of the Acquired Stores and the Commissary have been included
in the Company's results of operations since the acquisition date.
The following is the purchase price allocation:
Preferred stock, series C $ 1,090
Preferred stock, series D 1,000
Granted options 14
Direct acquisition costs 82
-------------------
Total purchase price 2,186
Assets acquired:
Inventories 105
Property and equipment 1,922
-------------------
Cost in excess of net assets acquired $ 159
===================
The excess of the total acquisition cost over the fair value of the net
assets acquired is being amortized over 10 years, the average life of the
operating lease obligations acquired, using the straight-line method.
The Company financed the purchase by issuing 33,538 shares of preferred
series C stock and 16,667 shares of cumulative preferred series D stock.
The Company also granted 15,000 stock options for professional services
rendered relating to the acquisition.
F-10
<PAGE>
OREGON BAKING COMPANY
DBA MARSEE BAKING
Notes to Financial Statements, Continued
(Dollars in Thousands, Except Share and Per Share Data)
The following pro-forma information is presented to show the results of
operations had the acquisition occurred January 1, 1997:
<TABLE>
<CAPTION>
DECEMBER 31,
1997
-------------------
(UNAUDITED)
<S> <C>
Total revenues $ 10,051
Loss from operations (1,704)
Net loss (1,942)
Cumulative dividends on preferred series D and A (102)
Net loss attributed to common shareholders (2,044)
Net loss per common share - basic and diluted (2.35)
</TABLE>
The above results of operations are not intended to be indicative of the
results of operations which actually would have been realized had the
acquisition occurred as of January 1, 1997, nor of the future results of
operations of the combined Company.
(4) PROPERTY AND EQUIPMENT
Property and equipment at December 31, consists of the following:
<TABLE>
<CAPTION>
1997 1998
-------------------- --------------------
<S> <C> <C>
Leasehold improvements $ 1,328 $ 4,237
Furniture and equipment 1,159 3,288
Equipment under capital leases 499 1,952
Construction in progress 364 --
-------------------- --------------------
3,350 9,477
Less accumulated depreciation and amortization (716) (1,966)
-------------------- --------------------
$ 2,634 $ 7,511
==================== ====================
</TABLE>
F-11
<PAGE>
OREGON BAKING COMPANY
DBA MARSEE BAKING
Notes to Financial Statements, Continued
(Dollars in Thousands, Except Share and Per Share Data)
(5) LINE OF CREDIT
The Company has $250 outstanding at December 31, 1997 and 1998 under an
operating line of credit secured by the assets of the Company. The credit
line bears interest at prime plus 1% (9.50% and 8.75% at December 31,
1997 and 1998, respectively) and the Company may borrow a maximum of
$250. All unpaid principal and interest is due and payable February 23,
1999. The line of credit is collateralized by the Company's assets. The
line also contains covenants which the Company was in compliance with at
December 31, 1998. (See note 14).
(6) NOTES PAYABLE
At December 31, 1998, the Company was in the process of obtaining bridge
financing through a private offering. The terms of the offering are that
for each $5.00 of financing provided, the investor is entitled to receive
one share of common stock together with a promissory note in the face
amount of $5.00 bearing interest at 8% and payment is due the earlier of
nine months from investment or at the time the Company's stock becomes
publicly traded. At December 31, 1998, there were outstanding promissory
notes with a face value of $525,000 related to the bridge financing. At
December 31, 1998, the Company had an obligation to issue 105,000 shares
of common stock purchased in connection with the bridge financing. (See
note 14).
F-12
<PAGE>
OREGON BAKING COMPANY
DBA MARSEE BAKING
Notes to Financial Statements, Continued
(Dollars in Thousands, Except Share and Per Share Data)
(7) LONG-TERM DEBT AND DEBT TO RELATED PARTIES
<TABLE>
<CAPTION>
1997 1998
-------------------- --------------------
<S> <C> <C>
Note payable to supplier due in monthly installments of
$2, including interest at 12%, maturing 2000, unsecured $ 53 $ 36
Construction loans related to leasehold improvements due in
monthly installments of between $4 and $2 including
interest at 11% - 12% maturing by 2000, unsecured 126 115
Note payable to bank due in monthly installments of $1
including interest at 10.50% maturing in 2001, unsecured -- 24
Note payable to finance company due in monthly installments
of $11, including interest at prime plus 2.75%
(10.5% at December 31, 1998), maturing 2003, secured
by lien and security interest in property. -- 462
Construction loan related to leasehold improvements due in
monthly installments of $2 including interest at 6%,
maturing in 2003, unsecured -- 106
Construction loans related to leasehold improvements due in
monthly installments of between $1 and $3 including
interest at 10% - 12.6% maturing by 2004, unsecured 95 348
Note payable to finance company due in monthly installments
of $16, including interest at prime plus 2.75% (10.5%
at December 31, 1998), maturing 2004, guaranteed by
certain shareholders 900 822
Notes payable to related party shareholders due in quarterly
installments of interest only at 10%, due on demand,
unsecured 26 26
Notes payable to related party shareholders with no stated
installments, interest varying, unsecured, due on demand 39 39
Notes payable to related party shareholders due in monthly
installments of principal and interest at between 17.5%
and 20.4%, unsecured, maturing June 1999 152 128
Notes payable to related party shareholders with no stated
installments, interest varying, unsecured, maturing
May 1999 -- 37
Notes payable to related party shareholders due in quarterly
installments of interest only at 12%, due by August 2000,
unsecured -- 190
-------------------- --------------------
1,391 2,333
Less current portion (257) (599)
-------------------- --------------------
$ 1,134 $ 1,734
==================== ====================
</TABLE>
F-13
<PAGE>
OREGON BAKING COMPANY
DBA MARSEE BAKING
Notes to Financial Statements, Continued
(Dollars in Thousands, Except Share and Per Share Data)
The principal payments on long-term debt are as follows at December 31,
1998:
1999 $ 599
2000 549
2001 336
2002 365
2003 306
Thereafter 178
-------------------
$ 2,333
===================
(8) LETTER OF CREDIT
At December 31, 1998, the Company had a letter of credit for $325
outstanding. The letter of credit is collateral for the Company's
obligations to a finance company. The letter of credit is collateralized
by two shareholders and by $108 of restricted cash by the Company.
