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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
COMMISSION FILE NUMBER 1-13260
SILVERADO FOODS, INC.
(Exact name of registrant as specified in its charter)
OKLAHOMA 73-1369218
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6846 SOUTH CANTON, SUITE 110
TULSA, OKLAHOMA 74136
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (918) 496-2400
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
Common Stock, $.01 Par Value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
As of March 25, 1997, 7,538,108 shares of the Registrant's Common
Stock were outstanding, and the aggregate market value of the Common Stock held
by non-affiliates was approximately $11,201,370.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held May 9, 1997, are incorporated by reference into Part III
of this Form 10-K.
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SILVERADO FOODS, INC.
FORM 10-K
YEAR ENDED DECEMBER 31, 1996
TABLE OF CONTENTS
Page
----
PART I
Item 1. Business........................................................ 1
Item 2. Properties...................................................... 5
Item 3. Legal Proceedings............................................... 5
Item 4. Submission of Matters to a Vote of Security-Holders............. 5
Item 4A. Executive Officers of the Registrant............................ 5
PART II
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters............................................. 7
Item 6. Selected Financial Data......................................... 8
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................... 8
Item 8. Financial Statements and Supplementary Data..................... 12
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............................. 12
PART III
Item 10. Directors and Executive Officers of the Registrant.............. 13
Item 11. Executive Compensation.......................................... 13
Item 12. Security Ownership of Certain Beneficial Owners and Management.. 13
Item 13. Certain Relationships and Related Transactions.................. 13
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K......................................... 13
Signatures...................................................... 17
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PART I
ITEM 1. BUSINESS
GENERAL
Silverado Foods, Inc. (the "Company") manufactures and markets various lines of
specialty baked goods, including biscotti, bagels and bagel bars, which are sold
through multiple distribution channels. In addition, the Company's wholly owned
subsidiary, Silverado Marketing Services, Inc. ("SMS"), is believed to be the
nation's largest retail snack tray company, servicing approximately 72,000
accounts in 23 major metropolitan areas across the country. SMS services the
in-office snack food and, to a lesser extent, coffee needs of small businesses
with between 5 and 50 employees.
The Company sells specialty baked goods to retail grocery stores, specialty
retailers, wholesale club stores, the food service industry and the vending
industry. The Company is integrating the distribution strength of SMS, which has
warehousing, packing, sales and distribution operations in 23 major metropolitan
areas, with its food sales efforts. The Company believes that controlling
distribution in some key markets into which it distributes provides a
competitive advantage over those competitors without such distribution
capabilities.
Financial information relating to the Company's industry segments is set forth
in Note 13 - "Business Segment Information" of the "Notes to Consolidated
Financial Statements" which are included herein. The specialty baked goods
segment accounted for approximately 54 percent, 57 percent and 54 percent of the
Company's revenues for the years ended December 31, 1994, 1995 and 1996,
respectively. The retail snack tray segment accounted for approximately 46
percent, 43 percent and 46 percent of the Company's revenues for the years ended
December 31, 1994, 1995 and 1996, respectively.
The Company was incorporated in Oklahoma on August 15, 1990. The Company's
principal office is located at 6846 South Canton, Suite 110, Tulsa, Oklahoma
74136, and its telephone number is (918) 496-2400. Unless the context requires
otherwise, all references to the "Company" include Silverado Foods, Inc. and its
consolidated subsidiaries.
COMPANY HISTORY
The Company was formed in August of 1990. Since that time, it has made numerous
acquisitions which have led the Company into two primary areas of concentration:
specialty baked goods and retail snack tray operations. During 1996, the
Company took steps to make it a more narrowly focused specialty baked goods
producer and retail snack tray company. In 1996, the following steps took
place:
. The Company sold its gift and gourmet division, which included five brands
which were selling to department stores and gourmet shops.
. The Company opened two large automated bakery production facilities in
Tulsa, Oklahoma and Santa Ana, California.
. The Company closed three of its bakery facilities and transferred the
bakery operations of such closed facilities to the Company's Tulsa, Santa
Ana, or Palestine facilities.
. The Company decided to seek alternatives for disposing of certain non-honor
snack distribution assets.
. The Company focused on internal growth rather than acquisition growth in
its retail snack tray operations.
These steps have positioned the Company to be a focused specialty baked goods
producer, having leading brands in niche product categories in growth markets.
In addition, the Company is the leading retail snack tray provider in the United
States to the growing small office market.
INDUSTRY OVERVIEW
Specialty Baked Goods. Specialty baked goods are baked products which have a
unique characteristic in one or more of the following: ingredients, process,
packaging, or distribution. Specialty baked goods are sold to in-store deli-
bakery operations, the food service industry, retail grocery stores, wholesale
club stores, the vending industry and mail order
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customers. There are several competitors in the industry which are much larger
than the company, such as Sara Lee, Campbell Soup, and Rich's. In addition,
there is a plethora of small regional specialty baked goods companies scattered
across the country.
Retail Snack Trays. Retail snack trays consist of cardboard boxes holding 60 to
110 snacks and a coin box that are placed in the coffee rooms or other
appropriate locations within a small business. Snacks are purchased by placing
money in the coin box on an "honor system". The trays are serviced every 8-10
business days. The snacks provided include candy, salty snacks and baked items.
Approximately 5% of the items offered in retail snack trays are comprised of the
Company's products. Retail snack trays are attractive alternatives to vending
machines in offices of 5 to 50 employees.
The retail snack tray industry was founded in 1977 by ARA Cory to supplement its
in-office coffee service business. The Company believes that the industry's
sales are approximately $300,000,000 annually with 350 companies furnishing this
service nationwide. The Company believes it is the largest retail snack tray
company in the country. Additionally, the Company believes the total potential
size of the market is $1.5 billion in sales with about 20% of the market being
serviced today by itself and all competitors.
BUSINESS STRATEGY
The Company has grown primarily through acquisitions, however, it has developed
a nationwide sales organization for its specialty baked goods and retail snack
tray divisions and anticipates growing the Company internally as well as through
strategic acquisitions.
By virtue of SMS's retail snack tray customers, the Company has 72,000 retail
outlets through which it currently sells two of its specialty baked goods. The
Company believes it has a significant opportunity to manufacture and sell
branded specialty baked goods directly to consumers through SMS. Additionally,
the Company believes that SMS, which operates 110 routes in 23 major
metropolitan areas through 24 warehouses across the country, provides it with
the base for controlling distribution for certain of its specialty baked goods
to key retail customers.
Operating Strategy--Retail Snack Tray. The Company believes it is the highest
quality service provider in the industry. The Company plans on providing
additional products required by small businesses on a repetitive basis with its
regular service calls. The first product and service extension being tested
is a coffee service designed for smaller offices. Additional products and
service extensions are being tested.
Operating Strategy--Specialty Baked Goods. By utilizing the Company's key
distribution partners to provide value added items, the Company believes it has
been able to develop a competitive advantage over many large but inflexible
competitors, as well as small but distribution constrained competitors. The
Company believes its evolving distribution strength and its ability to quickly
develop new specialty baked goods in response to customer needs gives it a
unique position to generate growth internally as well as add value to strategic
acquisitions. The Company will continue to search for potential acquisitions
that have established specialty baked products in unique market niches which
easily integrate into the Company's overall operating strategy.
PRODUCTS
The Company's products have historically been obtained through acquisition, but
the Company believes it has developed enough capability to now develop new
specialty baked products internally and will focus on acquisitions of businesses
which have proven products in certain markets which may be leveraged into the
Company's nationwide sales and distribution network.
The Company believes it is one of the largest producers of biscotti, an Italian
cookie that is generally eaten with a cup of coffee, cappuccino, milk or
espresso, and one of the leaders in the sale of crispy marshmallow square
treats. Additionally, the Company is one of the nations largest producers of
bagel bars (a hand-held, ready-to-eat, healthful rectangular meal replacement).
The Company also produces a line of cakes including special holiday cakes.
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SALES AND DISTRIBUTION
Retail Snack Tray. The key to development of a sales system in the retail snack
tray business is the route sales person whose responsibility it is to maintain
the route sales level and profitability. The Company maintains a high ratio of
field sales people to routes to provide additional support for the route sales
person. The field sales people are responsible for developing new routes,
strengthening poorer performing routes and aiding in the introduction of new
products and services.
The route sales person is provided pre-packed retail snack trays and a listing
of customers to service each business day. In addition, the route sales person
has, for each customer, information including the amount of revenue collected
for each of the past service cycles, and the gross profit of each customer. It
is the route sales person's responsibility to work with customers, field sales
people and market sales managers to control customer and route revenue and
profitability.
Specialty Baked Goods. All regional sales managers are responsible for
maintaining close personal contact with each key account and, when necessary, to
service key customers' needs personally. The Company has a national network of
brokers who specialize in in-store deli-bakery, food service, vending,
convenience store, and specialty retail distribution channels. Each broker's
objective is to maintain existing business and grow new business in each of
these channels. These brokers are managed by regional sales managers.
OPERATIONS
Production and Manufacturing. The Company currently operates three bakery
facilities located in Santa Ana, California (48,000 sq. feet), Tulsa, Oklahoma
(47,000 sq. feet), and Palestine, Texas (34,000 sq. feet). The Santa Ana and
Tulsa facilities are leased and the facility in Palestine is owned by the
Company.
The Company uses a third party manufacturer (co-packer) for its crispy
marshmallow square treats. The total sales from this product during 1996 were
approximately 5% of consolidated net sales.
Retail Snack Tray Operations. The operations of the retail snack tray segment
are conducted from 24 warehouses located throughout the country. Each separate
operation is comprised of 2 to 15 routes and, although part of a national system
of purchasing, route accounting, and control systems, has separate financial
statements for measurement of local effectiveness.
Each market center warehouse has a packing line, an accounting clerk, route
sales personnel, a market sales manager and, in some cases, a field sales
person. Purchasing is done from an approved menu and from approved suppliers.
Even though all paper work is handled and entered in the computer system at each
location, centralized control is maintained through a sophisticated wide area
network for route information, accounts payable, bill payment, cash
consolidation, payroll, and accounting.
Customer shortages are an obvious characteristic of the retail snack tray
business since it relies upon honesty of customers for payment. The Company
monitors customer shortages for each business cycle and if the shortage becomes
too large, corrective action is taken. Shortages increase cost of goods sold by
12% to 15%.
Suppliers. The major raw materials and ingredients purchased by the Company are
candy, fruit, nuts, sugar, flour, eggs, salty snacks and chocolate. Some of
these products are purchased as commodities and are subject to variations in
costs over short periods of time, which fluctuations can cause significant
impacts on gross margins. A few products are purchased from companies with very
strong brand recognition, such as salty snacks and candy bars. Branded products
purchased from companies who dominate a particular segment may be subject to
price increases from time to time. When this happens the Company must make a
decision related to value and impact on revenue if lesser brands are used.
These decisions may impact revenues and gross margins.
COMPETITION
Competition in the retail snack tray business may be defined as broadly as any
convenient place for a small business worker to purchase food. This can be
other retail snack tray companies, a local convenience store, or even an in-
office
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building deli or centralized vending area. The Company believes it is the lowest
cost provider of in-office snack alternatives and has many advantages such as
dependability and convenience over alternatives available to its customers.
The specialty baked goods business is highly competitive and is comprised of a
few large companies, such as Sara Lee, Campbell Soup, Kelloggs and Rich's and
numerous small regional companies. The Company believes that it has a
competitive advantage in that it has the flexibility to develop products to meet
the needs of key customers in a short time frame at a competitive cost and the
ability to produce those products in significant quantities. Flexibility and
responsiveness are believed to be an advantage over large competitors, while
cost, volume and distribution are believed to be advantages over local and
regional baking companies. The Company had sales to two customers during 1996
that exceeded 10% of consolidated sales (Sam's Wholesale Club, 15%, and Price
Costco, 19%.)
TRADEMARKS
The Company owns several federally registered trademarks for certain of the
trademarks that it uses. The Company believes that its registered and common law
trademarks have significant value and that some of its trademarks are
instrumental to its ability to create demand for and market its products. There
are currently no pending challenges to the use or registration of any of the
Company's significant trademarks. There can be no assurance, however, that the
Company's trademarks do not or will not violate the proprietary rights of
others, that they would be upheld if challenged or that the Company would, in
such an event, not be prevented from using its trademarks, any of which could
have an adverse effect on the Company.
REGULATION
The Company, as a manufacturer and marketer of food items, is subject to
regulation by various government agencies, including specifically, the United
States Food and Drug Administration. Under various statutes and regulations,
such agencies prescribe requirements and establish standards for quality, purity
and labeling. For example, under the Nutrition Labeling and Education Act of
1990, as amended, food manufacturers are now required to disclose nutritional
information on their labels in a uniform manner. The finding of a failure to
comply with one or more regulatory requirements can result in variety of
sanctions, including monetary fines and/or compulsory withdrawal of products
from store shelves. The Company may also be required to comply from time to time
with state and local laws regulating food handling and storage.
