<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
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)
(918) 496-2400
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
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 field such reports), and (2) has been subject to such filing
requirements of the past 90 days.
Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Class Outstanding at August 7, 1997
----- -----------------------------
Common Stock, $.01 Par Value 8,898,864
<PAGE>
PART I
FINANCIAL
INFORMATION
2
<PAGE>
SILVERADO FOODS, INC. AND SUBSIDIARIES
--------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 1997 1996
------ ------------ -------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash 20,095 164,118
Accounts receivable, net 3,053,089 4,605,632
Inventories, net 4,525,030 5,974,719
Prepaid expenses and other 778,997 543,709
Deferred tax assets 16,663 16,663
Net assets held for disposal 1,317,940 188,324
----------- -----------
Total current assets 9,711,814 11,493,165
----------- -----------
NOTES RECEIVABLE 1,281,268 1,315,584
PROPERTY, PLANT AND EQUIPMENT, net 11,529,651 11,829,580
GOODWILL AND OTHER INTANGIBLES, net 10,554,128 13,137,613
----------- -----------
Total assets 33,076,861 37,775,942
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current maturities of long-term debt 7,438,869 8,637,272
Trade accounts payable 5,573,925 8,338,029
Accrued liabilities 2,458,444 2,324,039
Other liabilities 189,466 290,311
----------- -----------
Total current liabilities 15,660,704 19,589,651
----------- -----------
LONG-TERM DEBT, less current maturities 15,306,211 13,442,197
DEFERRED TAX LIABILITIES 16,663 16,663
CAPITALIZED LEASE OBLIGATIONS 3,919,613 3,587,632
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY (DEFICIT)
Common stock, $.01 par value, 20,000,000 shares authorized 86,329 72,583
Warrants 61,563 61,563
Additional paid-in-capital 24,050,559 18,843,454
Accumulated deficit (25,960,129) (17,773,149)
----------- -----------
Total shareholders' equity (deficit) (1,761,678) 1,204,451
Less treasury stock (64,652) (64,652)
----------- -----------
Total shareholders' equity (deficit) (1,826,330) 1,139,799
----------- -----------
Total liabilities and shareholders' equity (deficit) 33,076,861 37,775,942
=========== ===========
</TABLE>
See notes to unaudited consolidated financial statements.
3
<PAGE>
SILVERADO FOODS, INC. AND SUBSIDIARIES
--------------------------------------
CONSOLIDTAED STATEMENTS OF OPERATIONS
-------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ---------------------------
1997 1996 1997 1996
----------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
NET SALES 11,801,513 $ 11,530,395 23,500,850 $21,456,443
COST OF SALES 7,977,146 7,452,155 16,245,202 13,941,750
----------- ------------ ----------- -----------
Gross profit 3,824,367 4,078,240 7,255,648 7,514,693
----------- ------------ ----------- -----------
OPERATING EXPENSES:
General and administrative 3,147,038 1,797,449 5,109,275 3,591,308
Selling and marketing 2,828,577 2,477,251 5,680,061 4,577,143
Depreciation 127,805 60,188 248,313 136,809
Amortization of goodwill
and other intangibles 216,921 311,112 446,113 584,846
----------- ------------ ----------- -----------
6,320,341 4,646,000 11,483,762 8,890,106
----------- ------------ ----------- -----------
OPERATING LOSS (2,495,974) (567,760) (4,228,114) (1,375,413)
OTHER INCOME (EXPENSE):
Interest (575,262) (325,064) (1,128,574) (631,540)
Accretion of debenture
discount - - (1,150,000) -
Other, net (12,484) (15,411) (23,039) (40,110)
----------- ------------ ----------- -----------
(587,746) (340,475) (2,301,613) (671,650)
----------- ------------ ----------- -----------
LOSS BEFORE INCOME TAXES (3,083,720) (908,235) (6,529,727) (2,047,063)
PROVISION FOR INCOME TAXES - - - -
----------- ------------ ----------- -----------
NET LOSS FROM CONTINUING
OPERATIONS (3,083,720) (908,235) (6,529,727) (2,047,063)
----------- ------------ ----------- -----------
DISCONTINUED OPERATIONS
Operating Loss (119,582) (175,683) (277,277) (314,847)
Loss on Disposal (1,379,976) - (1,379,976) -
----------- ------------ ----------- -----------
LOSS FROM DISCONTINUED
OPERATIONS (1,499,558) (175,683) (1,657,253) (314,847)
----------- ------------ ----------- -----------
NET LOSS (4,583,278) (1,083,918) (8,186,980) (2,361,910)
=========== ============ =========== ===========
LOSS PER COMMON AND
COMMON EQUIVALENT SHARE FROM
CONTINUING OPERATIONS $ (0.39) $ (0.14) $ (0.85) $ (0.33)
LOSS FROM DISCONTINUED
OPERATIONS $ (0.19) $ (0.03) $ (0.22) $ (0.05)
----------- ------------ ----------- -----------
LOSS PER SHARE $ (0.58) $ (0.17) $ (1.07) $ (0.38)
=========== ============ =========== ===========
</TABLE>
See notes to unaudited consolidated financial statements.
4
<PAGE>
SILVERADO FOODS, INC. AND SUBSIDIARIES
--------------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
---------------------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
Common Stock Treasury Stock
----------------- ------------------- Additonal
Number Number Paid-in Accumulated
of shares Amount of shares Amount Warrants Capital Deficit Total
--------- ------- --------- -------- -------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 7,258,243 $72,583 (26,995) $(64,652) $61,563 $18,843,454 $(17,773,149) $ 1,139,799
Issuance of common stock in
connection with debenture
conversion 1,374,569 13,746 - - - 1,461,504 - 1,475,250
Contribution of capital - - - - - 2,595,601 - 2,595,601
Accretion of debenture
discount - - - - - 1,150,000 - 1,150,000
Net loss - - - - - - (8,186,980) (8,186,980)
--------- ------- -------- -------- ------- ----------- ------------ -----------
BALANCE, JUNE 30, 1997 8,632,812 $86,329 (26,995) $(64,652) $61,563 $24,050,559 $(25,960,129) $(1,826,330)
</TABLE>
See notes to unaudited consolidated financial statements.