(9) CAPITAL LEASE OBLIGATIONS
The Company has entered into certain capital lease obligations related to
the purchase of equipment. The leases bear interest at rates ranging from
10% to 15% and require monthly payments of principal and interest. The
leases are secured by the equipment and mature during 2001 through 2002.
Future minimum payments on capital lease obligations are as follows at
December 31, 1998:
1999 $ 740
2000 707
2001 386
2002 48
-------------------
1,881
Less-portion representing interest (288)
-------------------
Present value of net minimum lease payments 1,593
Less-current portions (574)
-------------------
Long-term obligations under capital leases $ 1,019
===================
F-14
<PAGE>
OREGON BAKING COMPANY
DBA MARSEE BAKING
Notes to Financial Statements, Continued
(Dollars in Thousands, Except Share and Per Share Data)
(10) INCOME TAXES
Due to the Company's losses before provision for income taxes in each
period, there has been no provision for federal and state income taxes
for the years ended December 31, 1997 and 1998.
The reconciliation of the statutory federal income tax rates to the
Company's effective income tax rate for the years ended December 31, are
as follows:
<TABLE>
<CAPTION>
1997 1998
------------------- -------------------
<S> <C> <C>
Federal statutory rate 34.0% 34.0%
State income taxes, net of federal benefit 4.4 4.4
Change in valuation allowance (38.2) (38.3)
Other, net (0.2) (0.1)
------------------- -------------------
-- % -- %
=================== ===================
</TABLE>
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. The tax effects of significant items comprising the Company's
deferred tax assets as of December 31, are as follows:
<TABLE>
<CAPTION>
1997 1998
------------------- -------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 482 $ 1,824
Stock option compensation 12 89
Deferred rent 10 20
Depreciation and amortization 48 281
Bad debt expense 23 4
------------------- -------------------
575 2,218
Valuation allowance (575) (2,218)
------------------- -------------------
Net deferred tax assets $ -- $ --
=================== ===================
</TABLE>
The valuation allowance for deferred tax assets as of December 31, 1996
was $118. The net change in the total valuation allowance for years ended
December 31, 1997 and 1998, was an increase of $457 and $1,643,
respectively.
At December 31, 1998, the Company has net operating loss carryforwards of
approximately $4,755 to offset future federal taxable income and income
taxes, if any, through 2013. As defined in Internal Revenue Code Section
382, the utilization of a portion of the net operating loss and credit
carryforwards may be limited due to a change in ownership caused by
additional investors. A formal analysis has not been completed, but it
appears a change of ownership has occurred.
F-15
<PAGE>
(11) COMMITMENTS AND CONTINGENCIES
(A) OPERATING LEASES
The Company leases certain retail store, office and commissary
facilities under operating leases expiring through the year 2007.
Most lease agreements contain renewal options and rent escalation
clauses. Certain leases provide for contingent rentals based upon
gross sales.
Rental expense under these lease agreements for the years ended
December 31, was as follows:
<TABLE>
<CAPTION>
1997 1998
------------------- -------------------
<S> <C> <C>
Minimum rentals $ 270 $ 977
Contingent rentals 18 172
------------------- -------------------
$ 288 $ 1,149
=================== ===================
</TABLE>
Minimum future rental payments under non-cancelable operating lease
obligations as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
<S> <C>
1999 $ 1,009
2000 901
2001 815
2002 691
2003 633
Thereafter 1,333
-------------------
$ 5,382
===================
</TABLE>
(B) OPTION ISSUANCE
The Board has approved 100,000 options to be issued to the Company's
President and Chief Executive Officer at the current fair market
value at the time the options are earned. The options are earned once
the Company shows three consecutive months of EBITDA (earnings before
interest, income taxes, depreciation and amortization) of 10% or more
(percentage of gross revenues). All shares are fully vested when the
options are earned.
(C) SUPPLY AGREEMENT
The Company has an agreement with a supplier to purchase at least 80%
of certain products, as defined, from this supplier. The agreement
may be terminated by either party with 60 days prior written notice
to the other party. Management believes that other suppliers could
provide similar products. A change in suppliers, however, could
affect the terms currently received by the Company. Such a change
could have a negative impact on results from operations.
F-16
<PAGE>
OREGON BAKING COMPANY
DBA MARSEE BAKING
Notes to Financial Statements, Continued
(Dollars in Thousands, Except Share and Per Share Data)
(D) LEGAL PROCEEDINGS
In the normal course of business, the Company has various legal
claims and other contingent matters outstanding. Management believes
that any ultimate liability arising from these actions would not have
a material adverse effect on the Company's results of operations or
financial condition as of and for the year ended December 31, 1998.
(E) GEOGRAPHIC CONCENTRATION
All of the Company's bakery-cafe's are located in the greater
Portland and Seattle metropolitan areas. The concentration of limited
geographic markets exposes the Company to certain risks in the event
of a change in the economies in these markets which could have a
material adverse affect on the financial results of the Company.
(12) SHAREHOLDERS' (DEFICIT) EQUITY
During 1997, to raise funds, the Company sold 68,543 shares of Series B
preferred stock. In addition, 1,000 shares of common stock were issued in
connection with the purchase of assets (see note 3).
During 1998, in connection with an asset purchase (see note 3), the
Company issued 33,538 shares of Series C preferred stock and 16,667
shares of Series D preferred stock. To raise funds, the Company also sold
95,583 shares of Series C preferred stock at $32.50 per share during the
year. The Company's proceeds included in the financial statements are net
of offering costs.