In addition to laws relating to food products, the Company is subject to various
federal, state and local environmental laws and regulations which limit the
discharge, storage, handling and disposal of a variety of substances. The
Company's operations are also governed by laws and regulations relating to
workplace safety and worker health, principally the Occupational Safety and
Health Administration Act and regulations and applicable state laws and
regulations thereunder.
The Company believes that it currently complies in all material respects with
the foregoing laws and regulations, although there can be no assurance that
future compliance with such laws or regulations will not have a material adverse
effect on the Company's financial condition or results of operations.
EMPLOYEES
As of December 31, 1996, the Company employed 575 persons on a full-time basis.
The Company is not a party to any collective bargaining agreement as of March
20, 1997. The Company believes its relations with its employees are
satisfactory.
MANAGEMENT INFORMATION SYSTEMS
The Company's management information system allows for integrated
processing of all accounting records of acquired businesses. The retail snack
tray segment has implemented a PC-based wide area network information system,
the objective of which is to enable the Company to analyze sales, profitability,
frequency of service and shortages, for customers, routes and market centers.
The reports that provide key operating data by market center are available daily
at the Company's headquarters. The Company believes that these systems assist
management in analyzing key market center variables and will assist management
in the respective market centers to identify and eliminate unprofitable accounts
in an expeditious manner.
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SEASONALITY
Historically, the Company's operations have been somewhat seasonal in nature,
but in comparison with the Company's mail order catalog business which is
predominantly in the fourth quarter, the remaining business operations are less
seasonal. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
ITEM 2. PROPERTIES
The Company's executive offices are located in Tulsa, Oklahoma where the Company
leases 8,500 square feet of office space. This lease expires on January 1, 2000.
The Company leases the 48,000 square foot facility which houses its bread
products group in Santa Ana, California, which lease expires in 1998. The
Company also leases a 47,000 square foot facility in Tulsa, Oklahoma which
houses its specialty cookie products operations. This lease expires in 2006. In
addition, the Company leases 24 warehouse facilities from which the activities
of the retail snack tray segment are conducted. Such warehouse facilities range
in size from 300 square feet to 5,300 square feet. The Company owns a 34,000
square foot building in Palestine, Texas, which houses the Eilenberger's(R)
bakery. The Company believes that its facilities are suitable and adequate for
its immediate needs and that additional substitute space is available if needed
to accommodate expansion. The Company currently leases three facilities located
in Hayward, California, Carpenteria, California and Orlando, Florida where it
previously produced certain products that have now been consolidated into the
Tulsa and Santa Ana facilities. These leases expire over the next six months.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to ordinary routine litigation incidental to its
business, none of which is expected to have a material effect on the Company's
financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
There were no matters submitted to the Company's stockholders during the fourth
quarter of the fiscal year ended December 31, 1996.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is certain information with respect to the executive officers
of the Company. Executive officers are elected by the Board of Directors and
serve at its discretion.
NAME AGE POSITION
---- --- --------
Lawrence D. Field 37 Director, Chairman of the Board of Directors
Timothy G. Bruer 39 Director, President and Chief Executive Officer
Michael W. Knapik 48 Vice President of Sales and Marketing
Robert W. Luttman 52 President of Silverado Marketing Services, Inc.
Dorvin D. Lively 38 Vice President, Chief Financial Officer and Secretary
Richard A. Hall 57 Vice President of Operations
Lawrence D. Field, the founder of the Company, has been a Director, Chairman of
the Board of directors and Chief Executive Officer of the Company since its
inception in August 1990. Mr. Field relinquished his position as Chief
Executive Officer in March 1997. He was also President of the Company from
August 1990 to February 1994. From
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September 1984 to February 1990, Mr. Field was Vice President and a shareholder
of Capital Advisors, Inc., an investment management firm headquartered in Tulsa,
Oklahoma, which managed investments for pension and profit sharing plans,
foundations and individuals in the United States. From August 1982 to September
1984, Mr. Field served as Vice President of American Central Oil Corporation, an
independent oil and gas company. Mr. Field graduated from the University of
Texas at Austin in 1982 with a Bachelor of Science degree in Communications.
Timothy G. Bruer joined the Company as a Director, President and Chief Executive
Officer in March 1997. Mr. Bruer served as Vice-President/General Manager of the
Culinary Division of Nestle USA since 1992. From 1985 to 1992, Mr. Bruer was a
partner with Bain and Company, Inc., a national consulting firm working with
companies in the consumer marketing area, as well as clients in the high
technology and insurance industries. Mr. Bruer graduated from Stanford
University with a Bachelor of Arts degree in Economics and from the University
of Chicago with a Master of Business Administration degree.
Michael W. Knapik has been Vice President of Sales and Marketing of the Company
since December 1996. Prior to joining the Company, Mr. Knapik served as Vice
President/General Manager for Mission Foods from 1993 to 1996. From 1992 to
1993, Mr. Knapik was President and CEO of Maryland Beverage LP/Castle Food
Products LP. Mr. Knapik was Vice President/General Manager of Suntory Water
Group, Inc. from 1990 to 1992 and was Vice President of Sales for Haagen-Dazs
Company, Inc. from 1988 to 1990. Mr. Knapik has a Bachelor degree in Economics
and Political Science from the University of St. Thomas.
Robert W. Luttman has been President of Silverado Marketing Services, Inc. since
October of 1995. From 1990 to 1993, Mr. Luttman was President of Nibble with
Gibbles, Inc., a regional manufacturer and distributor of snack foods, which is
located in the northeast. Mr. Luttman also worked as a consultant for Nibble
with Gibbles, Inc. for the period of 1993 to 1995. Mr. Luttman also has 17 years
experience with Frito-Lay, Inc. in Dallas, Texas in manufacturing, distribution,
and strategic planning. Mr. Luttman has a Bachelor of Arts Degree in History and
Philosophy from St. Peter's College.
Dorvin D. Lively has been Vice President, Chief Financial Officer and Secretary
of the Company since February 1995. From December 1992 to January 1995, Mr.
Lively was Assistant Controller of Pepsi-Cola International. From June 1980 to
December 1992, Mr. Lively was with Arthur Andersen LLP serving in various
positions within the audit division. From June 1990 to June 1992, Mr. Lively was
appointed a Practice Fellow with the Financial Accounting Standards Board in
Norwalk, Connecticut. Mr. Lively holds a Bachelor of Science degree in Business
Administration from the University of Arkansas.
Richard A. Hall has been Vice President of Operations since November of 1995.
From February 1993 to 1995, Mr. Hall was Chief Operating Officer of Directions
International, a Dallas area management consulting company. During 1992 he
served as Vice President of Operations for the Drackett division of Bristol-
Myers Squibb, a maker of household cleaning products. For the period from 1986
to 1991, Mr. Hall served as Senior Vice President of Operations for Sky Chefs
when it became separated from American Airlines to serve the airline and airport
food operations industries. From 1981 through 1986, he was an area Manufacturing
Vice President for Frito-Lay. Mr. Hall is a graduate of the University of
Oklahoma with a Bachelor of Science degree in Chemical Engineering.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's Common Stock is traded on the American Stock Exchange ("AMEX")
under the symbol "SLV." The high and low transaction prices for each quarter
during fiscal 1995 and fiscal 1996 as traded on the AMEX are set forth below.
<TABLE>
<CAPTION>
Stock Prices
-------------------
FISCAL 1995 High Low
---------------- --------- --------
<S> <C> <C>
First Quarter... $4 3/8 $2 1/2
Second Quarter.. $3 7/8 $2 5/8
Third Quarter... $5 $3 5/8
Fourth Quarter.. $4 7/16 $2 3/4
FISCAL 1996
----------------
First Quarter... $3 1/4 $2 1/2
Second Quarter.. $3 15/16 $3
Third Quarter... $3 5/16 $2 3/8
Fourth Quarter.. $3 1/8 $2 1/4
</TABLE>
At March 25, 1997, the Company had 7,538,108 shares of Common Stock outstanding,
excluding 26,995 shares held in the Company's treasury, which were held by
approximately 966 beneficial owners, represented by 131 shareholders of record.
The Company has never paid cash dividends on its Common Stock. The Company
presently intends to retain any earnings for the operation and expansion of the
Company's business and does not anticipate paying cash dividends in the
foreseeable future. Any future determination as to the payment of dividends will
depend upon results of operations, capital requirements, the financial condition
of the Company and such other factors as the Board of Directors of the Company
may determine. In addition, the Company's revolving credit facility restricts
the Company's ability to declare or pay cash dividends under certain
circumstances. See Note 6 of the "Notes to Consolidated Financial Statements."
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ITEM 6. SELECTED FINANCIAL DATA
The following table of selected financial data should be read in conjunction
with the Financial Statements required by Item 8 and Management's Discussion and
Analysis of Financial Condition and Results of Operations included in Item 7.
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Year Ended December 31,/(1)/
-------------------------------------------------
1996 1995 1994 1993 1992
--------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales $50,414 $41,011 $34,229 $ 7,318 $ 928
Gross profit 15,918 13,354 12,522 2,761 231
Operating loss (5,045) (3,924) (1,016) (878) (724)
Interest and other 1,614 789 1,190 462 200
Loss from continuing operations (6,659) (4,713) (2,206) (1,340) (925)
Loss from discontinued operations (800) - - (467) (145)
Loss per share from continuing
operations (1.04) (.81) (.78) (.42) (.31)
Loss per share from discontinued
operations (.13) - - (.15) (.05)
<CAPTION>
December 31,
-------------------------------------------------
1996 1995 1994 1993 1992
--------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit) $(8,096) $ (34) $ 2,884 $ 357 $(1,302)
Total assets 37,776 22,637 20,766 11,659 1,316
Long-term debt 13,442 8,294 4,552 8,334 200
Shareholders' equity (deficit) 1,140 5,218 9,777 (1,708) (949)
</TABLE>
(1) Beginning shortly after inception, the Company consummated a series of
acquisitions which affect the comparability between the historical net
sales, gross profit, total assets and long-term debt for all years shown
above. See Note 2 of Notes to the Company's Consolidated Financial
Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
information set forth under "Selected Financial Data" and the Company's
Consolidated Financial Statements and notes thereto.
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The following table presents, as a percentage of net sales, certain selected
financial data for the Company for the years indicated:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
---------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net sales 100% 100% 100%
Gross profit 32 33 37
General and administrative 16 18 14
Selling and marketing 21 22 23
Unusual charges 1 - -
Depreciation and amortization of goodwill
and other intangibles 3 3 2
Interest and other 3 2 3
Loss from continuing operations (13) (11) (6)
Loss from discontinued operations (2) - -
Net loss (15) (11) (6)
</TABLE>
RESULTS OF OPERATIONS
The continuing operations information excludes the results from operations of
the Company's non-snack tray direct store delivery business located in southern
California. The Company began a direct store delivery business to accommodate
the distribution for certain of its specialty baked goods in the southern
California area in January 1996. No income tax benefit has been recognized in
connection with this discontinued operation due to the Company's net operating
loss carry forward position.
FISCAL 1996 COMPARED TO FISCAL 1995
Net Sales. Total sales for 1996 increased by $9,403,000 to $50,414,000, an
increase of 23%. Sales in the specialty baked goods segment increased by
$3,721,000, a 16% increase over 1995, whereas sales in the snack tray segment
increased by $5,682,000, an increase of 32%. Sales from businesses acquired
accounted for $2,133,000 of the increase in the specialty baked goods segment
and $267,000 of the increase in the snack tray segment. The Company acquired
certain assets of The MarveLoaf Corp. in January 1996, certain assets of The
Bagel Place, Inc. in August 1996, and one snack tray operation in January 1996.
Sales from the specialty baked goods segment were higher primarily because the
Company's biscotti product sales increased 77% over the 1995 level (an increase
of $5,600,000), and sales from the bagel/bagel bar products increased by 54% (an
increase of $2,370,000). These increases were partially offset by a decrease in
sales from the Company's snack product line of $4,594,000. Sales from the crispy
marshmallow square treat decreased over the prior year as other competitors
entered the market place and the Company lost market share of its product. The
remaining increase in total sales was due to internal growth primarily in the
snack tray segment where the number of accounts increased by 11% over 1995.
Gross Profit. Gross profit increased from $13,354,000 to $15,918,000, an
increase of 19%, but decreased as a percentage of net sales from 33% to 32%. The
decrease in gross profit as a percentage of net sales was due primarily to lower
gross margins from the snack tray segment where gross margins decreased from 43%
to 41%. This was a result of price increases from the Company's primary
suppliers in the cost of product purchased and sold through its snack tray
operations. Gross margins also declined in the specialty baked goods segment
from 25% to 23% due to a number of factors, including higher than anticipated
manufacturing costs during the fourth quarter as the Company consolidated its
Hayward and Carpenteria, California plants and its Orlando, Florida plant into
both the Tulsa, Oklahoma and the Santa Ana, California manufacturing facilities.