5
<PAGE>
SILVERADO FOODS, INC. AND SUBSIDIARIES
--------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------------------
1997 1996
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (8,186,980) $ (2,361,910)
------------ ------------
Adjustments to reconcile net loss to cash used in operating activities--
Depreciation and amortization 1,127,779 937,401
Accretion of debenture discount 1,150,000 -
Increase in allowance for doubtful accounts 1,000,000 -
Loss on sale of assets 1,308,046 -
Change in assets and liabilities, net of effect of acquisitions
(Increase) decrease in accounts receivable 1,428,505 (523,399)
(Increase) decrease in inventory 1,092,848 (823,474)
(Increase) decrease in prepaid expenses and other (185,288) 181,343
Increase in assets held for disposal (388,573) -
Increase (decrease) in payables and accrued liabilities (2,519,433) 1,571,970
(Increase) decrease in intangibles and other 231,136 (100,705)
------------ ------------
Total adjustments 4,245,020 1,243,136
------------ ------------
Cash used in operating activities (3,941,960) (1,118,774)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (938,525) (1,007,523)
Payments for acquisitions - (1,530,104)
------------ ------------
Cash used in investing activities (938,525) (2,537,627)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of warrants - 49,609
Borrowings from long-term debt 10,620,911 3,424,986
Payments on notes payable (5,884,449) 196,546
------------ ------------
Cash provided by financing activities 4,736,462 3,671,141
------------ ------------
NET INCREASE (DECREASE) IN CASH (144,023) 14,740
CASH, beginning of period 164,118 128,401
------------ ------------
CASH, end of period $ 20,095 $ 143,141
============ ============
Non-cash Financing Activities:
Issuance of stock for acquisition $ - $ 600,000
Issuance of stock for debenture conversion 1,461,504 -
Addition to paid-in-capital for debenture discount accretion 1,150,000 -
Contribution of capital 2,595,601 -
Capitalized Lease Obligation - 3,589,293
Receipt of Note Receivable for sale of assets 1,012,383 -
SUPPLEMENTAL CASH FLOWS INFORMATION:
Cash paid for-
Interest $ 572,213 $ 440,754
Income taxes - -
</TABLE>
See notes to unaudited consolidated financial statements.
6
<PAGE>
SILVERADO FOODS, INC. AND SUBSIDIARIES
--------------------------------------
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
1. GENERAL:
The accompanying consolidated financial statements have been prepared by
Silverado Foods, Inc. (the "Company") without audit and should be read in
conjunction with the Company's consolidated financial statements and the notes
thereto included in the Company's annual report and Form 10-K as of December 31,
1996. The foregoing financial statements include only normal recurring accruals
and all adjustments which the Company considers necessary for a fair
presentation.
2. DETAILS TO CONSOLIDATED BALANCE SHEETS:
Inventories consist primarily of finished goods and packaging supplies which are
stated at the lower of cost (first-in, first-out basis) or market as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
----------- ------------
<S> <C> <C>
Raw Materials $1,675,857 $2,348,945
Finished Goods 2,960,048 3,709,774
---------- ----------
4,635,905 6,058,719
Less: Allowance for excess and
obsolete inventory (110,875) (84,000)
---------- ----------
$4,525,030 $5,974,719
========== ==========
</TABLE>
Inventories are reflected net of approximately $330,000 of inventories related
to the Company's catalog division which are classified as net assets held for
disposal, as discussed in Note 4.
3. LOSS PER SHARE:
For the three months ended June 30, 1997 and June 30, 1996, the loss per share
calculation includes the weighted average number of shares outstanding for the
period which were 7,997,935 and 6,225,788, respectively. For the six months
ended June 30, 1997 and June 30, 1996, the loss per share calculation includes
the weighted average number of shares outstanding for the period which were
7,664,689 and 6,199,487, respectively.
In March 1997, Statement of Financial Accounting Standards (SFAS) No. 128,
"Earnings per Share" was issued. SFAS No. 128 replaces primary earnings per
share with basic earnings per share, and diluted earnings per share with fully
diluted earnings per share.
7
<PAGE>
The earnings per share calculations for the three and six month periods ended
June 30, 1997 and 1996 would not change under SFAS No. 128.
3. NOTES RECEIVABLE
In April 1996, the Company sold its Gift and Gourmet division in consideration
for a note receivable of $1,370,000 bearing interest at 11%. 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. During the second quarter of 1997, the Company provided a reserve
against this note receivable in the amount of $1,000,000 due to the
uncertainties surrounding the collection of this note receivable.
On June 6, 1997, the Company sold certain assets originally acquired from the
MarveLoaf Corp. for $1,062,000 including cash of $50,000 and a note receivable
for $1,012,000. Interest is at 10% and is payable on March 31, 1998 and March
31, 1999. In addition, principal payments of $12,500 plus interest will be due
quarterly beginning January 15, 2000 through 2006. No gain or loss was
recognized on this sale.
4. SUBSEQUENT EVENT
On July 1, 1997, the Company entered into a letter of intent to sell all of the
assets of its catalog division for $1,100,000, including an earn-out provision
for $100,000 if catalog sales during 1998 exceed a certain amount. Therefore, at
June 30, 1997, the Company has classified these assets as net assets held for
disposal and recognized a loss in connection with this proposed sale in the
amount of $1,380,000.
5. SHAREHOLDERS' EQUITY (DEFICIT)
In connection with the acquisition of Nonni's in 1993, the Company entered into
a royalty agreement. This royalty agreement was terminated in July 1996 by
issuing 700,000 shares of common stock with a guaranteed market price of $5.71
per share for the period April 1, 1997 through December 31, 1997. Through June
30,1997, certain shares were sold at a price below the guaranteed market price.
The Company is now obligated to issue approximately 900,000 shares in connection
with such obligation.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
----------------------------------------------
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
The following discussion and analysis should be read in conjunction with the
Company's Consolidated Financial Statements and notes thereto. The following
table presents, as a percentage of net sales, certain selected financial data
for the Company for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
------------------- -------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Sales 100% 100% 100% 100%
Gross Profit 32 35 31 35
General and Administrative 27 16 22 17
Selling and Marketing 24 22 24 21
Depreciation and Amortization of Intangibles 3 3 3 3
Interest & Other 5 3 10 3
Loss from Continuing Operations (26) (8) (28) (10)
Loss from Discontinued Operations (13) (2) (7) (2)
Net Loss (39) (9) (35) (11)
</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 and the Company's catalog division, both of which have been
discontinued. No income tax benefit has been recognized in connection with
these discontinued operations due to the Company's net operating loss carry
forward position.
PERIOD TO PERIOD COMPARISONS FOR THE THREE MONTHS ENDED JUNE 30, 1997 COMPARED
TO THE THREE MONTHS ENDED JUNE 30, 1996
Net Sales. Total net sales for the three month period ended June 30, 1997
increased 2% to $11,802,000, versus $11,530,000 for the same period of 1996.
The snack tray segment's net sales decreased from $6,194,000 to $5,987,000 and
accounted for 50% of total sales for the quarter ending June 30, 1997 compared
to 54% for the same period of 1996. Sales in the specialty baked goods segment
increased 9% to $5,815,000 during the second quarter of 1997 versus $5,337,000
for the same period of 1996 driven primarily by sales increases in the bagel bar
product line.
Gross Profit. Gross profit for the three months ended June 30, 1997 was
$3,824,000, a 6% decrease over the comparable period in 1996 of $4,078,000.
Gross profit as a percentage of net sales decreased from 35% to 32%. Total
gross profit in the snack tray segment was $2,708,000, an increase of 3% over
the prior year quarter and increased as a
9
<PAGE>
percentage of net sales from 42% to 44%. This increase in gross margin was a
result of lower purchased product cost for the snack tray segment when compared
to the same period of 1996. In the specialty baked goods segment, gross profit
decreased $345,000, from $1,461,000 to $1,116,000. This decline in gross profit
was due to a decline of approximately $254,000 in the Mom's Best and Maxi-Crisp
product lines and a decline of approximately $293,000 in the Nonni's biscotti
product lines, which was offset by an increase of approximately $202,000 in the
bagel bar product line.