(A) COMMON STOCK
The authorized number of shares of common stock, no par value, totals
15,000,000. Each share of common stock has voting rights of one vote
per share. Such voting rights are limited in certain circumstances.
F-17
<PAGE>
OREGON BAKING COMPANY
DBA MARSEE BAKING
Notes to Financial Statements, Continued
(Dollars in Thousands, Except Share and Per Share Data)
(B) PREFERRED STOCK
The Company has authorized 4,000,000 shares of no par value preferred
stock. The Company has authorized and issued shares of Series A, B, C
and D preferred stock. The terms of each series of preferred stock
are summarized below:
Dividends
---------
The Series D preferred stock is entitled to an annual cumulative
cash dividend, out of legally available funds, at the per annum
rate of $4.20 per share. Series D preferred stock dividends shall
accrue but not be paid during 1998 and 1999. On a quarterly basis,
Series D preferred stock dividends from 1998 and 1999 shall be
paid during 2000 out of legally available funds. At the option of
the holder of Series D preferred stock or the Company, the Series
D preferred stock's accruing dividends may be paid in the form of
shares of Series D preferred stock valued at $60 per share
(regardless of the fair market value of such shares at the time
the dividend is declared by the Company's Board of Directors);
provided, however, no more than an aggregate of 5,840 shares of
the Company's Series D preferred stock may be issued in lieu of
cash to satisfy the accruing Series D dividends.
The Series A preferred stock is entitled to an annual cumulative
cash dividend, out of legally available funds, at the per annum
rate of $0.60 per share. Dividends accrue from the date of
purchase and are payable only when (1) declared by the Company's
Board of Directors; (2) upon liquidation or dissolution of the
Company; and (3) upon conversion to common stock.
The Series B and C preferred shareholders are not entitled to
cumulative dividends. Series B and C shareholders are entitled to
receive dividends when and if declared by the Board of Directors.
As of December 31, 1998, no dividends have been declared or paid.
Liquidation Preferences
-----------------------
In the event of any liquidation, dissolution or winding up of the
Company, holders of Series D preferred stock shall be entitled to
be paid first out of the assets of the Company available for
distribution to holders of the Corporation's capital stock of all
classes (whether such assets are capital, surplus or earnings)
before any sums shall be paid or any assets distributed among the
holders of Series A, B, or C preferred stock. After payment of the
Series D preferred shareholders, holders of the other preferred
series shall be entitled to be paid out of the assets of the
Company available for distribution to holders of the Company's
capital stock before any sum shall be paid or any assets
distributed among the holders of common stock.
Voting
------
The Series A, B, and C preferred stock will vote with the common
stock of the Company as a single class and will be entitled to the
number of votes equal to the number of shares of common stock
issuable upon conversion of the Series A, B, and C preferred
stock. The Series D preferred stock has no voting rights.
F-18
<PAGE>
OREGON BAKING COMPANY
DBA MARSEE BAKING
Notes to Financial Statements, Continued
(Dollars in Thousands, Except Share and Per Share Data)
Conversion
----------
Any shares of the Series C and D preferred stock may, at the
option of the holder, be converted any time or from time to time
into fully paid common stock at a conversion rate of 10:1. The
holders of Series C and D preferred stock also have anti-dilution
protection. The anti-dilution protection provides for a favorable
adjustment to the conversion ratio of Series D preferred stock in
the event the Company issues any shares of preferred stock, common
stock, options or warrants at a price below $4.00.
The Series A preferred stock is convertible into common stock at
the option of the holder, at a conversion rate of 1:1. The holders
of the Series A may convert their shares into common stock any
time after December 31, 2000.
The Series B preferred stock is convertible into common stock at
the option of the holder, at a conversion rate of 1:1. The holder
of the Series B preferred stock shall have anti-dilution
protection. The anti-dilution provision provides for a favorable
adjustment to the conversion rate in the event the Company issues
any shares of preferred stock, common stock, option or warrants,
at a price below $2.50 per share.
ALL SERIES OF PREFERRED STOCK AUTOMATICALLY CONVERT TO COMMON
STOCK AT THE CURRENT CONVERSION RATIOS UPON THE SUCCESSFUL
COMPLETION OF AN UNDERWRITTEN INITIAL PUBLIC OFFERING.
As of December 31, 1998, the Company has reserved a total of
2,020,122 shares of its common stock pursuant to the conversion
privileges of outstanding preferred stock.
(C) STOCK WARRANTS
In May 1997, in connection with the acquisition of assets (see note
3), the Company issued 10,000 common stock purchase warrants
(Warrants). Each warrant represents the right to purchase one share
of the Company's common stock at an exercise price of $2.50, until
May 16, 2003.
In October 1997, in connection with securing debt financing, the
Company issued 10,000 warrants to related party shareholders for
personally guaranteeing loans of the Company. Each warrant represents
the right to purchase one share of the Company's common stock at an
exercise price of $1.00, until November 1, 2004.
In August 1998, in connection with securing debt financing, the
Company issued a total of 92,465 warrants to related party
shareholders for personally guaranteeing loans of the Company in
prior years. Each warrant represents the right to purchase one share
of the Company's common stock at an exercise price of $1.00, until
November 1, 2004.
In August 1998, in connection with securing debt financing, the
Company issued 4,750 warrants. Each warrant represents the right to
purchase one share of the Company's common stock at an exercise price
of $1.00, until November 1, 2004.
In March 1998, in connection with securing debt financing the Company
issued 1,500 warrants. Each warrant represents the right to purchase
one share of the Company's Preferred Series C stock at an exercise
price of $32.50, until November 1, 2004.
All warrants were valued using the Black-Scholes model. As of
December 31, 1998, no warrants had been exercised.