This consolidation resulted in the elimination of certain products, adjustments
to the carrying values for certain inventory items, lower margins during the
start-up stages of these two new plants and other expenses, some of which
management believes are non-recurring in nature but these are included in cost
of goods sold.
-9-
<PAGE>
General and Administrative. General and administrative expenses increased by
$578,000 to $7,876,000 but decreased as a percentage of net sales from 18% to
16%. This decrease as a percentage of net sales occurred in both the specialty
baked goods segment, where the Company centralized certain general and
administrative functions with the plant consolidation program discussed above
and in the snack tray segment, where these expenses decreased as a percentage of
net sales from 18% to 15%. This decrease in the snack tray segment was due
primarily to higher sales volumes as discussed above without the addition of
incremental general and administrative costs. Corporate overhead expenses
increased as the Company consolidated certain functions from the closed plants
into the corporate office and as the Company provided for a reserve against
receivables related to the sale of the gift and gourmet division of $500,000.
Sales and Marketing. Sales and marketing expenses increased by $1,874,000 or 21%
and decreased slightly as a percentage of net sales from 22% to 21%. The
increase was primarily in the snack tray segment where the Company incurred
sales and marketing costs associated with expansion of the base snack tray
operations, the result of which was an 11% increase the number of snack tray
accounts from 65,000 to 72,000 during 1996.
Unusual Charges. As a result of the Company's plant consolidation program in
1996, the Company incurred $636,000 of costs that management believes are non-
recurring in nature. These expenses include $344,000 of plant shut-down costs
associated with the consolidation program, including severance, rent expense and
other costs associated with closing the facilities in the specialty baked goods
segment and $292,000 of expenses due to the Company's decision to expense
previously capitalized route development costs in the snack tray segment. These
expenses represent 1% of net sales in 1996.
Depreciation and Amortization and Goodwill and Other Intangibles. Depreciation
and amortization increased from $1,110,000 to $1,705,000, an increase of 54%
while remaining at 3% of net sales. Of this increase, $472,000 was in the snack
tray segment and relates to amortization of route development costs. The
remaining increase was in the food sales segment and relates primarily to the
acquisitions and related goodwill discussed above. Other depreciation expenses
included in cost of goods sold above were $355,000 in 1996 and $252,000 in 1995.
Interest and Other. Interest expense increased from $789,000 to $1,614,000, an
increase of 105%. This increase was primarily due to higher debt outstanding
during 1996 as compared to 1995 as the Company's borrowings increased primarily
as a result of the acquisition of certain assets of The Bagel Place, Inc.,
capital expenditures incurred from the start-up of the Tulsa plant and funding
for current year operating losses. These acquisitions and capital expenditures
increased debt outstanding by approximately $8,000,000.
Loss before Discontinued Operations. Operating losses before discontinued
operations increased from 11% to 13% of net sales, an increase of $1,946,000.
This change was driven by an increase in depreciation and amortization of
goodwill and other intangibles, higher sales and marketing expenses and higher
general and administrative expenses as discussed above.
FISCAL 1995 COMPARED TO FISCAL 1994
Net Sales. Total sales for 1995 increased by $6,782,000 to $41,011,000, an
increase of 20%. Sales in the specialty baked goods segment increased by
$4,936,000, a 27% increase over 1994, whereas sales in the snack tray segment
increased by $1,846,000, an increase of 12%. Sales from businesses acquired
accounted for $6,091,000 of this increase, including $2,983,000 in the specialty
baked goods segment from the acquisition of two manufacturing companies in the
third quarter of 1994 (The New York Bagel Factory acquired in August 1994 and
Mom's Best acquired in August 1994) and $3,108,000 from the acquisition of
twelve snack tray companies during 1995. The remaining increase in the specialty
baked goods segment was due to higher sales from the Company's biscotti product
lines which increased by 38% over 1994, but was offset by lower sales from the
gift and gourmet product lines.
Gross Profit. Gross profit increased from $12,522,000 to $13,354,000, an
increase of 7%, but decreased as a percentage of net sales from 37% to 33%. The
decrease in gross profit as a percentage of net sales was due to a number of
factors, including higher than anticipated manufacturing costs, lower margins
during the fourth quarter on the Company's mail order business which resulted
from higher ingredients costs and higher than expected freight costs, the
discontinuance of certain product lines in the specialty baked goods segment,
underutilized plant facilities, and the implementation of a new cost accounting
system which, together with other factors resulted in adjustments to the
carrying value of
-10-
<PAGE>
inventories. In addition, cost of goods sold include depreciation expense of
$193,000 and $54,000 in 1995 and 1994, respectively. To address manufacturing
efficiency issues, management announced plans to consolidate the majority of its
manufacturing facilities into one production plant during 1996.
The snack tray business had an increase in gross profit of $717,000 or 10%.
This increase was due to the twelve businesses acquired during 1995, but was
offset by lower gross profit on the previously existing snack tray operations.
General and Administrative. General and administrative expenses increased by
$2,359,000 to $7,297,000 and increased as a percentage of net sales from 14% to
18%. Of this increase, approximately $400,000 was due to the two manufacturing
companies acquired in the specialty baked goods segment and $200,000 was due to
the twelve companies that were acquired during 1995 in the snack tray segment.
The remaining increase was due to higher corporate overhead as it has taken the
Company longer than expected to integrate the twenty-two acquisitions made over
the previous eighteen months.
Sales and Marketing. Sales and marketing expenses increased by $878,000 or 11%
and decreased as a percentage of net sales from 23% to 22%. A portion of the
increase was due to the two manufacturing companies acquired during the third
quarter of 1994 in the specialty baked goods segment and the twelve businesses
acquired in the snack tray segment in 1995. The decrease in selling and
marketing expenses as a percentage of net sales was due to the Company's
continuing efforts to centralize its selling and marketing functions within the
specialty baked goods segment.
Amortization and Goodwill and Other Intangibles. Amortization of goodwill and
other intangibles increased from $475,000 to $870,000, an increase of 83% while
increasing as a percentage of net sales from 1% to 2%. This increase was due to
full year amortization of intangibles for the two manufacturing companies
acquired in the third quarter of 1994 and the twelve snack tray companies
acquired during 1995.
Operating Loss. Operating losses increased from 3% to 10% of net sales, an
increase of $2,908,000. The increase was primarily driven by an increase in
general and administrative expenses of 4% of net sales over the same period as
discussed above.
Interest and Other. Interest expense decreased from $1,207,000 to $787,000, a
decrease of 35%. This was due to the non-recurrence of the one time write-off
of the unamortized balance of deferred financing charges related to certain debt
retired from the proceeds of the initial public offering which occurred in
August 1994 and lower debt outstanding as a result of the use of a portion of
the proceeds from the IPO.
Net Loss. The Company's net loss increased from $2,206,000 to $4,713,000, an
increase of $2,507,000 as a result of the changes discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operations was $4,749,000 for the year ended December 31, 1996,
compared with $2,360,000 in the prior year. Net cash used in investing
activities was $8,116,000 as the Company acquired three businesses in 1996. Net
cash generated from financing activities in 1996 was $12,901,000.
The Company's principal credit facility is a $7,000,000 revolving credit
agreement with a bank, of which the full amount had been drawn as of December
31, 1996. Borrowings under this facility are based upon a borrowing base which
is defined as 80% of eligible accounts receivable and 50% of eligible
inventories. This credit facility extends for a period of three years to April
1998, with interest at prime (defined as the Wall Street Journal-Southwest
Edition prime rate, 8 1/4% at December 31, 1996). Borrowings under this
facility are guaranteed by the Company's Chairman of the Board and his spouse.
There are no material long-term commitments associated with the Company's
capital expenditure plans. Consequently, the Company has a significant degree
of flexibility to adjust the level of such expenditures as circumstances
warrant.
In addition to the revolving credit facility, the Company has a $5,000,000 term
note from the same bank. At December 31, 1996, $5,000,000 was outstanding and
interest is at prime. Repayment of this term note begins in April 1997, with
the final payment being due in June 2000. This note is also guaranteed by the
Company's Chairman and his spouse.
-11-
<PAGE>
At December 31, 1996, the Company's borrowings on its revolving credit facility
exceeded the borrowing base of eligible accounts receivable and inventories by
approximately $500,000. As a result, the Company is in violation of the loan
agreement with the bank. The Company is reviewing alternatives with other
financial institutions which would increase the revolving credit line from
$7,000,000 to $10,000,000. In addition, the Company is seeking additional
capital from the placement of subordinated debentures in the amount of
$5,000,000 which would be used to both reduce amounts outstanding from accounts
payable and to reduce the amounts borrowed from the revolving credit line.
Therefore, the $7,000,000 currently outstanding on the revolving credit line is
classified as current in the financial statements as of December 31, 1996. In
the event that this financing transaction does not close by May 31, 1997, the
Company's Chairman has agreed to pledge certain of his personal assets as
collateral for the Company's existing credit facilities with the bank. In
addition to the immediate funding needs of the Company, the Company's Chairman
has agreed to fund any capital requirements and fund any cashflows necessary to
meet 1997 estimated expenditures. At December 31, 1996, the Company had borrowed
$8,927,000 from the Company's Chairman (see Note 6).
Subsequent to year-end the Company placed $2,600,000 of debentures ($1,100,000
due December 1998 and $1,500,000 due January 1999 with an interest rate of 8%)
pursuant to Regulation S of the Securities Act of 1933, as amended. These
debentures can be converted at any time after a holding period of 45 days at the
lower of (a) 70% of the closing price of the common stock for the day
immediately preceding the conversion date (in the case of the $1,500,000
debentures, it is the average closing bid price for the preceding five days
before conversion) or (b) 70% of the average of the closing prices of the common
stock for the five business days immediately preceding the date of subscription
by the purchaser (in the case of the $1,500,000 debentures it is $3.25 per
share). These funds were used for working capital purposes and the repayment of
a $200,000 note payable. $645,000 of these debentures have been converted by the
holders through March 20, 1997. The Company's Chairman has also converted
$750,000 of debentures which had been purchased in a separate offering which was
made pursuant to Regulation D. The combined weighted average conversion price of
these debentures was $3.25 per share. These debentures were converted under the
terms of the debenture agreements and the 401,053 common shares have been issued
or will shortly be issued by the Company's transfer agent.
While the Company has experienced losses since its inception in 1990, such
losses in the earlier years were due to the low volume of annual revenues
consistent with the start-up nature of the Company's business. In addition, the
Company has made numerous acquisitions and divestitures in the past three years
and, in 1996, consolidated major portions of those acquisitions in order to
attain economies of scale and the attendant cost savings associated therewith.
These start up costs, acquisitions and consolidations have required substantial
capital and, combined with operating losses of over $16 million in 1993-1996,
have left the Company in a highly leveraged financial position as of December
31, 1996, and subsequent thereto. However, management believes that: (1)
operations, as currently structured, will produce positive cash flow in 1997 and
(2) the financial support of the major stockholder and the debt guarantee of
such stockholder will continue to be available to the Company in 1997 and, as a
result, financing will continue to be available.
INFLATION
The Company's business operations are subject to inflationary pressures. There
can be no assurance that the Company will be able to increase prices in the
event of increased labor and material costs.
FORWARD LOOKING STATEMENTS
This Management's Discussion and Analysis of Financial Condition and Results of
Operations and other sections of this Form 10-K include certain statements that
may be "forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. All statements in this Form 10-K, other than
statement of historical facts, that address activities, events or developments
that the Company expects, believes or anticipates will or may occur in the
future are forward-looking statements. Although the Company believes the
expectations expressed in such forward-looking statements are based on
reasonable assumptions within the bounds of its knowledge of its business, such
statements are not guarantees of future performance and actual results or
developments may differ materially from those in the forward-looking statements.
Forward-looking statements involve risks and uncertainties including, but not
limited to, general economic trends, continued acceptance of the Company's
products in the marketplace, competitive factors, manufacturing and raw material
costs, the Company's dependence upon third-party suppliers, and other risks
detailed from time to time in the Company's periodic reports filed with the
Securities and Exchange Commission. The Company undertakes no obligation to
update publicly any forward-looking statements, whether as a result of new
information, future events or otherwise.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements and Supplementary Data are set forth herein commencing
on page F-1 of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
-12-
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item with respect to the Company's directors is
incorporated by reference from the sections of the Company's definitive Proxy
Statements for its 1997 Annual Meeting of Shareholders (the "Proxy Statement")
entitled "Election of Directors" and "Section 16(a) Beneficial Ownership
Reporting Compliance." The information required by this Item with respect to the
Company's executive officers appears at Item 4A of Part I of this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference from the
section of the Proxy Statement entitled "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference from the
section of the Proxy Statement entitled "Principal Stockholders and Security
Ownership of Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference from the
section of the Proxy Statement entitled "Certain Transactions."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Financial Statements:
The Financial Statements listed in the accompanying Index to Financial
Statements are filed as a part of this Form 10-K.