The decline in Mom's Best gross profit was due primarily to declining sales
volumes. The decline in Maxi-Crisp was due to declining sales volumes and higher
costs. Approximately 40% of the Nonni's gross profit decline was due to lower
sales and 60% of the decline was due to higher costs related to the initial
production of certain private-label biscotti products, and the installation of
additional production improvements. The increase in the bagel bar product line
was due to increased sales volumes offset by lower margins due to new production
start-up in the Santa Ana manufacturing facility and lower plant efficiency
prior to outsourcing the Company's traditional round bagel production.
General and Administrative. General and administrative expenses increased
from $1,797,000 to $3,147,000, an increase of $1,350,000 and increased as a
percentage of net sales from 16% to 27%. The majority of this increase was due
to a reserve provision of $1,000,000 related to a note receivable that occurred
as a result of the 1996 sale of the Company's Gift and Gourmet division. The
snack tray segment's general and administrative expenses increased by $205,000
or 24% due to higher payroll and other corporate expenses in the day to day
operations.
Selling and Marketing. Selling and marketing expenses increased as planned
from $2,477,000 to $2,829,000, an increase of 14% over the comparable period of
1996 and increased as a percentage of net sales from 22% to 24%. This increase
was due to increased sales and marketing expenses associated with the specialty
baked goods segment for demonstrations of the Company's bagel bar product and
increased sales expenses associated with development of new accounts in the
snack tray segment. Expenses for the second half of 1997 are planned to show a
decrease versus the prior year to balance total year spending.
Depreciation and Amortization of Intangibles. Depreciation and amortization
of goodwill and other intangibles decreased from $371,000 to $345,000, a
decrease of 7% over the same period of 1996. Of this amount, $128,000 and
$60,000 represented depreciation for the three months ended June 30, 1997 and
1996, respectively. In addition, there was an additional $170,000 and $69,000
of depreciation included in cost of goods sold for the three months ended June
30, 1997 and 1996, respectively.
Interest and Other. Interest and other expense increased from $341,000 to
$588,000, an increase of $247,000. The increase was due to increased debt
outstanding as compared to the prior year quarter for the funding of working
capital requirements.
10
<PAGE>
Loss from Continuing Operations. Losses from continuing operations increased
from $908,000 to $3,084,000, an increase of $2,176,000. This increase came from
both the snack tray segment and the specialty baked goods segment and was due to
the reserve provision of $1,000,000 discussed above and higher operating
expenses from both segments as discussed above as compared to the previous
period of 1996.
Loss from Discontinued Operations. During the second quarter, the Company
made the decision to sell its catalog division located in Palestine, Texas and,
therefore, has accounted for the net assets of this division as discontinued at
June 30, 1997. Related to this decision, the Company has provided a reserve of
$1,380,000 for a loss on sale of this division in the second quarter of 1997.
The Company anticipates closing this sale in August 1997.
Net Loss. The Company's net loss increased from $1,084,000 to $4,583,000, an
increase of $3,499,000 over the comparable period for 1996. Of this amount,
$1,000,000 relates to the reserve provision for the note receivable discussed in
general and administrative expenses above, and $1,380,000 relates to the loss
from discontinued operations from the sale of the Company's catalog division.
PERIOD TO PERIOD COMPARISONS FOR THE SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO
THE SIX MONTHS ENDED JUNE 30, 1996
Net Sales. Total net sales increased 10% from $21,456,000 to $23,501,000.
Sales in the snack tray segment decreased by $66,000 to $12,075,000 or 1% while
sales in the specialty baked goods segment increased by $2,307,000 or 24%. The
increase in the specialty baked goods segment was due to higher sales from the
Company's bagel related products which increased 185% over the same period of
1996, but was offset by lower sales from the Maxi-Crisp product lines which
decreased 56% compared to the same six month period of 1996.
Gross Profit. Gross profit decreased from $7,515,000 to $7,256,000, a
decrease of 3%. Gross profit as a percentage of net sales decreased from 35% to
31%. The decrease in gross profit as a percentage of net sales was due to lower
margin sales from warehouse clubs for the Company's bagel product lines and the
biscotti product lines, offset by higher gross margins from the snack tray
segment where gross margins increased from 41% to 44%.
General and Administrative. General and administrative expenses increased
from $3,591,000 to $5,109,000, an increase of 42% and increased as a percentage
of net sales from 17% to 22%. A portion of this increase was due to higher
general and administrative expenses from the snack tray segment which increased
by $266,000 due to higher payroll and other corporate expenses. The food sales
segment's general and administrative expenses decreased while corporate expenses
increased as certain functions were
11
<PAGE>
centralized as the Company closed three manufacturing facilities during the last
six months of 1996.
Selling and Marketing. Selling and marketing expenses increased from
$4,577,000 to $5,680,000 a increase of 24% and increased as a percentage of net
sales from 21% to 24%. The increase in selling and marketing expenses was due
to higher demonstration expenses associated with the bagel related product lines
and higher expenses associated with the snack tray segment as the Company incurs
expenses associated with maintaining customer accounts.
Depreciation and Amortization of Intangibles. Amortization of goodwill and
other intangibles decreased by $27,000, a decrease of 4%. The majority of this
decrease was in the snack tray segment and related to route development costs
previously capitalized but now these costs are expensed on a current basis.
Interest and Other. Interest and other expenses increased from $672,000 to
$2,307,000, an increase of $1,635,000. Of this amount, $1,150,000 related to a
charge from the issuance of certain Regulation S debentures that occurred in the
first quarter of 1997 that had a convertible feature at a discount to the market
price of the common stock of the Company. This intrinsic value associated with
the discount must be charged to interest expense over the holding period.
Loss from Continuing Operations. Losses from continuing operations increased
from $2,047,000 to $6,530,000, an increase of $4,483,000. Of this amount,
$1,000,000 related to the reserve provision against notes receivable arising
from the sale of the Gift and Gourmet division and $1,150,000 due to an interest
expense charge related to certain Regulation S debentures.
Loss from Discontinued Operations. Losses from discontinued operations
increased from $315,000 to $1,657,000, an increase of $1,342,000. This related
to the decision to sell the catalog division located in Palestine, Texas.
Net Loss. The Company's net loss increased from $2,362,000 to $8,187,000, an
increase of $5,825,000 due to the reasons discussed above.
12
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operations was $3,942,000 for the six months ended June
30, 1997 compared to $1,119,000 for the six months ended June 30, 1996. Net
cash used in investing activities was $938,000 compared to $2,538,000 for the
comparable period in 1996. Net cash generated from financing activities during
the first six months ended June 30, 1997 totaled $4,736,000 from net borrowings
on long term debt.
The Company has a revolving credit facility of $7 million with a bank of which
$7 million was drawn as of June 30, 1997. Borrowings are based upon 80% of
eligible accounts receivable and 50% of eligible inventories. The term of this
revolver is for a period of three years (due in 1998) with interest at Wall
Street Journal-Southwest Edition prime payable monthly and principal due at
maturity. At June 30, 1997, the Company's borrowings under this line of credit
exceeded the amounts available based upon the borrowing base of eligible
accounts receivable and inventories. Borrowings under this facility are
guaranteed by the Company's chairman and his spouse.