F-19
<PAGE>
OREGON BAKING COMPANY
DBA MARSEE BAKING
Notes to Financial Statements, Continued
(Dollars in Thousands, Except Share and Per Share Data)
(D) STOCK OPTIONS
At December 31, 1998, the Company had three Stock Option Plans: the
1993 Stock Option Plan adopted in September 1993, the 1997 Stock
Option Plan adopted in February 1997, and the 1998 Stock Option Plan
adopted in December 1998 (collectively, the Plans). Under the Plans,
key employees and consultants may be granted either incentive stock
options or nonqualified stock options. Incentive stock options must
comply with the requirements of the Internal Revenue Code (the Code),
may be granted only to employees. Nonqualified stock options may be
granted to employees and consultants at not less than 85% of the fair
market value of the stock at the date of grant. Canceled options are
available for future grant. The Company has reserved 1,796,908 shares
of its common stock for issuance under the Plans.
As of December 31, 1998, 1,690,440 options had been granted pursuant
to the Plans. The per share weighted-average fair value of stock
options granted during the years ended 1997 and 1998 were $0.92 and
$0.86, respectively, on the date of grant using the Black-Scholes
pricing model with the following weighted-average assumptions:
<TABLE>
<CAPTION>
1997 1998
------------------- --------------------
<S> <C> <C>
Dividend yield -- --
Expected volatility 100% 100%
Risk-free interest rate 6.5% 5.75%
Expected life 10 years 10 years
</TABLE>
The total value of options granted during the years ended December
31, 1997 and 1998 were approximately $211 and $867, respectively,
which will be amortized on a straight-line basis over the vesting
period of the options (typically four years).
The Company applies Accounting Principle Bulletin Opinion No. 25 in
accounting for stock options issued to employees and directors under
the Plans, accordingly, no compensation cost has been recognized for
these stock options in the financial statements. Had the Company
determined compensation cost based on the fair value at the grant
date for its stock options under Statement of Financial Accounting
Standards (SFAS) No. 123, the Company's net loss would have been
increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1998
------------------- --------------------
<S> <C> <C>
As reported:
Net loss $ (1,195) $ (4,404)
Net loss per common share (1.41) (5.07)
Pro forma:
Net loss (1,254) (4,545)
Net loss per common share (1.48) (5.23)
</TABLE>
F-20
<PAGE>
OREGON BAKING COMPANY
DBA MARSEE BAKING
Notes to Financial Statements, Continued
(Dollars in Thousands, Except Share and Per Share Data)
The following table summarizes the activity for the aforementioned
stock option plans:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF PRICE
SHARES PER SHARE
-------------------- --------------------
<S> <C> <C>
Outstanding at December 31, 1996 96,908 $ 0.87
Granted 404,990 1.65
Canceled (174,995) 2.50
Exercised -- --
-------------------- --------------------
Outstanding at December 31, 1997 326,903 0.96
Granted 1,153,542 1.00
Canceled (328,500) 1.00
Exercised -- --
-------------------- --------------------
Outstanding at December 31, 1998 1,151,945 $ 0.99
==================== ====================
</TABLE>
At December 31, 1998, the weighted-average exercise price and
weighted-average remaining contractual life of outstanding options
were $0.99 and 9 years, respectively.
At December 31, 1998, 424,278 outstanding options were currently
exercisable, and the weighted-average exercise price of these
options was $0.97.
At December 31, 1998, the range of exercise prices on outstanding
stock options was $0.50 to $1.00.
(13) RETIREMENT PLAN
Effective January 1, 1998, the Company adopted a tax deferred savings
plan (the 401(k) Plan). All employees age 21 years or over are eligible
to participate in the 401(k) Plan. Enrollment periods are semi-annually,
on January 1 and July 1 of each year. Participants who choose to
participate may contribute up to 15% of their pretax compensation to the
401(k) Plan subject to the statutorily prescribed annual limits. All
employee contributions to the 401(k) Plan are fully vested at all times.
Company contributions are made annually. The Company matches 25% of the
first 4% employees contribute through their salary deferral. Company
contributions vest at 20% per year starting the first year.
(14) SUBSEQUENT EVENTS
In February 1999, the Company amended the Company's Articles of
Incorporation and increased the number of authorized shares of common
stock to 15,000,000 and preferred stock to 4,000,000. The effect of the
revised number of authorized shares has been retroactively applied to the
accompanying financial statements.
F-21
<PAGE>
OREGON BAKING COMPANY
DBA MARSEE BAKING
Notes to Financial Statements, Continued
(Dollars in Thousands, Except Share and Per Share Data)
In February 1999, the Company granted warrants to purchase 250,000
shares of common stock at an exercise price of $1.00 per share in
connection with the Company obtaining additional financing. The
warrants will be valued using the Black-Scholes model.
Since December 31, 1998, the Company has received $1,055 in
additional bridge financing (see note 6), and has issued 316,000
shares of common stock pursuant to the bridge financing.
The Company's $250 line of credit and the $325 letter of credit were
renewed in March 1999. The line of credit was extended to February
2000. The letter of credit was extended to March 2000. Rates on the
line of credit are substantially the same as they were prior to the
renewal.
F-22
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================================
<S> <C>
Marsee Baking
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS [LOGO]
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 1,750,000 Shares of
STOCK AND PURCHASE WARRANTS ONLY IN THOSE JURISDICTIONS WHERE Common Stock
OFFERS AND SALES ARE PERMITTED. THE INFORMATION CONTAINED IN
THIS PROSPECTUS IS ACCURATE ONLY AS OF THE DATE OF THIS 1,750,000 Redeemable Warrants
PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS PROSPECTUS to Purchase Common Stock
OR ANY SALE OF THE COMMON STOCK OR PURCHASE WARRANT.
