<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement [_] CONFIDENTIAL, FOR USE OF THE
COMMISSION ONLY (AS PERMITTED BY
RULE 14A-6(E)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
SILVERADO FOODS, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
NOT APPLICABLE
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[_] No fee required.
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
NOT APPLICABLE
---------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
NOT APPLICABLE
---------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
THE FILING FEE HAS BEEN COMPUTED PURSUANT TO RULE 0-11(c)(2) UNDER THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. PURSUANT TO SUCH RULE, THE
AGGREGATE AMOUNT OF CASH, SECURITIES AND OTHER PROPERTY TO BE RECEIVED
BY THE REGISTRANT FOR THE PROPOSED TRANSACTION IS $22,600,000 IN CASH
AND AN ADDITIONAL $8,000,000 IN CASH IF CERTAIN PERFORMANCE CRITERIA
ARE MET.
---------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
$30,600,000
---------------------------------------------------------------------
(5) Total fee paid:
$6,120
---------------------------------------------------------------------
[X] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
-------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
-------------------------------------------------------------------------
(3) Filing Party:
-------------------------------------------------------------------------
(4) Date Filed:
-------------------------------------------------------------------------
Notes:
<PAGE>
SILVERADO FOODS, INC.
6846 SOUTH CANTON, SUITE 110
TULSA, OKLAHOMA 74136
November 25, 1998
Dear Shareholder:
You are cordially invited to attend the 1998 Annual Meeting of Shareholders
of Silverado Foods, Inc. (the "Company") to be held at the AmeriSuites hotel
located at 7037 South Zurich Avenue, Tulsa, Oklahoma 74136, on Tuesday, December
22, 1998, at 10:00 a.m., local time (the "Meeting"). A notice of the Meeting,
a Proxy Statement and a proxy card accompany this letter. Also enclosed is a
copy of the Company's 1997 Annual Report.
At the Meeting, you will be asked to consider and vote upon a number
important proposals, one of which is the approval and adoption of (a) the
Agreement of Stock Purchase and Sale dated as of August 14, 1998, as amended on
October 28, 1998 (as amended, the "Sale Agreement") by and among the Company,
Mom's Best Services, Inc., a wholly-owned subsidiary of the Company ("Existing
Sub"); and Swander Pace Capital Fund, L.P., SPC GP Fund, LLC, SPC Executive
Advisers Fund, LLC, SPC Associates Fund, LLC, and Silver Brands Partners, L.P.,
as the buyers (collectively, "Buyer"), (b) the sale (the "Sale") of
substantially all of the business, operations and assets of the Company's
Nonni's(R) Biscotti business to Buyer through a recapitalization of Existing
Sub, as contemplated by the Sale Agreement, and (c) the sale of the remaining
operating assets of the Company following the Sale.
The value realizable by the Company pursuant to the Sale Agreement is
approximately $28 million, including approximately (i) $15.9 million in cash at
closing (subject to adjustments), (ii) up to $3 million to be paid after closing
depending on the Nonni's(R) Biscotti business having achieved certain EBITDA
(earnings before interest, taxes, depreciation and amortization) targets for the
period ending December 31, 1998, (iii) a 10% minority investment in the common
equity of the Existing Sub that the Company would retain, and (iv) up to $8
million under two separate earn-out provisions. Payments under the earn-out
provisions would be contingent on the Nonni's(R) Biscotti business achieving
certain EBITDA targets for the periods ending March 1999, and October 1999.
The Company plans to sell its remaining operating assets and discontinue
its business as a manufacturer and marketer of branded specialty baked goods.
At such time the Company will have no further operating business and the Board
of Directors intends to concentrate its efforts on exploring opportunities to
acquire a new business. The Board of Directors has elected at this time not to
liquidate the Company and distribute its cash to the shareholders upon
consummation of the Sale, as the Board believes that the acquisition of a
business with growth potential has the potential to create a greater return for
the shareholders than the distribution of the Company's cash. Accordingly, a
vote in favor of the Sale will effectively constitute a vote in favor of selling
all of the operating assets of the Company's business and changing the nature of
the business of the Company. Depending on the structure of a future transaction,
if any, the shareholders of the Company may not have an opportunity to vote upon
any future proposal to acquire a new business.