In addition, the Company has a $6 million note payable with another bank due in
two years. The terms of this note call for interest only during the first year
with principal and interest during the second year on a five year amortization.
This note payable is collateralized by certain assets of the Company and is
guaranteed by the Company's chairman and his spouse along with another family
member of the Company's chairman.
Currently, the Company is reviewing alternatives to refinance the working
capital revolver and the note payable with other financial institutions. The
$7,000,000 revolver is classified as current in the financial statements as of
June 30, 1997. 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 during 1997.
The Company is subject to various covenants associated with its revolving line
of credit and term note, such as limitations on payments of dividends and on the
sale of a substantial portion of assets and on future indebtedness.
The Company curently does not meet all of the American Stock Exchange's listing
guidelines to be listed on the stock exchange and there can be no assurance in
the future that the Company's common shares will continue to be listed on the
American Stock Exchange. The Company is taking actions to address these
requirements.
FORWARD LOOKING STATEMENTS
This Management's Discussion and analysis of Financial Condition and Results of
Operations 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-Q, other than statements 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
13
<PAGE>
Company's product 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.
14
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable
ITEM 2. CHANGES IN SECURITIES
During the second quarter of 1997, the Company issued a total of
946,305 shares of common stock in connection with the conversion of convertible
debentures previously issued by the Company in transactions effected pursuant to
Regulation S promulgated under the Securities Act of 1933, as amended ( the
"Act"). The recipients of such shares of common stock were accredited investors
(as defined in Regulation D promulgated under the Act). The shares of common
stock issued upon such conversion were exempt from registration under the Act
pursuant to Section 3(a)(9) of the Act. No commission or other remuneration was
paid to a broker or placement agent in connection with such conversion. The
dates of the Company's issuance instructions to its transfer agent and the
conversion price per shares for each of such conversions is as follows:
<TABLE>
<CAPTION>
Date Conversion Price Number of Shares
<S> <C> <C>
April 4, 1997 1.35 44,527
April 11, 1997 1.15 123,004
May 1, 1997 1.03 8,715
May 16, 1997 1.20 13,011
May 21, 1997 1.06 47,220
May 28, 1997 .88 30,550
June 3, 1997 .83 45,108
June 5, 1997 .79 126,984
June 5, 1997 .88 91,428
June 6, 1997 .82 142,248
June 18, 1997 .76 27,585
June 19, 1997 .70 99,144
June 24, 1997 .70 102,855
June 30, 1997 .70 43,926
</TABLE>
15
<PAGE>
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
As of June 30, 1997, the Company's borrowings on its bank revolving
credit facility exceeded the borrowing base of eligible accounts receivable and
inventories. The principal amount owed by the Company under such revolving
credit facility is $7,000,000. The Company is current with respect to its
required payments under such revolving credit facility.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
The Annual Meeting of shareholders of the Company (the "Annual
Meeting") was held on May 9, 1997, in Tulsa, Oklahoma. At the Annual Meeting,
the shareholders of the Company elected Lawrence D. Field, Timothy G. Bruer,
Gerald E. Milton, James K. Tolbert, Milton D. McKenzie, Sam L. Susser, and James
H. Bankard as directors of the Company for one-year terms. The shareholders
also considered and approved the appointment of Arthur Andersen LLP as the
independent auditors of the Company for the fiscal year ending December 31,
1997.
There were present at the Annual Meeting, in person or by proxy, shareholders
holding 5,277,363 shares of the common stock of the Company, or 68.9% of the
total stock outstanding and entitled to vote at the Annual Meeting. The table
below describes the results of voting at the Annual Meeting:
16
<PAGE>
<TABLE>
<CAPTION>
Votes
Against
or
1. Election of Directors: Votes For Withheld Abstentions Non-Votes
--------- -------- ----------- ---------
<S> <C> <C> <C> <C>
Lawrence D. Field 5,273,263 4,100 -0- -0-
Timothy G. Bruer 5,273,263 4,100 -0- -0-
Gerald E. Milton 5,273,263 4,100 -0- -0-
James K. Tolbert 5,273,263 4,100 -0- -0-
Milton D. McKenzie 5,273,263 4,100 -0- -0-
Sam L. Susser 5,273,263 4,100 -0- -0-
James H. Bankard 5,273,263 4,100 -0- -0-
2. Ratification of Arthur 5,273,263 4,100 -0-
Andersen LLP as
independent auditors
of the Company for
fiscal 1997
</TABLE>
Not applicable
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.1 Promissory Note dated April 29,1997 in the original
principal amount of $6,000,000 payable to Bank of
Oklahoma, N. A.
10.2 Security Agreement dated April 29,1997, from the company
to Bank of Oklahoma, N. A.
27.0 Financial Data Schedule
(b) Reports on Form 8-K
None
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Silverado Foods, Inc.
---------------------
Registrant
By:/s/ Dorvin D. Lively
-----------------------
Dorvin D. Lively
Vice President, Chief Financial Officer
and Secretary (Duly Authorized
Officer and Principal
Accounting Officer)
Date: August 14, 1997
18
<PAGE>
INDEX TO EXHIBITS
The following documents are included as exhibits to this Form 10-Q.
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.
10.1 Promissory Note dated April 29,1997, in the original principal amount of
$6,000,000 payable to Bank of Oklahoma, N. A.
10.2 Security Agreement dated April 29,1997, from the Company to Bank of
Oklahoma, N. A.
27.0 Financial Data Schedule
<PAGE>
EXHIBIT 10.1
<TABLE>
<CAPTION>
PROMISSORY NOTE - FIXED OR VARIABLE RATE - COMMERCIAL ORIGINAL
============================================================================================================================
<S> <C> <C> <C> <C>
DEBTOR(S) NAME AND ADDRESS NOTE NUMBER DATE OF NOTE MATURITY DATE PRINCIPAL AMOUNT
0001 04/29/97 04/29/99 $6,000,000.00
--------------------------------------------------------------------------------
Silverado Foods, Inc. CUSTOMER NUMBER [X] NEW LOAN OFFICER
6846 S. Canton, #110
Tulsa, OK 74136 3684903 [ ] RENEWAL OF LOAN(S) NUMBER: DAJ428
--------------------------------------------------------------------------------
[ ] FIXED INTEREST RATE OF __________ % PER ANNUM. INTEREST PAYABLE:__________
[X] VARIABLE INTEREST RATE 0.000% ABOVE Chase Manhattan Prime
INITIAL RATE 8.500% INTEREST PAYABLE ______________________________________
--------------------------------------------------------------------------------
COLLATERAL CATEGORIES SOCIAL SECURITY NUMBER:
Equipment and Machinery 73-1369218
- ----------------------------------------------------------------------------------------------------------------------------
P PURPOSE
A T Accrued interest due and payable MONTHLY, beginning 05/29/97 and MONTHLY Financing for fixed assets
Y E thereafter, with 11 MONTHLY payments of $123,463.09, beginning 05/29/98, all
M R payments to be applied first to unpaid accrued interest and then to
E M principal with a final payment of the unpaid principal balance plus unpaid
N S accrued interest due on 4/29/99.