(2) Financial Statement Schedules:
All schedules are omitted as inapplicable or because the required
information is contained in the financial statements or included in the
footnotes thereto.
(3) Exhibits:
The following documents are included as exhibits to this Form 10-K. Those
exhibits below incorporated by reference herein are indicated as such by
the information supplied in the parenthetical thereafter. If no
parenthetical appears after an exhibit, such exhibit is filed herewith.
EXHIBIT NO.
- -----------
2.1 Asset Purchase Agreement dated July 25, 1996, between the Company and
The Bagel Place, Inc. (filed as Exhibit 2.1 to the Company's Form 8-K
filed August 22, 1996).
3.1 Certificate of Incorporation of the Company (filed as Exhibit 3.1 to
the Company's Registration Statement on Form S-1 Registration No. 33-
79736 (the "S-1 Registration Statement")).
-13-
<PAGE>
3.2 Certificate of Amendment of Certificate of Incorporation of the
Company filed June 17, 1992 (filed as Exhibit 3.2 to the S-1
Registration Statement).
3.3 Certificate of Amendment of Certificate of Incorporation of the
Company filed August 4, 1993 (filed as Exhibit 3.3 to the S-1
Registration Statement).
3.4 Certificate of Amendment of Certificate of Incorporation of the
Company filed June 2, 1994 (filed as Exhibit 3.6 to the S-1
Registration Statement).
3.5 Bylaws of the Company (filed as Exhibit 3.7 to the S-1 Registration
Statement).
4.1 Form of Offshore Securities Subscription Agreement (filed as Exhibit
4.1 to the Company's Form 10-Q for the quarterly period ended
September 30, 1996).
4.2 Form 8.0% Convertible Debenture due November 15, 1997 (filed as
Exhibit 4.2 to the Company's Form 10-Q for the quarterly period ended
September 30, 1996).
4.3 Form of Note Purchase Agreement (filed as Exhibit 4.3 to the Company's
Form 10-Q for the quarterly period ended September 30, 1996).
4.4 Form of Offshore Securities Subscription Agreement (filed as Exhibit
4.1 to the Company's Form 8-K filed January 17, 1997).
4.5 Form of Convertible Debenture due December 31, 1998 (filed as Exhibit
4.2 to the Company's Form 8-K filed January 17, 1997).
4.6 Form of Regulation S Securities Subscription Agreement (filed as
Exhibit 4.1 to the Company's Form 8-K filed February 18, 1997).
4.7 Form of 8% Convertible Debenture due January 31, 1999 (filed as
Exhibit 4.2 to the Company's Form 8-K filed February 18, 1997).
4.8 Form of Common Stock Purchase Warrant (filed as Exhibit 4.3 to the
Company's Form 8-K filed February 18, 1997).
4.9 Form of Registration Rights Agreement (filed as Exhibit 4.4 to the
Company's Form 8-K filed February 18, 1997).
10.1 Industrial Real Estate Lease dated January 16, 1992, between the
Company and Acquiport Two Corporation, as amended (filed as Exhibit
10.8 to the S-1 Registration Statement).
10.2 Master Vehicle Lease Agreement dated November 24, 1993, between Timmer
Leasing Company and Honor Snack, Inc. (filed as Exhibit 10.9 to the S-
1 Registration Statement).
10.3 Open-Ended Master Lease Agreement dated February 20, 1991, between
Figgie Leasing Corporation and Honor Snack, Inc. (as assignee of
Nationwide Gourmets, Inc.) (filed as Exhibit 10.10 to the S-1
Registration Statement).
10.4 Agreement dated July 16, 1993, between the Company and Le Groupe La
Cantinere, Inc. (filed as Exhibit 10.11 to the S-1 Registration
Statement).
10.5 Form of Warrant issued as of May 4, 1993, to Leslie M. Hannafey (filed
as Exhibit 10.12 to the S-1 Registration Statement).
-14-
<PAGE>
10.6 Form of Warrant issued to Regent Private Capital Corp. in 1993 in
connection with certain short-term financing (filed as Exhibit 10.13
to the S-1 Registration Statement).
10.7 Common Stock Purchase Warrants dated June 2, 1994, issued to: (I) ML
Oklahoma Venture Partners, Limited Partnership, for 12,121 shares,
(ii) Lawrence D. Field for 42,424 shares, and (iii) Gerald E. Milton
for 6,061 shares (filed as Exhibit 10.14 to the S-1 Registration
Statement).
10.8 Form of Warrant Issued to Commonwealth Associates in connection with
the initial public offering of the Company's common stock (filed as
Exhibit 10.15 to the S-1 Registration Statement).
10.9* Employment Agreement dated December 31, 1993, between the Company
and Steve Sirianni (filed as Exhibit 10.19 to the S-1 Registration
Statement).
10.10 Employment Agreement dated December 31, 1993, between the Company
and Tim Soldati (filed as Exhibit 10.20 to the S-1 Registration
Statement).
10.11 Employment Agreement dated December 31, 1993, between the Company
and Rich Martin (filed as Exhibit 10.21 to the S-1 Registration
Statement).
10.12 Loan Agreement dated April 11, 1995, between the Company and Liberty
Bank and Trust Company of Tulsa, National Association (filed as
Exhibit 10.1 to the Company's Form 10-Q for the quarterly period
ended March 31, 1995).
10.13 Security Agreement dated April 11, 1995, from the Company to Liberty
Bank and Trust Company of Tulsa, National Association (filed as
Exhibit 10.2 to the Company's Form 10-Q for the quarterly period
ended March 31, 1995.
10.14 Revolving Note dated April 11, 1995, in the original principal
amount of $5,000,000 payable to Liberty Bank and Trust Company of
Tulsa, National Association (filed as Exhibit 10.3 to the Company's
Form 10-Q for the quarterly period ended March 31, 1995).
10.15 Term Note dated April 11, 1995, in the original principal amount of
$5,000,000 payable to Liberty Bank and Trust Company of Tulsa,
National Association (filed as Exhibit 10.4 to the Company's Form
10-Q for the quarterly period ended March 31, 1995).
10.16 Third Amendment to Loan Agreement dated September 13, 1996, among
the Company, Silverado Marketing Services, Inc., Texas B&B, Inc.,
Lawrence D. Field, Cynthia Field and Liberty Bank and Trust Company
of Tulsa, National Association (filed as Exhibit 10.2 to the
Company's Form 10-Q for the quarterly period ended September 30,
1996).
10.17 Form of Indemnification Agreement between the Company and each
officer and director of the Company (filed as Exhibit 10.27 to the
S-1 Registration Statement).
10.18* Stock Option Agreement dated as of June 2, 1994, in favor of David
A. Hentschel for 3,000 shares (filed as Exhibit 10.29 to the S-1
Registration Statement).
10.19 Amended and Restated Registration Rights Agreement dated August 18,
1993, and Amendment to Amended and Restated Registration Rights
Agreement dated December 20, 1993 (filed as Exhibit 10.30 to the S-1
Registration Statement).
10.20* Silverado Foods, Inc. 1994 Stock Option Plan (filed as Exhibit 10.31
to the S-1 Registration).
10.21* Amendment Number 1 to Silverado Foods, Inc. 1994 Stock Option Plan
(filed as Exhibit A to the Company's Proxy Statement for Annual
Meeting of Shareholders held May 12, 1995).
-15-
<PAGE>
10.22 Lease Agreement dated July 20, 1992, between Richard S. Cohen and
Jenny W. Williams, as landlord, and Mom's Best Cookies, Inc. as
tenant (filed as Exhibit 10.34 to the Company's Form 10-K for the
fiscal year ended December 31, 1994).
10.23 Standard Industrial/Commercial Single-tenant Lease dated July 31,
1991, between the Katherine Shaw Wallace and Revett B. Wallace
Trust, as lessor, and The New York Bagel Factory of Santa Barbara,
as lessee (filed as Exhibit 10.35 to the Company's Form 10-K for the
fiscal year ended December 31, 1994).
10.24 Lease Agreement dated November 3, 1995, between DCA Grantor Trust,
as lessor, and The Company, as lessee (filed as Exhibit 10.32 to the
Company's Form 10-K for the fiscal year ended December 31, 1995).
10.25* Silverado Foods, Inc. 401(k) Plan (filed as Exhibit 4(f)) to the
Company's Registration Statement on Form S-8 as filed with the
Securities and Exchange Commission on December 8, 1995).
10.26 Royalty Termination Agreement dated November 8, 1996, among the
Company, Nonni's Inc., Steve Sirianni, Tim Soldati and Rich Martin
(filed as Exhibit 10.1 to the Company's Form 10-Q for the quarterly
period ended September 30, 1996).
10.27* Employment Agreement dated December 6, 1996, between the Company and
Michael W. Knapik
21. Subsidiaries of the Company. (filed as Exhibit 21 to the Company's
Form 10-K for the fiscal year ended December 31, 1995).
23. Consent of Arthur Andersen LLP.
27. Financial Data Schedule.
* Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K.
Form 8-K/A1 was filed October 21, 1996, in order to file the financial
statements required by Item 7 with respect to the Company's acquisition of
certain assets from The Bagel Place, Inc., which acquisition was reported
on the Company's Form 8-K filed August 22, 1996.
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<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SILVERADO FOODS, INC.