----------
---------- PROSPECTUS
----------
TABLE OF CONTENTS
PAGE
Barron Chase Securities
Prospectus Summary........................................5 [Logo]
Risk Factors..............................................7
Use of Proceeds..........................................12 7700 W. Camino Real
Dividend Policy..........................................12 Boca Raton, Florida 33433
Capitalization...........................................13 (561)347-1200
Dilution.................................................14
Management's Discussion and Analysis of Beverly Hills, California
Financial Condition and Results of Operations..........15 Boston, Massachusetts
Business.................................................23 Brooklyn, New York
Management...............................................31 Buffalo, New York
Certain Transactions.....................................38 Chicago, Illinois
Principal Shareholders...................................39 Clearwater, Florida
Description of Securities................................40 Duluth, Georgia
Shares Eligible for Future Sale..........................46 West Boca Raton, Florida
Underwriting.............................................48 Edison, New Jersey
Legal Matters............................................50 Eureka Springs, Arkansas
Experts..................................................50 Fort Lauderdale, Florida
Where You Can Find More Information......................50 Hasbrouck Heights, New Jersey
Index to Financial Statements.......................... F-1 La Jolla, California
Naples, Florida
---------- New York, New York
Orlando, Florida
Sarasota, Florida
Tampa, Florida
UNTIL _______ __, 1999 (25 DAYS AFTER COMMENCEMENT OF THE
OFFERING), ALL DEALERS EFFECTING TRANSACTIONS IN MARSEE BAKING
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE , 1999
REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY 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>
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Oregon Business Corporation Act (the "Act") authorizes the
indemnification of an officer or director made party to a proceeding because the
officer or director is or was an officer or director against liability
(including amounts paid in settlement) incurred in the proceeding and against
expenses with respect to the proceeding (including attorney fees) if: (a) the
conduct of the officer or director was in good faith, (b) the officer or
director reasonably believed that his conduct was in the best interests of the
corporation or at least not opposed to its best interests, and (c) in the case
of a criminal proceeding, the officer or director had no reasonable cause to
believe his conduct was unlawful; PROVIDED, HOWEVER, neither a director nor an
officer may be indemnified in connection with (1) a proceeding by or in the
right of the corporation in which the director or officer was adjudged liable or
(2) any other proceeding charging improper personal benefit to the director or
officer in which the director or officer was adjudged liable on the basis that
personal benefit was improperly received by the director or officer. The
Registrant's Amended and Restated Articles of Incorporation (the "Articles")
allow and the company's Amended and Restated Bylaws (the "Bylaws") require the
Registrant to indemnify officers and directors to the fullest extent permissible
by law. The Articles and Bylaws become effective upon the closing of the public
offering.
The Act further provides that the articles of incorporation of a
corporation may provide that no director shall be personally liable to a
corporation or its shareholders for monetary damages for conduct as a director,
except that the provision does not eliminate the liability of a director (a) for
any breach of the director's duty of loyalty to the corporation or its
shareholders, (b) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of the law, (c) for any unlawful
distribution as defined under the Act, or (d) for any transaction from which the
director derived an improper personal benefit. The Registrant's Articles and
Restated Bylaws provide that, to the fullest extent permissible by law, no
director shall be personally liable to the Registrant or its shareholders for
monetary damages.
Reference is also made to Section 6(b) of the Underwriting Agreement
filed as Exhibit 1.1 hereto, indemnifying directors and officers of the
Registrant against certain liabilities, including certain liabilities arising
under the Securities Act of 1933, as amended (the "Securities Act"), in certain
circumstances by the underwriter.
Reference is also made to the form of Indemnification Agreement filed
as Exhibit 10.30 hereto, which the Registrant intends to enter into with its
directors and officers, providing indemnification to the fullest extent provided
by law.
The effect of these provisions is to indemnify the directors and
officers of the Registrant against all costs and expenses of liability incurred
by them in connection with any action, suit or proceeding in which they are
involved by reason of their affiliation with the Registrant, to the fullest
extent permitted by law.
II-1
<PAGE>
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than the
underwriting discount, payable by the Registrant in connection with the sale of
common stock and purchase warrants being registered. All amounts are estimates
except the SEC registration fee, the NASD review filing fee, the Nasdaq filing
and membership fees, and Boston Stock Exchange filing and listing fees.
AMOUNT
TO BE PAID
----------
SEC Registration Fee............................ $6,478
NASD Review Filing Fee.......................... ______
Nasdaq Filing and Listing Fee................... ______
Boston Exchange Filing and Listing Fees......... ______
Printing and Engraving Expenses................. ______
Legal Fees and Expenses......................... ______
Accounting Fees and Expenses.................... ______
Blue Sky Fees and Expenses...................... ______
Transfer Agent and Registrar Fees............... ______
Nonaccountable Expense Allowance................ ______
Miscellaneous Expenses.......................... ______
Total $______
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
The following is a summary of transactions by the Registrant since
December 31, 1995 involving sales of the Registrant's securities that were not
registered under the Securities Act:
1. During September 1995 through January 1996, the Registrant sold an
aggregate of 52,667 shares of Series A Preferred Stock to 19
individuals or entities at a price of $6 per share. The Registrant
received $316,002 as total proceeds from the offering. THESE SALES
WERE MADE IN RELIANCE UPON THE EXEMPTION FROM REGISTRATION SET
FORTH IN SECTION 4(2) OF THE SECURITIES ACT AND REGULATION D, AS
TRANSACTIONS BY AN ISSUER NOT INVOLVING A PUBLIC OFFERING. THE
RECIPIENTS OF SECURITIES IN EACH TRANSACTION REPRESENTED THEIR
INTENTION TO ACQUIRE THE SECURITIES IN EACH TRANSACTION NOT WITH A
VIEW TO, OR FOR SALE IN CONNECTION WITH, ANY DISTRIBUTION THEREOF,
AND APPROPRIATE LEGENDS WERE AFFIXED TO SHARE CERTIFICATES AND
INSTRUMENTS ISSUED IN THE TRANSACTIONS.