T
============================================================================================================================
</TABLE>
FOR VALUE RECEIVED, the undersigned Debtor(s), jointly and severally if more
than one, agree to the terms of this Note and promise to pay to the order of
Lender named below at its place of business as indicated herein or at such other
place as may be designated in writing by holder, the Principal Amount of this
Note together with interest until maturity at the per annum interest rate or
rates stated above. If the writing above indicates that the per annum interest
rate is to vary with changes made from time to time in the base or prime rate of
Lender or other financial institution, each change in the rate will become
effective without notice to Debtor on the same day such base or prime rate is
changed, unless a different effective date is specified above. The base or
prime rate set forth above is determined by the named Financial Institution in
its sole discretion primarily on a basis of its cost of funds, is not
necessarily the lowest or highest rate the named Financial Institution is
charging its customers, and is not necessarily a published rate. In the event
the named Financial Institution fixing the base or prime rate ceases to exist or
ceases to announce such a rate, lender may specify a new Financial Institution
to fix such rate, in its sole discretion. Interest on this Note is calculated
on the actual number of days elapsed on a basis of a 360 day year unless
otherwise indicated herein. For purposes of computing interest and determining
the date principal and interest payments are received, all payments made under
this Note will not be deemed to have been made until such payments are received
in collected funds.
PAYMENTS NOT MADE WHEN DUE. Any principal and/or interest amount not paid when
due shall bear interest at a rate six percent (6%) per annum greater than the
per annum interest rate prevailing on this Note at the time the unpaid amount
became due, but in no event at a rate less than fifteen percent (15%) per annum.
In addition or in the alternative to the interest rate provided for in this
paragraph Lender may assess a charge of ten dollars ($10.00) times the number of
days late to cover cost of past due notices and other expenses. In no event
shall the interest rate and related charges either before or after maturity be
greater than permitted by law.
ALL PARTIES PRINCIPALS. All parties liable for payment hereunder shall each be
regarded as a principal and each party agrees that any party hereto with
approval of holder and without notice to other parties may from time to time
renew this Note or consent to one or more extensions or deferrals of Maturity
Date for any term or terms, and all parties shall be liable in same manner as on
original note. All parties liable for payment hereunder waive presentment,
notice of dishonor and protest and consent to partial payments, substitutions or
release of collateral and to addition or release of any party or guarantor.
ADVANCES AND PAYMENTS. It is agreed that the sum of all advances under this
Note may exceed the Principal Amount as shown above, but the unpaid balance
shall never exceed said Principal Amount. Advances and payments on Note shall
be recorded on records of Lender and such records shall be prima facie evidence
of such advances, payments and unpaid principal balance. Subsequent advances
and the procedures described herein shall not be construed or interpreted as
granting a continuing line of credit for Principal Amount. Lender reserves the
right to apply any payment by Debtor, or for account of Debtor, toward this Note
or any other obligation of Debtor to Lender.
COLLATERAL. This Note and all other obligations of Debtor to Lender, and all
renewals or extensions thereof, are secured by all collateral securing this Note
and by all other security interests heretofore or hereafter granted to Lender as
more specifically described in Security Agreements and other securing
documentation.
ACCELERATION. At option of holder, the unpaid balance of this Note and all
other obligations of Debtor to holder, whether direct or indirect, absolute or
contingent, now existing or hereafter arising, shall become immediately due and
payable without notice or demand upon the occurrence or existence of any of the
following events or conditions: (a) Any payment required by this Note or by any
other note or obligation of Debtor to holder or to others is not made when due
or the occurrence or existence of any event which results in acceleration of the
maturity of any obligation of Debtor to holder or to others under any promissory
note, agreement or undertaking; (b) Debtor defaults in performance of any
covenant, obligation, warranty or provision contained in any loan agreement or
in any instrument or document securing or relating to this Note or any other
note or obligation of Debtor to holder or to others; (c) Any warranty,
representation, financial information or statement made or furnished to Lender
by or in behalf of Debtor proves to have been false in any material respect when
made or furnished; (d) The making of any levy against or seizure, garnishment or
attachment of any collateral; (e) Any time Lender in good faith determines
prospect of payment of this Note is impaired; (f) When in the judgment of Lender
the collateral, if any, becomes unsatisfactory or insufficient either in
character or value and upon request, Debtor fails to provide additional
collateral as required by Lender; (g) Loss, theft, substantial damage or
destruction of collateral, if any; (h) Death, dissolution, change in senior
management, or termination of existence of any Debtor; or (i) Appointment of a
receiver over any part of the property of any Debtor, the assignment of property
by any Debtor for the benefit of creditors, or the commencement of any
proceedings under any bankruptcy or insolvency laws by or against any party
liable, directly or indirectly, hereunder.
WAIVERS. No waiver by holder of any payment or other right under this Note or
any related agreement or documentation shall operate as a waiver of any other
payment or right.
GOVERNING LAW. This Note and the obligations evidenced hereby are made, entered
into, to be construed and governed by the laws of the state indicated in the
address of Lender shown below. Debtor(s) consent to the jurisdiction and venue
of any Court sitting in the State indicted in the address of Lender.
COLLECTION COSTS. All parties liable for payment hereunder agree to pay
reasonable costs of collection, including an attorney's fee of a minimum of
fifteen percent (15%) of all sums due upon default.
RIGHT OF OFFSET. Any indebtedness due from holder hereof to Debtor or any party
hereto including, but without limitation, any deposits or credit balances due
from holder, is pledged to secure payment of this Note and any other obligation
to holder of Debtor or any party hereto, and may at any time while the whole or
any part of such obligation remains unpaid, either before or after Maturity
hereof, be appropriated, held or applied toward the payment of this Note or any
other obligation to holder of Debtor or any party hereto.
PURPOSE. Debtor affirms that the proceeds of this Note are to be used for a
business or agricultural purpose and not for a personal, family or household
purpose.
ENTIRE AGREEMENT. All parties acknowledge that this Note and related documents
contain the complete and entire agreement between Debtor and Lender and no
variation, modification, changes or amendments to this Note or related documents
shall be binding unless in writing and signed by all parties. No legal
relationship is created by the execution of this Note and related documents
except that of debtor and creditor or as stated in writing.
================================================================================
LENDER NAME AND ADDRESS DEBTOR(S) SIGNATURE(S)
- --------------------------------------------------------------------------------
Silverado Foods, Inc.
Bank of Oklahoma, N.A.
P.O. Box 2300 ------------------------- -------------------------
Tulsa, OK 74192-2300 Lawrence Field, CEO
------------------------- -------------------------
------------------------- -------------------------
================================================================================
<PAGE>
EXHIBIT 10.2
Page 1 of 2
SECURITY AGREEMENT - Equipment and Motor Vehicles DATE OF AGREEMENT
APRIL 29, 1997
================================================================================
DEBTOR NAME AND ADDRESS LENDER NAME AND ADDRESS
- --------------------------------------------------------------------------------
Silverado Foods, Inc. Bank of Oklahoma, N.A.