Date: April 9, 1997 By:/s/ Lawrence D. Field
---------------------
Lawrence D. Field
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
NAME TITLE DATE
- ---- ----- ----
<S> <C> <C>
/s/ Lawrence D. Field Director and Chairman of the Board April 9, 1997
- ------------------------
Lawrence D. Field
/s/ Timothy G. Bruer President and Chief Executive Officer April 9, 1997
- ------------------------
Timothy G. Bruer
/s/ James H. Bankard Director April 9, 1997
- ------------------------
James H. Bankard
/s/ Milton D. McKenzie Director April 9, 1997
- ------------------------
Milton D. McKenzie
/s/ Gerald E. Milton Director April 9, 1997
- ------------------------
Gerald E. Milton
/s/ Sam L. Susser Director April 9, 1997
- ------------------------
Sam L. Susser
/s/ James K. Tolbert Director April 9, 1997
- ------------------------
James K. Tolbert
/s/ Dorvin D. Lively Vice President, Chief Financial Officer April 9, 1997
- ------------------------ and Secretary (Principal Financial
Dorvin D. Lively Officer and Principal Accounting Officer)
</TABLE>
<PAGE>
INDEX TO FINANCIAL STATEMENTS
SILVERADO FOODS, INC. AND SUBSIDIARIES
Report of independent public accountants F-2
Consolidated balance sheets as of December 31, 1996 and 1995 F-3
Consolidated statements of operations for the years ended
December 31, 1996, 1995 and 1994 F-4
Consolidated statements of shareholders' equity for the years
ended December 31, 1996, 1995 and 1994 F-5
Consolidated statements of cash flows for the years ended
December 31, 1996, 1995 and 1994 F-6
Notes to consolidated financial statements F-7
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and
Shareholders of Silverado Foods, Inc.:
We have audited the accompanying consolidated balance sheets of Silverado Foods,
Inc. (an Oklahoma corporation) and subsidiaries as of December 31, 1996 and
1995, and the related consolidated statements of operations, shareholders'
equity (deficit) and cash flows for the years ended December 31, 1996, 1995 and
1994. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Silverado Foods,
Inc. and subsidiaries as of December 31, 1996 and 1995, and the results of its
operations and its cash flows for the years ended December 31, 1996, 1995 and
1994, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Tulsa, Oklahoma
March 27, 1997
F-2
<PAGE>
SILVERADO FOODS, INC. AND SUBSIDIARIES
--------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1996 1995
---- ----
<S> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash $ 164,118 $ 128,401
Accounts receivable, net of allowance of $676,495 and $55,502
doubtful accounts in 1996 and 1995, respectively (Notes 5 and 6) 4,605,632 3,173,138
Inventories, net (Notes 1, 5 and 6) 5,974,719 5,005,431
Prepaid expenses and other 543,709 750,077
Deferred tax assets (Note 7) 16,663 16,663
Nets assets held for sale (Note 4) 188,324 -
------------ ------------
Total current assets 11,493,165 9,073,710
------------ ------------
NOTE RECEIVABLE (Note 12) 1,315,584 -
PROPERTY, PLANT AND EQUIPMENT, net (Note 5) 11,829,580 2,716,635
GOODWILL AND OTHER INTANGIBLES, net (Notes 1 and 5) 13,137,613 10,846,661
------------ ------------
Total assets $ 37,775,942 $ 22,637,006
============ ============
LIABILITIES AND SHAREHOLDER'S EQUITY
------------------------------------
CURRENT LIABILITIES:
Current maturities of long-term debt (Note 6) $ 8,637,272 $ 1,449,716
Trade accounts payable 8,338,029 5,916,024
Accrued liabilities 2,324,039 1,534,760
Other liabilities 290,311 207,563
------------ ------------
Total current liabilities 19,589,651 9,108,063
------------ ------------
LONG-TERM DEBT, less current maturities (Note 6) 13,442,197 8,293,992
------------ ------------
DEFERRED TAX LIABILITIES (Note 7) 16,663 16,663
------------ ------------
CAPITALIZED LEASE OBLIGATION, less current portion (Note 10) 3,587,632 -
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 10)
SHAREHOLDERS' EQUITY (Note 8)
Common stock, $.01 par value, 20,000,000 shares authorized 72,583 59,831
Warrants 61,563 77,408
Additional paid-in-capital 18,843,454 15,459,850
Accumulated deficit (17,773,149) (10,314,149)
------------ ------------
1,204,451 5,282,940
Less treasury stock (64,652) (64,652)
------------ ------------
Total shareholders' equity 1,139,799 5,218,288
------------ ------------
Total liabilities and shareholders' equity $ 37,775,942 $ 22,637,006
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
SILVERADO FOODS, INC. AND SUBSIDIARIES
--------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
NET SALES $50,414,100 $ 41,010,993 $34,228,541
COST OF SALES 34,496,578 27,656,567 21,706,863
----------- ------------ -----------
Gross Profit 15,917,522 13,354,426 12,521,678
----------- ------------ -----------
OPERATING EXPENSES:
General and administrative 7,875,726 7,297,209 4,937,794
Selling and marketing 10,745,896 8,871,974 7,994,256
Unusual charges (Note 3) 636,000 - -
Depreciation 362,417 239,769 130,490
Amortization of goodwill and other intangibles 1,342,499 869,791 475,091
----------- ------------ -----------
20,962,538 17,278,743 13,537,631
----------- ------------ -----------
OPERATING LOSS (5,045,016) (3,924,317) (1,015,953)
----------- ------------ -----------
OTHER INCOME (EXPENSE):
Interest (1,541,555) (787,093) (1,207,101)
Other, net (72,429) (1,601) 16,786
----------- ------------ -----------
(1,613,984) (788,694) (1,190,315)
----------- ------------ -----------
LOSS FROM CONTINUING OPERATIONS (6,659,000) (4,713,011) (2,206,268)
----------- ------------ -----------
LOSS FROM DISCONTINUED OPERATIONS (Note 4) (800,000) - -
----------- ------------ -----------
NET LOSS (7,459,000) (4,713,011) (2,206,268)
----------- ------------ -----------
Accretion of common stock subject to price
guarantee or put option - - (97,587)
----------- ------------ -----------
$(7,459,000) $ (4,713,011) $(2,303,855)
=========== ============ ===========
PER SHARE AMOUNTS:
Continuing operations $(1.04) $(0.81) $(0.78)
Discontinued operations (0.13) - -
------------ ------------ -----------
NET LOSS $(1.17) $(0.81) $(0.78)
============ ============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
SILVERADO FOODS, INC. AND SUBSIDIARIES
--------------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
-----------------------------------------------
<TABLE>
<CAPTION>
Series B Preferred Stock Series C Preferred Stock Common Stock Treasury Stock
------------------------ ------------------------ ----------------- ------------------
Shares Amount Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993 179,385 $ 1,794 330,457 $ 3,305 886,652 $ 8,867 - $ -
Accretion of common
stock subject to
price guarantee or
put option - - - - - - - -
Conversion of Series
B to common stock (179,385) (1,794) - - 450,000 4,500 - -
Conversion of Series
C to common stock - - (330,457) (3,305) 743,528 7,435 -
Issuance of warrants - - - - - - - -
Issuance of common
stock in connection
with acquisition - - - - 33,750 338 - -
Purchase of treasury
stock - - - - - - (26,995) (64,652)
Issuance of common
stock in public
offering - - - - 2,300,000 23,000 - -
Conversion of debt - - - - 1,181,250 11,813 - -
Reclass common stock
subject to price
guarantee or put
option - - - - 157,500 1,575 - -
Net loss - - - - - - - -
-------- ------- -------- -------- --------- ------- ------- --------
Balance, December 31, 1994 - - - - 5,752,680 57,528 (26,995) (64,652)
Conversion of warrants - - - - 162,829 1,628 - -
Exercise of common
stock options - - - - 67,500 675 - -
Net loss - - - - - - - -
-------- ------- -------- -------- --------- ------- ------- --------
Balance, December 31, 1995 - - - - 5,983,009 59,831 (26,995) (64,652)
Accretion of common
stock subject to
price guarantee - - - - - - - -
Exercise of warrants - - - - 35,651 356 - -
Issuance of common
stock in connection
with acquisition - - - - 200,000 2,000 - -
Issuance of common
stock in connection
with settlement of
royalty agreement - - - - 700,000 7,000 - -
Issuance of common
stock in connection
with debenture
conversion - - - - 187,012 1,870 - -
Exercise of common
stock options - - - - 90,000 900 - -
Issuance of common
stock - - - - 62,571 626 - -
Net loss - - - - - - - -
-------- ------- -------- -------- --------- ------- ------- --------
Balance, December 31, 1996 - $ - - $ - 7,258,243 $72,583 (26,995) $(64,652)
======== ======= ======== ======== ========= ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
Additional
Paid-in
Warrants Capital Deficit Total
-------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Balance, December 31, 1993 $119,225 $ 1,445,715 $(3,297,283) $(1,708,377)
Accretion of common
stock subject to
price guarantee or
put option - - (97,587) (97,587)
Conversion of Series
B to common stock - (2,706) - -
Conversion of Series
C to common stock - (4,130) - -
Issuance of warrants 30,303 - - 30,303
Issuance of common
stock in connection
with acquisition - 147,319 - 147,657
Purchase of treasury
stock - - - (64,652)
Issuance of common
stock in public
offering - 12,882,722 - 12,905,722
Conversion of debt - 473,299 - 485,112
Reclass common stock
subject to price
guarantee or put
option - 283,344 - 284,919
Net loss - - (2,206,268) (2,206,268)
------- ----------- ------------ -----------
Balance, December 31, 1994 149,528 15,235,563 (5,601,138) 9,776,829
Conversion of warrants (72,120) 142,612 - 72,120
Exercise of common
stock options - 81,675 - 82,350
Net loss - - (4,713,011) (4,713,011)
------- ----------- ------------ -----------
Balance, December 31, 1995 77,408 15,459,850 (10,314,149) 5,218,288
Accretion of common
stock subject to
price guarantee - (131,250) - (131,250)
Exercise of warrants (15,845) 31,334 - 15,845
Issuance of common
stock in connection
with acquisition - 598,000 - 600,000
Issuance of common
stock in connection
with settlement of
royalty agreement - 1,993,000 - 2,000,000
Issuance of common
stock in connection
with debenture
conversion - 605,919 - 607,789
Exercise of common
stock options - 108,900 - 109,800
Issuance of common
stock - 177,701 - 178,327
Net loss - - (7,459,000) (7,459,000)
------- ----------- ------------ -----------
Balance, December 31, 1996 $61,563 $18,843,454 $(17,773,149) $ 1,139,799
======= =========== ============ ===========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-5
<PAGE>
SILVERADO FOODS, INC. AND SUBSIDIARIES
--------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
<TABLE>
<CAPTION>
For the year ended December 31,
-------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(7,459,000) $(4,713,011) $(2,206,268)
Adjustments to reconcile net loss to cash used in operating activities
Depreciation and amortization 2,139,414 1,362,379 1,212,064
Loss on sale of assets - - 13,036
Change in assets and liabilities, net of effect of
acquisitions
(Increase) decrease in accounts receivable (2,431,908) 626,109 (1,802,268)
Increase in inventory (356,735) (603,780) (966,295)
(Increase) decrease in prepaid expenses and other 238,722 (166,901) (425,381)
Increase in accounts payable and accrued liabilities 3,578,552 1,636,557 678,631
Increase in intangibles and other (458,110) (501,229) (441,081)
----------- ----------- -----------
Total adjustments 2,709,935 2,353,135 (1,731,294)
----------- ----------- -----------
Cash used in operating activities (4,749,065) (2,359,876) (3,937,562)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets - - 115,268
Capita1 expenditures (3,891,533) (630,852) (939,378)
Payments for acquisitions (4,224,376) (2,378,952) (3,328,631)
----------- ----------- -----------
Cash used in investing activities (8,115,909) (3,009,804) (4,152,741)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sales of stock and exercise of options and
warrants 128,141 154,470 12,905,722
Purchase of treasury stock - - (64,652)
Proceeds from long-term debt 13,743,629 9,308,150 4,493,768
Principal payments on long-term debt (971,079) (4,522,749) (9,075,130)
Borrowings from notes payable - - 1,000,000
Payments on notes payable - - (1,722,814)
----------- ----------- -----------
Cash provided by financing activities 12,900,691 4,939,871 7,536,894
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH 35,717 (429,809) (553,409)
CASH, beginning of period 128,401 558,210 1,111,619
----------- ----------- -----------
CASH, end of period $ 164,118 $ 128,401 $ 558,210
=========== =========== ===========
Non-cash financing activities:
Exercise of warrants for common stock $ 15,845 $ 72,120 $ -
SUPPLEMENTAL CASH FLOWS INFORMATION:
Cash paid for-
Interest $ 930,230 $ 757,922 $ 841,604
Income taxes - - -
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
SILVERADO FOODS, INC. AND SUBSIDIARIES
--------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
-------------------------------------------------------
BUSINESS
- --------
Silverado Foods, Inc. (the Company), an Oklahoma corporation, was incorporated
on August 15, 1990. The Company manufactures and markets a diversified line of
specialty baked goods through multiple distribution channels and operates a
retail snack tray business throughout the United States.
PRINCIPLES OF CONSOLIDATION
- ---------------------------
The consolidated financial statements include the accounts of Silverado Foods,
Inc. and its wholly-owned subsidiaries. Acquired businesses are included in
results of operations effective with the closing dates of the various
acquisitions (see Note 2). All significant intercompany accounts and
transactions have been eliminated in consolidation.
INVENTORIES
- -----------
Inventories consist primarily of finished goods, ingredients and packaging
supplies which are stated at the lower of cost (first-in, first-out basis) or
market as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------
1996 1995
---- ----
<S> <C> <C>
Raw materials $2,348,945 $2,010,577
Finished goods 3,709,774 3,023,927
---------- ----------
$6,058,719 $5,034,504
Less - allowance for excess and obsolete inventory (84,000) (29,073)
---------- ----------
$5,974,719 $5,005,431
========== ==========
</TABLE>
PROPERTY, PLANT AND EQUIPMENT
- -----------------------------
Property, plant and equipment are stated at cost. Depreciation on property,
plant and equipment is provided using the straight-line method over estimated
service lives ranging from three-to-forty years. Maintenance, repairs and
betterments, including replacement of minor items of physical properties, are
charged to expense. Major additions to physical properties are capitalized.
The cost of the assets retired or sold is credited to the asset accounts and the
related accumulated depreciation is charged to the accumulated depreciation
accounts. The gain or loss from sale or retirement of property, if any, is
included in the consolidated statement of operations.
GOODWILL AND OTHER INTANGIBLES
- ------------------------------
Goodwill and other intangibles were recorded in conjunction with the
acquisitions discussed in Note 2. Amortization is provided using the straight-
line method using lives as described in Note 5. The Company annually evaluates
all goodwill and other intangibles to determine if the remaining estimated
useful life of goodwill and other intangibles may warrant revision or that the
remaining balance may not be recoverable. When factors indicate that goodwill
or other intangibles should be evaluated for possible impairment, the Company
uses an estimate of the related business segment's undiscounted cash flows over
the remaining life in measuring whether the asset is recoverable in accordance
with the provisions of Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for the Impairment of
Long-Lived Assets to be Disposed of."
F-7
<PAGE>
REVENUE RECOGNITION
- -------------------
Revenues are recognized upon shipment of the product or receipt of cash in the
case of sales from the Company's retail snack trays.
FEDERAL AND STATE INCOME TAXES
- ------------------------------
The Company uses the liability method of accounting for income taxes. Under the
liability method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax basis of assets and liabilities
and are measured using the enacted tax rates and laws in effect or that will be
in effect when the differences are expected to reverse.
LOSS PER SHARE
- --------------
Loss per share is calculated based on the weighted average number of shares
outstanding. The loss per share calculation for 1996, 1995, and 1994 includes
the weighted average number of shares outstanding for the respective periods
which were 6,384,651, 5,832,896, and 2,943,691.