2. During December 1996 through February 1997, the Registrant sold
an aggregate of 510,575 shares of Series B Preferred Stock to 24
individuals and entities, at a price per share of $2.50. Jensen
Securities Co. acted as the placement agent for the offering. The
REGISTRANT received total proceeds of $1,250,000 after deducting
$53,305 as commissions and fees paid to the placement agent.
Jensen Securities also received 10,575 shares of Series B
Preferred Stock as consideration for its services. THESE SALES
WERE MADE IN RELIANCE UPON THE EXEMPTION FROM REGISTRATION SET
FORTH IN SECTION 4(2) OF THE SECURITIES ACT AND REGULATION D, AS
TRANSACTIONS BY AN ISSUER NOT INVOLVING A PUBLIC OFFERING. THE
RECIPIENTS OF SECURITIES IN EACH TRANSACTION REPRESENTED THEIR
INTENTION TO ACQUIRE THE SECURITIES IN EACH TRANSACTION NOT WITH A
VIEW TO, OR FOR SALE IN CONNECTION WITH, ANY DISTRIBUTION THEREOF,
AND APPROPRIATE LEGENDS WERE AFFIXED TO SHARE CERTIFICATES AND
INSTRUMENTS ISSUED IN THE TRANSACTIONS.
II-2
<PAGE>
3. During January through April 1998, upon the terms of an asset
purchase agreement, the Registrant issued 33,538 shares of Series
C Preferred Stock and 16,667 shares of Series D Preferred Stock to
the shareholders of Bernie's Bagels, Inc. THE ISSUANCES WERE MADE
IN RELIANCE UPON THE EXEMPTION FROM REGISTRATION SET FORTH IN
SECTION 4(2) OF THE SECURITIES ACT, RELATING TO SALES BY AN ISSUER
NOT INVOLVING ANY PUBLIC OFFERING.
4. During January through October 1998, the Registrant sold an
aggregate of 95,583 shares of Series C Preferred Stock to 19
individuals and entities, at a price per share of $32.50. THE
Registrant received proceeds of approximately $3,106,433. THESE
SALES WERE MADE IN RELIANCE UPON THE EXEMPTION FROM REGISTRATION
SET FORTH IN SECTION 4(2) OF THE SECURITIES ACT AND REGULATION D,
AS TRANSACTIONS BY AN ISSUER NOT INVOLVING A PUBLIC OFFERING. THE
RECIPIENTS OF SECURITIES IN EACH TRANSACTION REPRESENTED THEIR
INTENTION TO ACQUIRE THE SECURITIES IN EACH TRANSACTION NOT WITH A
VIEW TO, OR FOR SALE IN CONNECTION WITH, ANY DISTRIBUTION THEREOF,
AND APPROPRIATE LEGENDS WERE AFFIXED TO SHARE CERTIFICATES AND
INSTRUMENTS ISSUED IN THE TRANSACTIONS.
5. During January through April 1999, the Registrant sold 502,800
Units, each Unit consisting of one share of common stock and a
promissory note in the principal amount of $5.00 and bearing
interest of 8% to 37 purchasers. The principal and accrued
interest are due and payable nine months of the date of the
promissory note or upon the closing of a public offering of the
common stock, whichever is earlier. The Registrant received
proceeds of $1,960,920 after deducting $301,680 in commissions and
fees to Barron Chase Securities, Inc., the Registrant's placement
agent. THESE SALES WERE MADE IN RELIANCE UPON THE EXEMPTION FROM
REGISTRATION SET FORTH IN SECTION 4(2) OF THE SECURITIES ACT AND
REGULATION D, AS TRANSACTIONS BY AN ISSUER NOT INVOLVING A PUBLIC
OFFERING. THE RECIPIENTS OF SECURITIES IN EACH TRANSACTION
REPRESENTED THEIR INTENTION TO ACQUIRE THE SECURITIES IN EACH
TRANSACTION NOT WITH A VIEW TO, OR FOR SALE IN CONNECTION WITH,
ANY DISTRIBUTION THEREOF, AND APPROPRIATE LEGENDS WERE AFFIXED TO
SHARE CERTIFICATES AND INSTRUMENTS ISSUED IN THE TRANSACTIONS.
6. On April 29, 1999, the Registrant issued to Mr. Joseph Tanous, a
director of the Registrant, 150,000 shares of common stock in
consideration for agreeing to personally guarantee up to $750,000
of the Registrant's working capital line of credit. THE ISSUANCE
WAS MADE IN RELIANCE UPON THE EXEMPTION FROM REGISTRATION SET
FORTH IN SECTION 4(2) OF THE SECURITIES ACT, RELATING TO SALES BY
AN ISSUER NOT INVOLVING ANY PUBLIC OFFERING.
7. Since 1994, the Registrant has issued 28 warrants to purchase up
to an aggregate of 397,548 shares of common stock at an exercise
price ranging from $1.00 to $6.00 per share. These warrants have
been granted to individuals and entities who have made valuable
contributions to the company in the form of providing loans,
personal guarantees, assets and financial consulting services. One
warrant to purchase 500 shares of commons stock was exercised in
February 1996. TWO WARRANTS TO PURCHASE A TOTAL OF 10,000 SHARES
OF COMMON STOCK WERE CANCELED AND SUBSTITUTED WITH REPLACEMENT
WARRANTS TO PURCHASE THE SAME NUMBER OF COMMON STOCK SHARES. As of
MAY 31, 1999, 12 warrants have expired representing warrants to
purchase 4,833 shares of common stock and 14 warrants remain
outstanding representing warrants to purchase 382,215 shares of
common stock at exercise prices ranging from $1.00 to $3.00 per
share.
The Registrant has also issued a warrant to a equipment lease
financing company to purchase up to 1,500 shares of Series C
Preferred Stock or 15,453 shares of common stock into which the
Series C Preferred stock is currently convertible.