6846 S. Canton #110 P. O. Box 2300
Tulsa, OK 74136 Tulsa, OK 74192-2300
================================================================================
As of the Date indicated above, the undersigned Debtor and the undersigned
Lender, with addresses as they appear herein, agree as follows:
I. GRANT OF A SECURITY INTEREST. For value received, Debtor hereby grants to
Lender a security interest in the property described in Paragraph II, which
property is hereinafter referred to collectively as "Collateral". This security
interest is given to secure the obligations of the Debtor to Lender as more
fully set forth in Paragraphs IV and V hereof.
II. COLLATERAL. The collateral shall include the property described below, all
additions, accessions and substitutions thereto and therefor, and all
accessories, parts and equipment now or hereafter affixed thereto or used in
connection therewith. The Collateral shall also include all similar property
hereafter acquired. The Collateral shall in addition include the proceeds and
products of the Collateral and all money and property owned by Debtor which is
now or which hereafter may be possessed or controlled by Lender, whether by
pledge, deposit or otherwise.
================================================================================
COLLATERAL
- --------------------------------------------------------------------------------
A. SPECIFICALLY DESCRIBED COLLATERAL. All Machinery and Equipment of Debtor, now
owned or hereafter acquired, all additions, accessions and substitutions
thereto and therefor and all accessories, parts and equipment now or
hereafter affixed thereto or used in connection therewith and all goods
acquired with the proceeds thereof.
B. USE OF COLLATERAL. Debtor warrants that the Collateral is to be used
primarily for one or more of the following purposes only:
[ ] Farming operations, or [X] Business other than farming operations.
C. OWNERSHIP OF COLLATERAL. Debtor warrants that the Collateral is:
[X] Now owned solely by Debtor, or [ ] Being acquired solely by Debtor
with the proceeds of loans secured by this Agreement.
D. LOCATION OF COLLATERAL. Debtor warrants that the location of the Collateral
will not be changed except with the written prior consent of Lender, and that
the Collateral is or promptly will be located as follows: 1701 E Edinger
Suite F5, Santa Anna, CA 92705
[ ] At Debtor's address as shown above,
or
[X] at the following address:
3920 E. Pine St., Tulsa, OK 74115
E. VEHICLES. If Collateral includes a vehicle (or vehicles) covered by a
certificate of title registration, Debtor warrants that the location of the
Collateral indicated above is the place where the Collateral normally will be
garaged, hangared, moored or otherwise kept between uses. Debtor warrants
said vehicle (or vehicles) is now or promptly will be registered and licensed
as follows:
State of Oklahoma
F. MOBILE GOODS. If the Collateral includes "mobile equipment" not covered by a
certificate of title registration (examples being some motor vehicles,
trailers, airplanes, shipping containers, road building and construction
machinery, commercial harvesters, oil rigs and such other mobile goods which
are capable of being used in more than one jurisdiction whether or not Debtor
intends to so use), Debtor warrants that the locations of such Collateral as
set forth above is the place where it will be normally located when not in
use.
G. FIXTURES. If the Collateral is to become a fixture, Debtor warrants that it
has not yet been affixed to any real property, and when it is, it will be
affixed to real property having the following legal description:
-----------------------------------------------------------------------------
================================================================================
III. ADDRESS OF DEBTOR. Debtor warrants that the address shown above is
Debtor's residence, or if Debtor is a corporation or a partnership, that the
above address is its place of business or its chief executive office if it has
more than one place of business. Debtor agrees to notify Lender promptly of any
change of address.
IV. OBLIGATIONS OF DEBTOR SECURED BY THIS AGREEMENT. The security interest
herein granted is given to secure all of the obligations of Debtor to Lender
including: A. The performance of all agreements, covenants and warranties of
the Debtor as set forth in this or any other agreement between the parties; B.
All liabilities of Debtor to Lender of every kind and description including:
(1) all future advances, (2) both direct and indirect liabilities, (3)
liabilities due or to become due and whether absolute or contingent, and (4)
liabilities now existing or hereafter arising and however evidenced; C. All
extensions and renewals of liabilities for any term or terms; D. All interest
due or to become due on the liabilities of Debtor to Lender; E. All
expenditures by Lender for taxes and insurance on, repairs to and maintenance of
Collateral; F. All expenditures by Lender involving the performance of or
enforcement of any agreement, covenant or warranty provided for by this or any
other agreement between the parties; and G. All costs, attorneys' fees and
other expenditures of Lender in the collection and enforcement of any obligation
or liability of Debtor to Lender and in the collection and enforcement of or
realization upon any of the Collateral.
V. FUTURE ADVANCES. It is specifically agreed that the obligations of Debtor
secured by this Agreement include all future advances by Lender to Debtor as set
forth in Paragraph IV above.
VI. ADDITIONAL PROVISIONS. This Agreement is subject to Additional Provisions
set forth on the second page hereof, the same being incorporated herein by
reference.
================================================================================
LENDER NAME DEBTOR SIGNATURE
- --------------------------------------------------------------------------------
Bank of Oklahoma, N.A. Silverado Foods, Inc.
- -------------------------- ----------------------- ------------------------
Dave A. Johnson, Vice Pres Lawrence Field, CEO
================================================================================
<PAGE>
ADDITIONAL PROVISIONS
DEBTOR EXPRESSLY WARRANTS, COVENANTS AND AGREES:
================================================================================
WARRANTIES AND COVENANTS
- --------------------------------------------------------------------------------
A. RECORDS AND INFORMATION
1. Financial Information. All loan applications, balance sheets, earnings
---------------------
statements, other financial information and other representations which have
been, or may hereafter be, furnished to Lender to induce it to enter into or
continue a financial transaction with Debtor fairly represent the financial
condition of Debtor as of the date and for the period shown therein, and all
other information, reports, documents, papers and data furnished to Lender are
or shall be, at the time furnished, accurate and correct in all material
respects and complete insofar as completeness may be necessary to give Lender a
true and accurate knowledge of the subject matter. There has been no material
change in the financial condition of Debtor since the effective date of the last
furnished financial information which has not been reported to Lender in
writing.
2. Furnishing of Information on Collateral. Debtor will furnish Lender
---------------------------------------
information adequate to identify with accuracy all Collateral in a form and
substance and at times as may be requested by Lender. Debtor will also upon
request deliver to Lender true copies of purchase orders, shipping and delivery
receipts and invoices evidencing and describing the Collateral. Debtor will
execute such documents as Lender may from time to time require to enable Lender
to perfect the security interest granted hereby and to receive proceeds of and
distributions from or interests in the Collateral.
3. Residence, Use and Location. Statements herein as to Debtor's address and
---------------------------
as to location, possession and use of the Collateral are true. Debtor agrees
immediately to notify Lender in writing of any proposed change in Debtor's
address and to provide such notification prior to the proposed effective date
thereof. Debtor will not permit any of the Collateral to be removed (except for
normal use) from the location specified herein without the written consent of
Lender.