CASH FLOWS INFORMATION
- ----------------------
For purposes of the consolidated statements of cash flows, all highly liquid
investments purchased with a maturity of three months or less are considered to
be cash equivalents.
CONCENTRATION OF CREDIT RISK
- ----------------------------
The Company extends trade credit to various companies in the food sales markets
in the normal course of business. Within these markets, certain concentrations
of credit risk exist. These concentrations of credit risk may be similarly
affected by changes in economic or other conditions and may, accordingly, impact
the Company's overall credit risk. However, management believes that
consolidated receivables are well diversified, thereby reducing potential credit
risk to the Company, and that allowances for doubtful accounts are adequate to
absorb estimated future losses.
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.
RECLASSIFICATIONS
- -----------------
Certain reclassifications to the consolidated financial statements for the year
ended December 31, 1995 have been made to conform to the presentation of the
December 31, 1996 consolidated financial statements.
2. ACQUISITIONS:
------------
During the three year period ended December 31, 1996, the Company made numerous
acquisitions, all of which were accounted for using the purchase method of
accounting. The significant acquisitions and their terms are summarized below:
MARVELOAF
- ---------
On January 5, 1996, the Company acquired certain assets of the MarveLoaf
Corporation for approximately $537,000 in cash, 200,000 shares of the Company's
common stock and the assumption of approximately $53,000 in liabilities. The
Company entered into an employment agreement with the seller for a period of two
years for $67,000 per year. Subsequent to December 31, 1996, the Company
entered into a letter of intent to sell the acquired assets back to the original
owner. No gain or loss was recognized. See Note 14.
F-8
<PAGE>
YOUR CHOICE SNACKS
- ------------------
On January 12, 1996, the Company acquired certain assets of Your Choice Snacks,
Inc., a snack tray business in Pennsylvania, for a purchase price of $1,000,000,
including a note payable of $200,000.
THE BAGEL PLACE
- ---------------
On August 7, 1996, the Company acquired certain assets of The Bagel Place, Inc.
in Santa Ana, California (Bagel Place) for approximately $2,800,000 including
the assumption of certain liabilities of approximately $342,000. The assets
acquired were previously used in the business of producing bagels and bagel
related products. Simultaneous with this acquisition, the Company closed its
manufacturing facility in Carpenteria, California and combined its manufacturing
operations into the Santa Ana facility. Costs associated with this plant
closing are discussed further in Note 3.
NEW YORK BAGEL FACTORY
- ----------------------
On August 12, 1994, the Company purchased substantially all of the assets of The
New York Bagel Factory of Santa Barbara ("New York Bagel Factory"). The
consideration for the acquisition consisted of $1,025,000 in cash, a two year
promissory note in the amount of $350,000 bearing interest at 9% per annum, the
payment of a portion of New York Bagel Factory's debt of approximately $436,000,
forgiveness of indebtedness of New York Bagel Factory to the Company in the
amount of $75,000 and assumption of certain liabilities of New York Bagel
Factory.
MOM'S BEST COOKIES, INC.
- ------------------------
On August 12, 1994, the Company purchased substantially all of the assets of
Mom's Best Cookies, Inc. ("Mom's Best"). The consideration for the acquisition
consisted of $500,000 cash, a two year promissory note in the amount of $317,700
bearing interest at 8% per annum, payment of a portion of Mom's Best debt of
approximately $170,000 and assumption of certain liabilities of Mom's Best.
During 1996, the Company was required to issue 62,571 shares of common stock, as
required by the asset purchase agreement, based upon certain sales targets that
were achieved during 1996.
NONNI'S
- -------
In December 1993, the Company purchased certain assets of Nonni's for a purchase
price of approximately $990,000. The Company paid approximately $295,000 in
cash, issued $180,000 of notes payable, assumed certain liabilities and issued
78,750 shares of the Company's common stock (including contingent shares issued
subsequent to the acquisition date). Approximately $272,000 of the assumed
liabilities were paid at the acquisition date.
The Company also entered into a seven year royalty agreement with the sellers
which was amended in October 1994 and was terminated in July 1996. The royalty
agreement originally provided for a royalty of 6% of gross sales (as defined)
and was amended to provide for a 3% royalty increasing to 12% in July 1996 and
then to be reduced down to 3% by December 2001. The amended agreement also
provided the Company with the option to purchase the royalty obligation for
$3,200,000. The termination of this royalty agreement in July 1996 was effected
by the Company issuing 700,000 shares of common stock and a contingency which
provides for the issuance of an additional 200,000 shares of common stock, if
sales of products which were subject to the original royalty exceed $10,000,000
for any twelve month period beginning July 1996 through July 1999. The issuance
of the 700,000 shares resulted in the Company recording an additional $2,000,000
of goodwill. In connection with the issuance of these additional shares, the
Company guaranteed a market price of $5.71 per share for those shares under
certain circumstances. Contingent shares, if issued, are also subject to this
guarantee. Such guarantee is payable in cash or stock, at the option of the
Company.
Also in connection with the acquisition, the Company entered into a seven year
employment agreement with the three selling shareholders. Effective October 1,
1994, this agreement was also amended. The original agreement called for
monthly compensation for each employee of the greater of 2.66% of gross sales
(as defined) or $2,750. The revised agreement provides for monthly compensation
of 1.33% of gross sales (as defined) from the period of October 1, 1994 through
October 1, 2006.
F-9
<PAGE>
SUPPLEMENTARY CASH FLOW INFORMATION
- -----------------------------------
The following summarizes the liabilities assumed/issued in connection with all
the acquisitions discussed above, net of cash held by the companies acquired, if
any.
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Fair value of assets acquired $4,783,535 $2,266,174 $6,367,000
Cash paid 4,112,415 2,255,975 3,490,000
---------- ---------- ----------
Liabilities assumed/issued $ 671,120 $ 10,199 $2,877,000
========== ========== ==========
</TABLE>
UNAUDITED PRO FORMA INFORMATION
- -------------------------------
Unaudited pro forma results of operations for the years ended December 31, 1996
and 1995, give effect to acquisitions as if they had occurred on January 1, of
the respective year. The unaudited pro forma information is presented in
response to applicable accounting rules relating to acquisition transactions.
It is not necessarily indicative of the actual results that would have been
achieved had the transactions occurred on the above dates, and is not
necessarily indicative of future results.
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Net sales $57,569,000 $ 52,643,000
Gross profit 17,875,000 16,747,000
Loss from continuing operations (8,962,000) (26,243,000)
</TABLE>
3. UNUSUAL CHARGES:
----------------
Operating income for 1996 has been reduced for unusual items of $636,000
comprised of $344,000 related to plant closings and the write off of $292,000
related to route development costs previously capitalized. The plant closing
costs relate to the closure of the Company's bakery operations located in
Carpenteria and Hayward, California and Orlando, Florida. These bakery
operations were consolidated into the Company's plants in Tulsa, Oklahoma and
Santa Ana, California.
4. DISCONTINUED OPERATIONS:
------------------------
In December 1996, the Company decided to dispose of its non-snack tray direct
store delivery distribution business located in Southern California. The net
assets of this business are reflected in the accompanying balance sheet at the
estimated fair market value. The Company started this business in January 1996.
The consolidated statement of operations for 1996 has been presented to reflect
the results of continuing operations. Due to the Company's net operating loss
carryforward position, no income tax effect was recognized from this
transaction. Since the operations of this business began in 1996, operating
results are shown below for 1996 only:
<TABLE>
<CAPTION>
1996
-----------
<S> <C>
Net sales $ 3,050,000
Cost of sales (2,211,000)
Selling, general and administrative and other expenses (1,639,000)
-----------
Loss from discontinued operations $ (800,000)
===========
</TABLE>
F-10
<PAGE>
5. DETAILS TO CONSOLIDATED BALANCE SHEETS:
---------------------------------------
<TABLE>
<CAPTION>
Depreciation
Property, Plant and Equipment Period December 31,
- ----------------------------- ------------- -------------------------
1996 1995
---- ----
<S> <C> <C> <C>
Land and improvements - $ 25,000 $ 25,000
Building and improvements 5 to 40 years 6,316,320 443,002
Machinery and equipment 5 to 20 years 5,729,586 2,205,982
Office equipment 3 to 10 years 1,029,944 828,375
----------- ----------
13,100,850 3,502,359
Less - accumulated depreciation 1,271,270 785,724
----------- ----------
$11,829,580 $2,716,635
=========== ==========
<CAPTION>
Intangibles December 31,
- ----------- Amortization --------------------------
Period 1996 1995
------------ ---- ----
<S> <C> <C>
Goodwill 15 years $14,225,517 $11,165,691
Recipes 7 years 70,000 119,000
Deferred loan costs 3 years 148,792 16,988
Trademarks 7 years 160,876 202,518
Customer data base 7 years 127,834 127,834
Route development 3 years - 216,451
Other 3 years 561,790 475,960
----------- -----------
15,294,809 12,324,442
Less - accumulated amortization 2,157,196 1,477,781
----------- -----------
$13,137,613 $10,846,661
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
December 31,
-----------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Allowances for accounts receivable:
Balance, beginning of year $ (55,502) $ (168,820) $ (69,000)
Provision for losses on receivables (660,191) (97,094) (136,250)
Receivables written-off, net of recoveries 39,198 210,412 36,430
----------- ----------- -----------
Balance, end of year $ (676,495) $ (55,502) $ (168,820)
=========== =========== ===========
Allowances for inventories:
Balance, beginning of year $ (29,073) $ (11,000) $ (41,000)
Provision (202,573) (244,781) -
Inventories written-off 147,646 226,708 30,000
----------- ----------- -----------
Balance, end of year $ (84,000) $ (29,073) $ (11,000)
=========== =========== ===========
Accumulated amortization of goodwill and other
intangibles:
Balance, beginning of year $(1,477,781) $ (607,113) $ (189,954)
Provision (1,058,200) (870,668) (619,569)
Retirements and other 378,786 - 202,410
----------- ----------- -----------
Balance, end of year $(2,157,195) $(1,477,781) $ (607,113)
=========== =========== ===========
</TABLE>
F-11
<PAGE>
6. LONG-TERM DEBT:
---------------
In September 1996, the Company amended certain terms of its revolving credit
facility with a bank. The amended facility provided for a revolving line of
credit of up to $7,000,000 based upon the borrowing base which is defined as 80%
of eligible accounts receivable and 50% of eligible inventories ($7,000,000
outstanding at December 31, 1996). The term of this revolver expires in 1998
with interest at prime (defined as the Wall Street Journal-Southwest Edition
prime rate, 8 1/4% at December 31, 1996) , payable monthly, with principal due
at maturity.
In addition, the credit facility provides for a $5,000,000 acquisition credit
line with each funding request subject to review and approval by the lender
($5,000,000 outstanding at December 31, 1996). The term of this acquisition
line expires in 2000 with interest at prime (see above) and principal payments
fixed to effect a four year payout.
The Company is subject to various covenants associated with the amended
facility, such as limitations on payment of dividends, maintenance of certain
ratios, the sale of a substantial portion of assets, and on further indebtedness
with restrictions of the payment of dividends. Borrowings under the amended
facility are guaranteed as to repayment of principal and interest by the
Company's Chairman and his spouse.
At December 31, 1996, the Company's borrowings under the revolving credit line
exceeded the amounts available based upon the borrowing base for eligible
accounts receivable and inventories. The Company is reviewing alternatives with
other financial institutions which would increase the revolving credit line from
$7,000,000 to $10,000,000. The Company has also raised $2,600,000 for Regulation
S Convertible Debentures (see Note 14). In addition, the Company is seeking
additional capital from the placement of subordinated debentures in the amount
of $5,000,000 which would be used to both reduce amounts outstanding from
accounts payable and to reduce the amounts borrowed from the revolving credit
line. Therefore, the $7,000,000 currently outstanding on the revolving credit
line is classified as current in the financial statements as of December 31,
1996. In the event that the Company is unable to close a financing transaction,
the Company's Chairman has agreed to fund any capital and operating requirements
in 1997.
Long-term debt consists of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
====================================================================================================
<S> <C> <C>
10% notes payable to the Company's Chairman, due in 1998. $ 5,927,197 $ 600,000
9% convertible debenture payable to the Company's Chairman, due
1999. 3,000,000 -
Revolving credit agreement for up to $7,000,000, interest at prime,
payable monthly, due in 1998. 7,000,000 4,600,000
Acquisition line of credit, interest at prime, payable in equal monthly
installments beginning April 1997, through June 2000. 5,000,000 3,798,002
Promissory notes payable to affiliates, interest at Chase Prime plus
1%, payable in quarterly principal installments. - 200,000
9% note payable. - 350,000
9% note payable in January 1997. 200,000 -
9 1/4% note payable to a vendor, due in 1997. 370,323 -
9% three year subordinated debentures, convertible into common
stock at $3.25 per share, due 1999, interest payable quarterly. 550,000 -
Other notes payable. 31,949 195,706
----------- ----------
Total long-term debt 22,079,469 9,743,708
Less - current maturities 8,637,272 1,449,716
----------- ----------
$13,442,197 $8,293,992
=========== ==========
</TABLE>
F-12
<PAGE>
The annual maturities of long-term debt are: 1997 - $8,637,272; 1998 -
$10,417,197; 1999 - $2,160,000; 2000 - $865,000.