EACH OF THESE ISSUANCES were deemed to be exempt from registration
under the Securities Act in reliance on Section 4(2) of the
Securities Act, Regulation D, Section 3(a)(9) or Rule 701
promulgated under the Securities Act, as transactions by an issuer
not involving a public offering, transactions involving an
exchange of securities by the issuer with its security holders
where no commission or remuneration is paid or given directly or
indirectly for soliciting the exchange, or transactions pursuant
to compensatory benefit plans and contracts relating to
compensation. The recipients of securities in each transaction
represented their intention to acquire the securities in each
transaction not with a view to, or for sale in connection with,
any distribution thereof, and appropriate legends were affixed to
share certificates and instruments issued in the transactions.
II-3
<PAGE>
8. SINCE SEPTEMBER 1993, THE REGISTRANT HAS GRANTED INCENTIVE STOCK
OPTIONS AND NON-QUALIFIED STOCK OPTIONS TO PURCHASE AN AGGREGATE
OF 1,707,745 SHARES OF COMMON STOCK UNDER INDIVIDUAL STOCK OPTION
AGREEMENTS AND ITS 1993, 1997 AND 1998 STOCK OPTION PLANS TO
ELIGIBLE OFFICERS, DIRECTORS, EMPLOYEES AND CONSULTANTS OF THE
REGISTRANT. OF THOSE OPTIONS GRANTED, OPTIONS TO PURCHASE 365,900
SHARES HAVE EXPIRED OR HAVE BEEN TERMINATED BY THEIR TERMS, AND
THERE ARE CURRENTLY OUTSTANDING OPTIONS TO PURCHASE 1,341,845
SHARES, AS OF THE FILING DATE. SINCE SEPTEMBER 1993, THE
REGISTRANT HAS NOT ISSUED ANY SHARES OF COMMON STOCK UPON THE
EXERCISE OF OPTIONS. THE ISSUANCES WERE MADE IN RELIANCE UPON
SECTION 4(2) OF THE SECURITIES ACT, AND UPON RULE 701 THEREUNDER,
AS TRANSACTIONS BY AN ISSUER NOT INVOLVING A PUBLIC OFFERING OR
TRANSACTIONS PURSUANT TO COMPENSATORY BENEFIT PLANS AND CONTRACTS
RELATING TO COMPENSATION. THE RECIPIENTS OF SECURITIES IN EACH
TRANSACTION REPRESENTED THEIR INTENTION TO ACQUIRE THE SECURITIES
IN EACH TRANSACTION NOT WITH A VIEW TO, OR FOR SALE IN CONNECTION
WITH, ANY DISTRIBUTION THEREOF, AND APPROPRIATE LEGENDS WERE
AFFIXED TO SHARE CERTIFICATES AND INSTRUMENTS ISSUED IN THE
TRANSACTIONS.
ITEM 27. EXHIBITS
(a) Exhibits
Exhibit No. Description
---------- -----------
1.1* Form of Underwriting Agreement
1.2* Form of Selected Dealer Agreement
3.1* Proposed Amended and Restated Articles of
Incorporation
3.2* Articles of Incorporation (filed June 26, 1992)
3.3* Amendment to Article II of the Articles of
Incorporation (filed December 13, 1996)
3.4* Certificate of Designation of Series C Convertible
Preferred Stock and Series D Convertible and
Redeemable Preferred Stock (filed January 7,
1998)
3.5* Amendment to Article II of the Articles of
Incorporation (filed March 6, 1998)
3.6* Articles of Correction (filed June 3, 1998)
3.7* Amendment to Certificate of Designation of Series
C Convertible Preferred Stock and Series D
Convertible and Redeemable Preferred Stock
(filed October 7, 1998)
3.8* Amendment to Article II of the Articles of
Incorporation (filed March 16, 1999)
3.9* Proposed Amended and Restated Bylaws
3.10* Bylaws
4.1* See Articles II and IV of Exhibit 3.1 and Articles
I and V of Exhibit 3.9
4.2+ Form of Common Stock Certificate
4.3+ Form of Purchase Warrant Certificate
4.4+ Form of Purchase Warrant Agreement with Transfer
Agent
5.1+ Opinion of Tonkon Torp LLP as to legality of the
securities being registered, including consent
10.1* Registrant's 1993 Non-Qualified Stock Option Plan
and Amendments Nos. 1 and 2
10.2* Form of Stock Option Agreement under the 1993
Non-Qualified Stock Option Plan
10.3* Registrant's 1997 Stock Option/Stock Issuance Plan
10.4* Form of Notice of Grant under the 1997 Stock
Option/Stock Issuance Plan
10.5* Registrant's 1998 Non-Qualified Stock Option Plan
II-4
<PAGE>
10.6* Form of Notice of Grant under the 1998
Non-Qualified Stock Option Plan
10.7*/** SYSCO Master Distribution Agreement dated April
13, 1998
10.8* SYSCO Agreement dated February 19, 1999
10.9* Silicon Valley Bank Loan and Security Agreement
dated October 28, 1997 and Loan Modification
Agreements
10.10* Contribution and Indemnity Agreement dated October
28, 1997 with Tanous and Durbetaki
10.11* LINC Capital Inc. Master Lease Agreement dated
April 17, 1998 and Schedules 1, 2 and 3
10.12* LINC Capital Inc. Warrant and Warrant Purchase
Agreement dated April 17, 1998
10.13* Form of the Registrant's currently outstanding
Warrant Agreement
10.14* Heller First Capital Corp. Promissory Note dated
June 20, 1996 [sic]
10.15* Heller First Capital Corp. Authorization and Loan
Agreement dated May 16, 1997
10.16* Heller First Capital Corp. Security Agreement
dated June 20, 1997
10.17* Heller Financial Leasing, Inc.