4. Maintenance, Inspection and Records. Debtor, at own expense, shall keep
-----------------------------------
the Collateral in good condition and repair, shall not permit it to be misused
or abused or wasted or allowed to deteriorate except for the ordinary wear and
tear of its intended primary use, shall prudently protect the Collateral from
the elements, shall use the described property lawfully and not permit its
illegal use or its use in a manner not permitted by the written insurance
coverage. Debtor will at all times maintain accurate books and records covering
the Collateral. Lender is hereby given the right and privilege of making such
inspections of the collateral and records of the Debtor relating to the
Collateral at any time and from time to time. Debtor agrees to assist Lender in
every way necessary to facilitate such inspections, audits and verifications.
B. LIEN STATUS, INSURANCE AND ORDINARY COURSE DISPOSITION
1. Ownership Free of Encumbrances. Except for the security interest granted
------------------------------
hereby, Debtor now owns, or will use the proceeds of the advances hereunder to
become the owner of, the Collateral free from any prior lien, security interests
or encumbrances, and Debtor warrants title to all will defend the Collateral
against all claims and demands of persons claiming any interest therein adverse
to the Lender. Debtor will not permit any liens or security interests other than
the Lender's security interest to attach to any of the Collateral, will not
permit the Collateral to be levied upon, garnished or attached under any legal
process, or permit any other thing to be done that may impair the value of the
Collateral or the security interest afforded hereby.
2. Sale, Lease or Disposition of Collateral Prohibited. Debtor shall not
---------------------------------------------------
sell, transfer, exchange, lease or otherwise dispose of the Collateral or any
part thereof or the Debtor's rights therein without first obtaining the prior
written consent of Lender, except as to inventory sold or disposed of in the
ordinary course of business. The consent of Lender may be conditioned upon any
requirements which the Lender deems to be for its protection; and it is
understood and agreed that such consent will not be deemed to be effective
unless and until such requirements and conditions have been fulfilled.
3. Financing Statement. No Financing Statement, or other instrument of
-------------------
encumbrance, covering Collateral is on file in any public office. Debtor agrees
to join with Lender in executing one or more Financing Statements, or other
instrument of encumbrance, in form satisfactory to Lender, in order to perfect,
or to continue perfection of, the security interest of Lender which may arise
hereunder.
4. Taxes. Debtor shall promptly pay any and all taxes, assessments and
-----
license fees with respect to the Collateral or the use of the Collateral.
5. Adequate Insurance. Debtor at own expense shall insure Collateral with
------------------
companies acceptable to Lender against such casualties and in such amounts as
prudent and adequate to protect Lender or as Lender shall require. All insurance
policies shall be written for benefit of Debtor and Lender as their interests
appear and such policies or certified copies thereof evidencing same shall be
furnished to Lender within ten days of date of this Agreement. All policies of
insurance shall provide for at least ten days prior written notice of
cancellation to Lender. Lender may act as attorney for Debtor in the procuring
of insurance, in making, adjusting, and settling claims under or cancelling such
insurance and in endorsing Debtor's name on any drafts or checks drawn by
insurers of Collateral.
6. Affixing to Real or Personal Property Prohibited. Debtor shall not permit
------------------------------------------------
any of the Collateral to become an accession or affixed to other personal
property or to become attached or affixed to real property without first
obtaining prior written consent of Lender. The consent of Lender may be
conditional upon any requirements (including, but not limited to, the
subrogation of other interest owners in and to such other personal or real
property to the rights and interest of Lender) which requirements Lender deems
to be for its protection; and it is understood and agreed that such consent will
not be deemed to be effective until such conditions and requirements have been
fulfilled.
- --------------------------------------------------------------------------------
EVENTS OF DEFAULT
- --------------------------------------------------------------------------------
Debtor shall be in default under this Agreement upon the happening of any of the
following events or conditions, herein called "Events of Default":
1. Any warranty, covenant, agreement, representation, financial information
or statement made or furnished to Lender by or in behalf of Debtor to induce
Lender to enter into this Agreement, or in conjunction therewith, is violated or
proves to have been false in any material respect when made or furnished.
2. Any payment required hereunder or under any not or obligation of Debtor to
this Lender or to others is not made when due or in accordance with terms of the
applicable contract.
3. Debtor defaults in the performance of any covenant, obligation, warranty
or provision contained in any Loan Agreement or in any other note or obligation
of Debtor to Lender or to others.
4. The occurrence of any event or condition which results in acceleration of
the maturity of any obligation of Debtor to Lender or to others under any note,
indenture, agreement or undertaking.
5. Loss, theft, substantial damage to or destruction of Collateral.
6. The making of any levy against or seizure, garnishment or attachment of
any Collateral, the consensual encumbrance thereof by Debtor, or the sale, lease
or other disposition of Collateral by Debtor without the prior written consent
of Lender as required elsewhere in the Agreement, except inventory sold in the
ordinary course of business.
7. When in the judgment of Lender the Collateral becomes unsatisfactory or
insufficient in character or value, and upon request Debtor fails to provide
additional Collateral as required by Lender.
8. Any time Lender in its sole discretion believes the prospect of payment or
performance of any liability, covenant, warranty or obligation secured hereby is
impaired.
9. The death, dissolution, termination or existence or insolvency of Debtor,
the appointment of a receiver over any part of debtor's property or any part of
the Collateral, an assignment for the benefit of creditors, or the commencement
of any proceeding under any bankruptcy or insolvency law by or against debtor or
any guarantor or surety for Debtor.
- --------------------------------------------------------------------------------
REMEDIES
- --------------------------------------------------------------------------------
Upon the occurrence of an Event of Default, and at any time thereafter, Lender
may at is option and without notice or demand to Debtor except as otherwise
provided by law, exercise any and all rights and remedies provided by the
Uniform Commercial Code of the state in which Lender is organized or holds its
certificate of authority, as well as all other rights and remedies possessed by
Lender, including, but not limited to:
1. Declare all liabilities secured hereby immediately due and payable, and/or
proceed to enforce payment and performance of all liabilities secured hereby.
2. Require Debtor to assemble Collateral or evidence thereof and make it
available to Lender at any place designated by Lender which is reasonably
convenient to both parties.
3. Repossess the Collateral, and for this purpose Lender is hereby granted
authority to enter into and upon any premises on which Collateral or any party
may be situated, and to remove it as a part of such repossession. Debtor also
consents to the removal of any other personal property attached to or contained
in the Collateral, to its retention by Lender until called for by Debtor and, if
not called for within thirty (30) days, to its disposition in any manner by
Lender.
4. Possess all books and records evidencing or pertaining to the Collateral,
and for this purpose Lender is hereby given authority to enter into and upon any
premises at which such books and records or any part of them may be situated,
and to remove them.
5. Apply that portion of the Collateral consisting of cash or cash equivalent
items such as checks, drafts or deposited funds against any liabilities of
Debtor selected by Lender, and for this purpose Debtor agrees that cash or
equivalents will be considered identical to cash proceeds. Lender shall have the
right immediately and without further action by it to set off against the
liabilities secured hereby all money owed by Lender to Debtor, whether due or
not due, and Lender shall be deemed to have exercised such right to set off and
to have made a charge against such money at the time of any acceleration upon
default even though such charges made are entered on the Lender's books
subsequent thereto.
6. Transfer any of the Collateral or evidence thereof into its own name or
that of a nominee and receive the proceeds therefrom and hold the same as
security for the liabilities of Debtor to Lender or apply it on or against any
such liability. Lender may also demand, collect, receipt for, settle,
compromise, adjust, sue for, foreclose, release or realize upon Collateral in
its own name or int he name of the Debtor as Lender may determine.