7. INCOME TAXES:
-------------
The Company paid no income taxes and recorded no income tax expense or benefit
from its inception through December 31, 1996. Therefore, the effective tax rate
is zero in each reporting period versus the 34% federal statutory rate.
Deferred income taxes reflect the net tax effects of (i) temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes, and (ii) operating loss
and tax credit carry forwards. The effects of significant items comprising the
Company's net deferred tax assets are as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------
1996 1995
------------ ------------
<S> <C> <C>
Deferred tax liabilities:
Fixed asset basis differences $ (176,863) $ (142,024)
Intangible asset basis differences (18,986) (90,696)
----------- -----------
Total deferred tax liabilities (195,849) (232,720)
Deferred tax assets:
Net operating loss carryforwards 5,142,266 2,977,180
Reserves not currently deductible 429,310 247,987
Intangible asset basis differences 307,305 231,527
Other 8,040 6,823
----------- -----------
Total deferred tax assets 5,886,921 3,463,517
----------- -----------
Valuation allowance for deferred tax assets (5,691,072) (3,230,797)
----------- -----------
195,849 232,720
----------- -----------
Net deferred tax assets $ - $ -
=========== ===========
</TABLE>
Due to its history of losses, management has provided valuation allowances
against all of its net deferred tax assets. The net change in the valuation
allowance was attributable to current year temporary differences.
At December 31, 1996, the Company had federal net operating loss (NOL) carry
forwards of approximately $15,200,000 available to offset future federal taxable
income. The utilization of approximately $1,292,000 of the NOL is limited on an
annual basis by Section 382 of the Internal Revenue Code. The federal NOL carry
forwards begin to expire in 2005. The Company has state NOL carry forwards of
varying amounts available to offset future state taxable income which also begin
to expire in 2005.
8. SHAREHOLDERS' EQUITY:
---------------------
COMMON STOCK WARRANTS
- ---------------------
In connection with the Company's initial public offering in 1994, 230,000
warrants were issued to Commonwealth Associates, representative of the
underwriters, to purchase common stock at $11.55 per share over a four year
period. The Company has issued certain warrants to an independent research firm
to produce research reports on the Company in exchange for common stock
warrants. Total warrants outstanding were 423,713 and 436,031 at December 31,
1996 and 1995, respectively, and range in exercise price from $0.44 to $11.55
per warrant.
COMMON STOCK OPTIONS
- --------------------
In June 1994, the Company established the Silverado Foods, Inc. 1994 Stock
Option Plan (the Plan). The Plan provides for the grant of incentive stock
options, other forms of statutory stock options and non-statutory stock options
to employees of the Company. The total amount of common stock options currently
authorized and issued under the Plan as of December 31, 1996 and 1995 were
40,000 and 170,000, respectively. Of this amount, 10,000 are fully vested with
F-13
<PAGE>
the remaining shares to vest over a one year period (1997), if certain targets
are met. Subsequent to December 31, 1996, 185,000 shares were granted to
certain employees.
The Company has adopted the disclosure-only provision of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
No. 123). SFAS No. 123 established financial accounting and reporting standards
for stock-based compensation plans and transactions in which an entity issues
its equity instruments to acquire goods and services from non-employees. Since
the effect of SFAS No. 123 is not material, the Company has made no disclosure
of pro forma net income and earnings per share as if SFAS No. 123 had been
adopted.
PREFERRED STOCK
- ---------------
At December 31, 1996, 1995 and 1994, the Company had 1,000,000 authorized shares
of preferred stock, $0.01 par value. At December 31, 1996 and 1995, there were
no shares issued and outstanding.
Pursuant to a preferred stock and debt exchange agreement dated May 4, 1993, and
a debt exchange agreement dated May 20, 1993, (i) the holders of the 179,385
outstanding shares of Series A Convertible Participating Preferred Stock
exchanged such shares for an equal number of shares of newly created Series B
Convertible Preferred Stock and (ii) the holders of certain outstanding
indebtedness of the Company consisting of $432,500 in aggregate principal amount
of the Company's 10% subordinated debentures and 12% senior subordinated
debentures and $476,264 in aggregate principal amount of other notes payable and
indebtedness contributed such debt to the capital of the Company in exchange for
330,457 shares of newly created Series C Convertible Preferred Stock.
Additionally, preferred shareholders will participate equally in any dividends
declared payable to common shareholders, and preferred shareholders will be
entitled to the same voting rights as common shareholders. The preferred stocks
were mandatorily convertible into common shares in the event of the closing of a
public offering pursuant to an effective registration statement under the
Securities Act of 1933 at an aggregate offering price equal to or in excess of
$3 million and resulting in the market equity capitalization of the Company
equal to or in excess of $9.5 million. Therefore, in 1994, the Series B and
Series C preferred shares converted into 450,000 and 743,528 shares of common
stock, respectively.
9. RELATED PARTY TRANSACTIONS:
---------------------------
Significant related party transactions of the Company for the three years ended
December 31, 1996 are summarized below:
The Company has entered into numerous short-term and long-term financing
transactions with the Company's Chairman, with companies principally owned by
the Company's Chairman and with a director of the Company. At December 31,
1996, the Company has notes payable to a director for $250,000 and notes payable
to the Company's Chairman for $8,927,000. Subsequent to December 31, 1996,
$750,000 of the debentures owed to the Company's Chairman were converted in
accordance with the terms of the agreement. See Note 14.
Also from time to time, Mr. Field has guaranteed obligations of the Company.
Currently, Mr. Field has guaranteed the Company's obligations with respect to
certain vehicle lease agreements. Also, Mr. Field and his spouse have
guaranteed the Company's two credit facilities with a bank in the amount of
$12,000,000, which bears interest at the prime rate published in The Wall Street
Journal.
10. COMMITMENTS AND CONTINGENCIES:
------------------------------
The Company leases its manufacturing plant located in Tulsa under an agreement
which is classified as a capital lease and included in property, plant, and
equipment. The lease term is for a period of 10 years and the Company has an
option to purchase the facility at the end of year two. Future minimum
payments, by year and in the aggregate, under this capital lease and under
operating leases consist of the following:
F-14
<PAGE>
<TABLE>
<CAPTION>
Capital Leases Operating Leases
-------------- ----------------
<S> <C> <C>
1997 $ 438,978 $1,397,482
1998 4,086,610 1,021,730
1999 43,154 544,878
2000 - 247,771
2001 - 92,913
Future years -
----------
Total minimum lease payments 4,568,742
Amounts representing interest 542,132
----------
Present value of net minimum payments 4,026,610
Less current portion 438,978
----------
Long term capitalized lease obligation $3,587,632
==========
</TABLE>
The Company's rental expense for operating leases was $1,201,000, $729,000, and
$856,000 for 1996, 1995, and 1994, respectively.
11. SIGNIFICANT CUSTOMERS:
----------------------
During 1996, the Company had sales to two customers, Price Costco and Sam's,
representing 19% and 15%, respectively, of net sales. During 1995 and 1994,
sales to one customer, Price Costco, was approximately 11% of total net sales.
12. NOTE RECEIVABLE:
----------------
In April 1996, the Company sold its gift and gourmet division in consideration
for a note receivable of $1,390,000 which bears interest at 11% and is secured
by a security interest in the related tangible and intangible assets. The terms
of the note receivable call for interest only for the first two years and
principal and interest over the remaining four years. No gain or loss was
recognized on this transaction.
F-15
<PAGE>
13. BUSINESS SEGMENT INFORMATION:
-----------------------------
<TABLE>
<CAPTION>
December 31,
-------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net Sales:
Retail Snack Tray $23,337,100 $17,655,107 $15,808,720
Specialty Baked Goods 27,077,000 23,355,886 18,419,821
----------- ----------- -----------
$50,414,100 $41,010,993 $34,228,541
=========== =========== ===========
Operating Income (Loss):
Retail Snack Tray $(1,688,197) $ (740,383) $ (9,139)
Specialty Baked Goods (1,464,574) (659,325) (779,593)
Corporate (1,892,245) (2,524,609) (227,221)
----------- ----------- -----------
$(5,045,016) $(3,924,317) $(1,015,953)
=========== =========== ===========
Identifiable Assets:
Retail Snack Tray $ 8,534,783 $ 7,393,522 $ 4,877,596
Specialty Baked Goods 25,907,934 14,833,219 15,682,470
Corporate 3,333,225 410,265 206,095
----------- ----------- -----------
$37,775,942 $22,637,006 $20,766,161
=========== =========== ===========
Capital Expenditures:
Retail Snack Tray $ 1,296,760 $ 2,328,764 $ 427,482
Specialty Baked Goods 9,844,010 644,741 1,319,773
Corporate 45,553 285,160 48,419
----------- ----------- -----------
$11,186,323 $ 3,258,665 $ 1,795,674
=========== =========== ===========
Depreciation and Amortization:
Retail Snack Tray $ 721,719 $ 328,459 $ 161,133
Specialty Baked Goods 948,679 969,004 502,323
Corporate 389,850 64,916 184,544
----------- ----------- -----------
$ 2,060,248 $ 1,362,379 $ 848,000
=========== =========== ===========
</TABLE>
14. SUBSEQUENT EVENTS:
------------------
Subsequent to December 31, 1996, the following events occurred:
Sale of assets - In March 1997, the Company entered into an agreement to sell
- --------------
certain assets related to The MarveLoaf, Corp. back to the original owner for
approximately $1,050,000 including cash of $50,000 and a note payable to the
Company for $1,000,000. The terms of the note are for a period of 10 years with
interest and principal payable monthly. This transaction includes both
intangible assets (trademarks, etc.), certain fixed assets, certain accounts
receivable and certain current liabilities.
Regulation S Convertible Debentures - In January 1997, the Company placed
- -----------------------------------
$2,600,000 of Regulation S 8% convertible debentures ($1,100,000 due in one year
with an interest rate of 8% and $1,500,000 due in two years with an interest
rate of 8%). These debentures can be converted at any time after a holding
period of 45 days at the lower of (a) 70% of the closing price of the common
stock for the day immediately preceding the conversion date (in the case of the
$1,500,000 debentures it is the average closing bid price for the preceding five
days before conversion) or (b) 70% of the average of the closing prices of the
common stock for the five business days immediately preceding the date of
subscription by the purchaser (in the case of the $1,500,000 debentures it is
$3.25 per share). These funds were used for working capital purposes and the
repayment of a $200,000 note payable. In connection with these convertible
debentures, the Chairman of the Company has agreed to convert certain debentures
owed him by the Company at an exchange per share in order that the weighted
average conversion price will be $3.25 per share.
F-16
<PAGE>
Of the Regulation S convertible debentures placed by the Company subsequent to
December 31, 1996, $645,000 have been converted by the holders through March 20,
1997. The Company's Chairman has also converted $750,000 of debentures. The
combined weighted average conversion price of these debentures was $3.25 per
share. These debentures were converted under the terms of the debenture
agreements and the common shares have been issued or will shortly be issued by
the Company's transfer agent.
F-17
<PAGE>
INDEX TO EXHIBITS
The following documents are included as exhibits to this Form 10-K. Those
exhibits below incorporated by reference herein are indicated as such by the
information supplied in the parenthetical thereafter. If no parenthetical
appears after an exhibit, such exhibit is filed herewith.
EXHIBIT
NUMBER DESCRIPTION
------- -----------
2.1 Asset Purchase Agreement dated July 25, 1996, between the Company and
The Bagel Place, Inc. (filed as Exhibit 2.1 to the Company's Form 8-K
filed August 22, 1996).
3.1 Certificate of Incorporation of the Company (filed as Exhibit 3.1 to
the Company's Registration Statement on Form S-1 Registration No. 33-
79736 (the "S-1 Registration Statement")).
3.2 Certificate of Amendment of Certificate of Incorporation of the
Company filed June 17, 1992 (filed as Exhibit 3.2 to the S-1
Registration Statement).
3.3 Certificate of Amendment of Certificate of Incorporation of the
Company filed August 4, 1993 (filed as Exhibit 3.3 to the S-1
Registration Statement).
3.4 Certificate of Amendment of Certificate of Incorporation of the
Company filed June 2, 1994 (filed as Exhibit 3.6 to the S-1
Registration Statement).