Promissory Note dated April 28, 1998
10.18* Heller Financial Leasing, Inc. Security Agreement
dated April 28, 1998
10.19* Heller Financial Leasing, Inc. Letter Agreement
dated May 5, 1998
10.20* Heller Financial Leasing, Inc. Promissory Note
dated May 19, 1998
10.21* Heller Financial Leasing, Inc. Promissory Note
dated August 26, 1998
10.22* Heller Financial Leasing, Inc. Cross-Collateral
and Cross-Default Agreement dated August 26,
1998
10.23* Heller Financial Leasing, Inc. Promissory Note
dated November 6, 1998
10.24* Employment Agreement with Raymond W. Lindstrom
dated January 1, 1999
10.25* Employment Agreement with Howard Wasserteil dated
July 12, 1996
10.26* Amended Employment and Stock Grant Agreement with
Joann Vazquez dated April 8, 1999
10.27* Real Estate Lease dated May 1995 for Portland
Commissary
10.28* Industrial Real Estate Lease dated November 28,
1994 for Seattle Commissary and Assignment and
Consent to Assignment of Lease dated December
26, 1997
10.29* Investor's Rights Agreement dated January 9, 1998
and Amendment dated September 11, 1998
10.30* Form of Officers and Directors Indemnification
Agreement
10.31* Separation Agreement dated as of March 12, 1999
with Brad K. Barnett
10.32* Consulting Agreement dated January 12, 1999 with
Viking Group, LLC and Anthony Kamin
10.33* Form of Underwriter's Warrant Agreement and form
of Warrant Certificate
10.34* Form of Financial Advisory Agreement
10.35* Form of Merger and Acquisition Agreement
10.36* Agreement to Provide Guaranty
23.1* Consent of KPMG Peat Marwick LLP DATED APRIL 20,
1999
23.1A Consent of KPMG Peat Marwick LLP DATED JUNE 17,
1999
23.2+ Consent of Tonkon Torp LLP (included in Exhibit
5.1)
24.1* Power of Attorney (see Page II-8 of the
Registration Statement FILED APRIL 30, 1999)
27.1* Financial Data Schedule FOR YEARS AND 1997
AND 1998
27.2 FINANCIAL DATA SCHEDULE FOR FIRST QUARTERS OF
1998 AND 1999
* PREVIOUSLY filed.
** Certain portions of this exhibit are omitted pursuant to a request for
confidential treatment.
+ TO BE FILED BY AMENDMENT.
II-5
<PAGE>
ITEM 28. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the
underwriter at the closing specified in the Underwriting Agreement certificates
in the denominations and registered in the names as required by the underwriter
to permit prompt delivery to each purchaser.
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 foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
the indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. If a claim for indemnification against these
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 the
director, officer or controlling person in connection with the securities being
registered hereunder, 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 of whether the indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of the issue.
The undersigned Registrant hereby undertakes that:
(1) 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 under the Securities Act and
contained in a 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.
(2) 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
therein, and the offering of these securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-6
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned in the City of Portland,
State of Oregon, on June 17, 1999.
OREGON BAKING COMPANY, DBA MARSEE BAKING
By /s/ Raymond W. Lindstrom
------------------------
Raymond W. Lindstrom
Chairman of the Board, President and Chief
Executive Officer
By /s/ Stephen A. Aanderud
-----------------------
Stephen A. Aanderud
Chief Financial Officer and Assistant
Secretary
By /s/ Howard J. Wasserteil
------------------------
Howard J. Wasserteil
Executive Vice President, Secretary
and Director
By Robert E. Schneider*
-------------------
Robert E. Schneider, Ph.D.
Director
By Gerald W. Frank*
---------------
Gerald W. Frank
Director
By Joeseph F. Tanous*
-----------------
Joseph F. Tanous
Director
By Raymond Zimmerman*
-----------------
Raymond Zimmerman
Director
*By /s/ Steven A. Aanderud
------------------------
Raymond W. Lindstrom
(Attorney-in-Fact)
II-7
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Oregon Baking Company dba Marsee Baking:
We consent to the use of our reports included herein and to the reference to our
firm under the headings "Summary Financial Information" and of "Experts" in the
prospectus.
Our report dated February 23, 1999 contains an explanatory paragraph that states
that the Company has suffered recurring losses from operations which raises
substantial doubt about its ability to continue as a going concern. The
financial statements do not include any adjustments that might result from the
outcome of that uncertainty.
/s/ KPMG Peat Marwick LLP
Portland, Oregon
June 17, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the Balance
Sheets and Statements of Operations found in pages F-3 and F-4, respectively, of
the Registration Statement and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> MAR-31-1998 MAR-31-1999
<PERIOD-START> JAN-01-1998 JAN-01-1999
<PERIOD-END> MAR-31-1998 MAR-31-1999
<CASH> 0 129
<SECURITIES> 0 0
<RECEIVABLES> 0 245
<ALLOWANCES> 0 10
<INVENTORY> 0 207
<CURRENT-ASSETS> 0 1,028
<PP&E> 0 9,533
<DEPRECIATION> 0 2,353
<TOTAL-ASSETS> 0 8,977
<CURRENT-LIABILITIES> 0 6,241
<BONDS> 0 0
0 0
0 6,541
<COMMON> 0 828
<OTHER-SE> 0 7,364
<TOTAL-LIABILITY-AND-EQUITY> 0 8,977
<SALES> 2,732 2,938
<TOTAL-REVENUES> 2,732 2,938
<CGS> 1,554 1,721
<TOTAL-COSTS> 3,005 3,049
<OTHER-EXPENSES> 618 730
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 67 256
<INCOME-PRETAX> (958) (1,077)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (958) (1,077)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (958) (1,077)
<EPS-BASIC> (1.13) (.97)
<EPS-DILUTED> (1.13) (.97)
</TABLE>