7. Sell or otherwise dispose of the Collateral. Unless Collateral in whole or
part is perishable or threatens to decline speedily in value or is of a type
customarily sold on a recognized market, Lender will give Debtor reasonable
notice of the time and place of any public sale, or of the time after which any
private sale or other disposition is to be made. Any requirement of notice shall
be met if notice is mailed, postage prepaid, to the address of Debtor provided
herein at least ten days before sale or other disposition or action. Lender
shall be entitled to, and Debtor shall be liable for, all reasonable costs, fees
for replevin bonds, storage, repossession costs, repair and preparation costs
for sale, selling costs and reasonable attorneys' fees as set forth in any
promissory note. All such costs shall be secured by the security interest in the
Collateral covered herein.
8. Lender shall not be liable for failure to collect any account, enforce any
contract right, or for any other act or omission on the part of Lender, its
officers, agents or employees, except as the same constitutes a lack of good
faith or failure to act in a commercially reasonable manner. Lender shall have
acted in a commercially reasonable manner if its action or non-action is
consistent with the general usage of lenders in the area of Lender's location at
the time the action or non-action occurs, but this standard shall not constitute
disapproval of any procedures which may be otherwise reasonable under the
circumstances nor require Lender to take necessary steps to preserve rights
against prior parties in an instrument or chattel paper.
- --------------------------------------------------------------------------------
GENERAL
- --------------------------------------------------------------------------------
1. Expenditures of Lender. At its option and after any written notice to
----------------------
Debtor required by law, which notice Debtor and Lender hereby agrees is
sufficient if mailed, postage prepaid, to the address of Debtor provided for
herein at least ten days before the commencement of the performance of the
duties specified therein, it is agreed Lender may discharge taxes, liens,
security interests or other encumbrances on the Collateral and may pay for the
repair of any damage to the Collateral, for the maintenance and preservation
thereof and for insurance thereon. Debtor shall be liable for and agrees to pay
Lender for all expenditures of Lender for taxes on the Collateral, for the
discharge of liens, security interests or other encumbrances on the Collateral,
for the repair of any damage to Collateral, and for all costs, attorneys' fees
and other disbursements of Lender in connection with the foregoing. Debtor
agrees promptly to reimburse Lender for all such expenditures and until such
reimbursement the amounts of such expenditures shall be considered a liability
of Debtor to Lender which is secured by this Agreement. In addition, Debtor
shall be liable for and agrees to pay Lender for all costs, attorney's fees and
other disbursements of Lender as allowed by law or provided for herein in the
enforcement or collection of any note, warranty or liability of Debtor to
Lender, or in the realization upon or the enforcement or collection of any
account receivable, contract right, promissory note, chattel paper, instrument,
documents or other Collateral in which Lender has a security interest. Debtor
agrees promptly to reimburse Lender for all such expenditures, and until such
reimbursement the amounts of such expenditures shall be considered a liability
of Debtor to Lender which is secured by this Agreement.
2. Right of Offset. Any property, tangible or intangible, of Debtor in
---------------
possession of Lender at any time during the term hereof, or any indebtedness due
from Lender to Debtor and any deposit or credit balances due from Lender to
Debtor, or any of the foregoing of any party hereto, is pledged to secure
payment hereof and may at any time while the whole or any part of Debtor's
indebtedness to Lender remains unpaid, whether before or after maturity thereof,
be appropriated, held or applied toward the payment of any obligation of Debtor
to Lender.
3. Applicable Law. The law of the jurisdiction where Lender is organized or
--------------
holds its certificate of authority shall control this Agreement.
4. Waivers. No act, delay or omission, including Lender's waiver of remedy
-------
because of any default hereunder, shall constitute a waiver of any of Lender's
rights and remedies under this Agreement or any other agreement between the
parties. All rights and remedies of Lender are cumulative and may be exercised
singularly or concurrently, and the exercise of any one or more remedy will not
be a waiver of any other. No waiver, change, modification or discharge of any of
Lender's rights or of Debtor's duties as so specified or allowed will be
effective unless in writing and signed by a duly authorized officer of Lender,
and any such waiver will not be a bar to the exercise of any right or remedy on
any subsequent default. No officer or employee of Lender has authority to waiver
or modify the provisions of this paragraph.
5. Agreement Binding on Assigns. This Agreement shall inure to the benefit of
----------------------------
the successors and assigns of Lender and shall be binding upon the heirs,
executors, administrators, successors and assigns of Debtor.
6. Rights of Lender Assignable. Lender at any time and at its option may
---------------------------
pledge, transfer or assign its rights under this Agreement in whole or in part,
and any pledgee, transferee or assignee shall have all the rights of Lender as
to the rights or parts thereof so pledged, transferred or assigned. The rights
of the Debtor hereunder may not be assigned.
7. Joint and Several Responsibility of Debtor. If more than one Debtor
------------------------------------------
executes this Agreement, their responsibility hereunder shall be joint and
several and the reference to Debtor herein shall be deemed to refer to each
Debtor.
8. Separability of Provisions. If any provision of this Agreement shall
--------------------------
for any reason be held to be invalid or unenforceable, such invalidity or shall
not affect any other provision hereof, and this Agreement shall be construed as
if such invalid or unenforceable provision had never been contained herein.
9. Copies. A carbon, photographic, or other reproduction of this Security
Agreement or of any financing statement prepared or filed with respect hereto is
sufficient as a financing statement.
10. Notice of Name Change, etc. Debtor will immediately notify Lender of any
--------------------------
change in his, her, its or their name, identity, or organizational or corporate
structure. 11. Notice of Movement of Collateral. Debtor will immediately notify
Lender of any movement or relocation of the Collateral, or any part thereof or
any records relating thereto, from any county or state to another county or
state.
11. Notice of Movement of Collateral. Dealer will immediately notify Lender
--------------------------------
of any movement or relocation of the Collateral, or any part thereof or any
records relating thereto, from any county or state or another county or state.
================================================================================
Page 2 of 2 ___________ Borrower's Initials
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 20,095
<SECURITIES> 0
<RECEIVABLES> 3,053,089
<ALLOWANCES> 0
<INVENTORY> 4,525,030
<CURRENT-ASSETS> 9,711,814
<PP&E> 11,529,651
<DEPRECIATION> 0
<TOTAL-ASSETS> 33,076,861
<CURRENT-LIABILITIES> 15,660,704
<BONDS> 0
0
0
<COMMON> 86,329
<OTHER-SE> (1,912,659)
<TOTAL-LIABILITY-AND-EQUITY> 33,076,861
<SALES> 23,500,850
<TOTAL-REVENUES> 23,500,850
<CGS> 16,245,202
<TOTAL-COSTS> 27,728,964
<OTHER-EXPENSES> 1,173,039
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,128,574
<INCOME-PRETAX> (6,529,727)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,529,727)
<DISCONTINUED> (1,657,253)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,186,980)
<EPS-PRIMARY> (1.07)
<EPS-DILUTED> (1.07)
</TABLE>