3.5 Bylaws of the Company (filed as Exhibit 3.7 to the S-1 Registration
Statement).
4.1 Form of Offshore Securities Subscription Agreement (filed as Exhibit
4.1 to the Company's Form 10-Q for the quarterly period ended
September 30, 1996).
4.2 Form of 8.0% Convertible Debenture due November 15, 1997 (filed as
Exhibit 4.2 to the Company's Form 10-Q for the quarterly period ended
September 30, 1996).
4.3 Form of Note Purchase Agreement (filed as Exhibit 4.3 to the
Company's Form 10-Q for the quarterly period ended September 30,
1996).
4.4 Form of Offshore Securities Subscription Agreement (filed as Exhibit
4.1 to the Company's Form 8-K filed January 17, 1997).
4.5 Form of Convertible Debenture due December 31, 1998 (filed as Exhibit
4.2 to the Company's Form 8-K filed January 17, 1997).
4.6 Form of Regulation S Securities Subscription Agreement (filed as
Exhibit 4.1 to the Company's Form 8-K filed February 18, 1997).
4.7 Form of 8% Convertible Debenture due January 31, 1999 (filed as
Exhibit 4.2 to the Company's Form 8-K filed February 18, 1997).
4.8 Form of Common Stock Purchase Warrant (filed as Exhibit 4.3 to the
Company's Form 8-K filed February 18, 1997).
4.9 Form of Registration Rights Agreement (filed as Exhibit 4.4 to the
Company's Form 8-K filed February 18, 1997).
10.1 Industrial Real Estate Lease dated January 16, 1992, between the
Company and Acquiport Two Corporation, as amended (filed as Exhibit
10.8 to the S-1 Registration Statement).
10.2 Master Vehicle Lease Agreement dated November 24, 1993, between
Timmer Leasing Company and Honor Snack, Inc. (filed as Exhibit 10.9
to the S-1 Registration Statement).
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.3 Open-Ended Master Lease Agreement dated February 20, 1991, between
Figgie Leasing Corporation and Honor Snack, Inc. (as assignee of
Nationwide Gourmets, Inc.) (filed as Exhibit 10.10 to the S-1
Registration Statement).
10.4 Agreement dated July 16, 1993, between the Company and Le Groupe La
Cantinere, Inc. (filed as Exhibit 10.11 to the S-1 Registration
Statement).
10.5 Form of Warrant issued as of May 4, 1993, to Leslie M. Hannafey
(filed as Exhibit 10.12 to the S-1 Registration Statement).
10.6 Form of Warrant issued to Regent Private Capital Corp. in 1993 in
connection with certain short-term financing (filed as Exhibit 10.13
to the S-1 Registration Statement).
10.7 Common Stock Purchase Warrants dated June 2, 1994, issued to: (I) ML
Oklahoma Venture Partners, Limited Partnership, for 12,121 shares,
(ii) Lawrence D. Field for 42,424 shares, and (iii) Gerald E. Milton
for 6,061 shares (filed as Exhibit 10.14 to the S-1 Registration
Statement).
10.8 Form of Warrant Issued to Commonwealth Associates in connection with
the initial public offering of the Company's common stock (filed as
Exhibit 10.15 to the S-1 Registration Statement).
10.9* Employment Agreement dated December 31, 1993, between the Company and
Steve Sirianni (filed as Exhibit 10.19 to the S-1 Registration
Statement).
10.10 Employment Agreement dated December 31, 1993, between the Company and
Tim Soldati (filed as Exhibit 10.20 to the S-1 Registration
Statement).
10.11 Employment Agreement dated December 31, 1993, between the Company and
Rich Martin (filed as Exhibit 10.21 to the S-1 Registration
Statement).
10.12 Loan Agreement dated April 11, 1995 between the Company and Liberty
Bank and Trust Company of Tulsa, National Association (filed as
Exhibit 10.1 to the Company's Form 10-Q for the quarterly period
ended March 31, 1995).
10.13 Security Agreement dated April 11, 1995, from the Company to Liberty
Bank and Trust Company of Tulsa, National Association (filed as
Exhibit 10.2 to the Company's Form 10-Q for the quarterly period
ended March 31, 1995.
10.14 Revolving Note dated April 11, 1995, in the original principal amount
of $5,000,000 payable to Liberty Bank and Trust Company of Tulsa,
National Association (filed as Exhibit 10.3 to the Company's Form 10-
Q for the quarterly period ended March 31, 1995).
10.15 Term Note dated April 11, 1995, in the original principal amount of
$5,000,000 payable to Liberty Bank and Trust Company of Tulsa,
National Association (filed as Exhibit 10.4 to the Company's Form 10-
Q for the quarterly period ended March 31, 1995).
10.16 Third Amendment to Loan Agreement dated September 13, 1996, among the
Company, Silverado Marketing Services, Inc., Texas B&B, Inc.,
Lawrence D. Field, Cynthia Field and Liberty Bank and Trust Company
of Tulsa, National Association (filed as Exhibit 10.2 to the
Company's Form 10-Q for the quarterly period ended September 30,
1996).
10.17 Form of Indemnification Agreement between the Company and each
officer and director of the Company (filed as Exhibit 10.27 to the S-
1 Registration Statement).
10.18* Stock Option Agreement dated as of June 2, 1994, in favor of David A.
Hentschel for 3,000 shares (filed as Exhibit 10.29 to the S-1
Registration Statement).
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.19 Amended and Restated Registration Rights Agreement dated August 18,
1993, and Amendment to Amended and Restated Registration Rights
Agreement dated December 20, 1993 (filed as Exhibit 10.30 to the S-1
Registration Statement).
10.20* Silverado Foods, Inc. 1994 Stock Option Plan (filed as Exhibit 10.31
to the S-1 Registration).
10.21* Amendment Number 1 to Silverado Foods, Inc. 1994 Stock Option Plan
(filed as Exhibit A to the Company's Proxy Statement for Annual
Meeting of Shareholders held May 12, 1995).
10.22 Lease Agreement dated July 20, 1992, between Richard S. Cohen and
Jenny W. Williams, as landlord, and Mom's Best Cookies, Inc. as
tenant (filed as Exhibit 10.34 to the Company's Form 10-K for the
fiscal year ended December 31, 1994).
10.23 Standard Industrial/Commercial Single-tenant Lease dated July 31,
1991, between the Katherine Shaw Wallace and Revett B. Wallace Trust,
as lessor, and The New York Bagel Factory of Santa Barbara, as lessee
(filed as Exhibit 10.35 to the Company's Form 10-K for the fiscal
year ended December 31, 1994).
10.24 Lease Agreement dated November 3, 1995, between DCA Grantor Trust, as
lessor, and The Company, as lessee (filed as Exhibit 10.32 to the
Company's Form 10-K for the fiscal year ended December 31, 1995).
10.25* Silverado Foods, Inc. 401(k) Plan (filed as Exhibit 4(f)) to the
Company's Registration Statement on Form S-8 as filed with the
Securities and Exchange Commission on December 8, 1995).
10.26 Royalty Termination Agreement dated November 8, 1996, among the
Company, Nonni's Inc., Steve Sirianni, Tim Soldati and Rich Martin
(filed as Exhibit 10.1 to the Company's Form 10-Q for the quarterly
period ended September 30, 1996).
10.27* Employment Agreement dated December 6, 1996, between the Company and
Michael W. Knapik
21. Subsidiaries of the Company. (filed as Exhibit 21 to the Company's
Form 10-K for the fiscal year ended December 31, 1995).
23. Consent of Arthur Andersen LLP.
27. Financial Data Schedule.
- --------------------
*Management contract or compensatory plan or arrangement.
<PAGE>
EXHIBIT 10.27
-------------
December 6, 1996
Mr. Michael W. Knapik
3639 Sope Creek Farm Rd.
Marietta, GA 30067-5175
Subject: Employment Offer with Silverado Foods, Inc.
Dear Michael:
This is to confirm our offer of employment to you of November 22, 1996 in the
position of Vice President, Sales and Marketing, reporting directly to me,
resulting from the purchase of M. Wendlin Konsulting, Inc. by the Company for
the sum of one ($1) dollar.
Your starting salary will be $135,000 per year. Our pay periods are every two
weeks. Subsequent salary adjustments shall be at the discretion of the
Company's management, and are typically reviewed annually. You have been
granted a car allowance of $750.00 per month, excluding normal operating
expenses. Company policy requires that you maintain at least $100/$300,000
bodily injury and $25,000 property damage insurance on personal autos used for
business purposes.
You have received a copy of our medical benefits insurance. Your coverage will
be effective on your first calendar day of employment which is currently
scheduled for Monday, December 9, 1996. The current cost of coverage for you
and all eligible dependents will be $44.12 per pay period.
Additionally, we will provide, at Company expense, term life insurance equal to
twice your base annual salary and long-term disability coverage that will
provide at least 75% coverage of base annual salary. You will be required to
complete and pass any normally required physical minimums for this coverage.
These coverages will be provided within the first ninety(90) days of employment.
You are immediately entitled to three weeks paid vacation, taken at your
discretion in full days, upon acceptance of this offer. You will continue to be
eligible for three weeks paid annual vacation for as long as your length of
service does not provide for at least three weeks paid annual vacation.
The position will be located in Tulsa, Oklahoma. You will be allowed to
maintain your residence in Marietta, Georgia until June, 1998. At that time,
you will be required to relocate to the Tulsa, Oklahoma area. All reasonable
and customary expenses incurred in the move, including reasonable and customary
Realtor's commissions, will be fully reimbursed by the Company within thirty
days of receipt by the Company. Expenses incurred while in Tulsa, Oklahoma
prior to relocation will be considered normal business travel expenses.
You will be eligible to participate in the Company 401-K plan at the first
effective entry date after your acceptance of this offer. The next plan entry
date after December 9, 1996 is March 1, 1997.
Upon acceptance of this employment offer, you will immediately be granted
options for five thousand(5,000) shares of Company stock. The option price of
these shares is three and one-half dollars($3.50). The normal term of these
options is three(3) years. In the event of termination for any reason, these
shares will become exercisable immediately.
You are also eligible for annual incentive awards. You are eligible to earn
stock options in 1997, 1998, and 1999 for fifteen thousand (15,000) shares of
Company stock each year for achieving mutually agreed upon incentive targets.
These options are issued as part of the Company Incentive Stock Option Plan.
The options have a three year term and an option price of three and one-half
dollars($3.50). In the event of termination for any reason, any awarded stock
options will become immediately exercisable.
<PAGE>
Should your employment with the Company be terminated by the Company for any
reason, your base salary will continue to be paid to you by the Company for a
period of six(6) months from the effective date of termination.
Your employment with the Company has no specified term, and may be terminated by
yourself or the Company, with or without cause, by notice to the other.
Nothing contained in this letter, nor in the subsequent statements, policies,
actions or inactions of the Company during the course of your employment shall
be deemed to give rise to an express or implied agreement to the contrary. The
employment status described above can be altered only by a written agreement
executed by the Company's Chief Executive Officer.
We are very pleased and optimistic about you becoming a critical part of our
team.
Sincerely,
Silverado Foods, Inc. Accepted as to the terms and conditions
President
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our reports included (or incorporated by reference) in this Form 10-K, into the
Company's previously filed Registration Statement File No. 333-17127,
Registration Statement File No. 33-80157 and Registration Statement File No.
33-80159.
ARTHUR ANDERSEN LLP
Tulsa, Oklahoma
April 9, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1996 JAN-01-1995
<PERIOD-END> DEC-31-1996 DEC-31-1995
<CASH> 164,118 128,401
<SECURITIES> 0 0
<RECEIVABLES> 4,605,632 3,173,138
<ALLOWANCES> 0 0
<INVENTORY> 5,974,719 5,005,431
<CURRENT-ASSETS> 11,493,165 9,073,710
<PP&E> 13,100,850 3,502,359
<DEPRECIATION> 1,271,270 785,724
<TOTAL-ASSETS> 37,775,942 22,637,006
<CURRENT-LIABILITIES> 19,589,651 9,108,063
<BONDS> 0 0
0 0
0 0
<COMMON> 72,583 59,831
<OTHER-SE> 1,067,216 5,158,457
<TOTAL-LIABILITY-AND-EQUITY> 37,775,942 22,637,006
<SALES> 50,414,100 41,010,993
<TOTAL-REVENUES> 50,414,100 41,010,993
<CGS> 34,496,578 27,656,567
<TOTAL-COSTS> 55,459,116 44,935,310
<OTHER-EXPENSES> 72,429 1,601
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 1,541,555 787,093
<INCOME-PRETAX> (6,659,000) (4,713,011)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (6,659,000) (4,713,011)
<DISCONTINUED> (800,000) 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (7,459,000) (4,713,011)
<EPS-PRIMARY> (1.17) (.81)
<EPS-DILUTED> 0 0
</TABLE>