<PAGE>
YOUR BOARD OF DIRECTORS HAS DETERMINED THAT THE SALE IS FAIR AND IN THE
BEST INTERESTS OF THE COMPANY AND ITS SHAREHOLDERS, HAS AUTHORIZED THE SALE
(SUBJECT TO SHAREHOLDER APPROVAL) AND RECOMMENDS THAT SHAREHOLDERS VOTE FOR
APPROVAL OF THE SALE. In arriving at its recommendation, the Board gave careful
consideration to a number of factors, as described in the enclosed Proxy
Statement, including the opinion of its financial advisor, Penn Hudson Financial
Group, Inc. ("Penn Hudson") to the effect that the consideration to be received
by the Company for the Sale is fair, from a financial point of view, to the
Company and its shareholders. The written opinion of Penn Hudson is attached as
Appendix B to the Proxy Statement, which you are urged to read in its entirety
for a description of the assumptions made, the matters considered and procedures
followed by Penn Hudson.
In addition to the Sale, you will be asked to consider and act upon a
proposal to issue, in accordance with the rules of the American Stock Exchange,
Inc., up to 6,000,000 shares of the Company's common stock to Steve Sirianni,
Tim Soldati and Rich Martin pursuant to certain agreements entered into between
the Company and these individuals. The stock issuance represents consideration
payable by the Company to such individuals for the termination of certain
royalty and employment agreements that were entered into in connection with the
Company's acquisition of certain assets relating to the Nonni's(R) Biscotti
business in 1993. The amount of stock the Company will be obligated to issue
depends upon the market price of the stock at the time the obligations are paid.
If the Company were required to issue all of the 6,000,000 shares it would equal
approximately 28% of the Company's currently issued and outstanding common
stock.
The Company determined that the cost of the compensation payable to such
individuals under the agreements relating to the Nonni's acquisition was greater
than the cost of the consideration payable for the termination of such
agreements. Accordingly, the Board of Directors has previously approved the
termination agreements and believes that it is desirable and in the best
interest of the Company to issue up to 6,000,000 shares of the Company's common
stock in accordance with the termination agreements.
The matters to be considered at the Meeting, and especially the Sale, are
of great importance to the Company and its shareholders. Details of the Sale,
as well as the other proposals to be considered and voted upon at the Meeting,
appear in the accompanying Proxy Statement, which you should read carefully.
We look forward to greeting personally those shareholders who are able to
be present at the Meeting; however, whether or not you plan to attend the
Meeting, please complete, sign and date the enclosed proxy card and mail it
promptly using the enclosed, pre-addressed, postage-paid, return envelope. If
you attend the Meeting, you may vote in person if you wish, even if you have
previously returned your proxy card. Your prompt attention will be greatly
appreciated.
Very truly yours,
/s/ LAWRENCE D. FIELD
Lawrence D. Field
Chairman of the Board
<PAGE>
SILVERADO FOODS, INC.
6846 SOUTH CANTON, SUITE 110
TULSA, OKLAHOMA 74136
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD DECEMBER 22, 1998
To the Shareholders of
SILVERADO FOODS, INC.:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of Silverado
Foods, Inc., an Oklahoma corporation (the "Company"), will be held at the
AmeriSuites hotel located at 7037 South Zurich Avenue, Tulsa, Oklahoma 74136, on
Tuesday, December 22, 1998, at 10:00 a.m., local time, for the following
purposes:
1. To consider and vote upon a proposal to approve and adopt (a) the
Agreement of Stock Purchase and Sale dated as of August 14, 1998, as
amended on October 28, 1998 (as amended, the "Sale Agreement"), by and
among the Company, Mom's Best Services, Inc., a Florida corporation and
a wholly-owned subsidiary of the Company ("Existing Sub"); and Swander
Pace Capital Fund, L.P. ("Swander Capital"), SPC GP Fund, LLC ("SPC
GP"), SPC Executive Advisers Fund, LLC ("SPC Executive"), SPC Associates
Fund, LLC ("SPC Associates," and together with Swander Capital, SPC GP
and SPC Executive, collectively referred to as "Swander Pace") and
Silver Brands Partners, L.P. ("Silver Brands," and together with Swander
Pace, collectively referred to as the "Buyer"), as buyers, (b) the sale
(the "Sale") of substantially all of the business, operations and assets
of the Company's Nonni's/(R)/ Biscotti business to the Buyer through a
recapitalization of Existing Sub, as contemplated by the Sale Agreement,
and (c) the sale of the remaining operating assets of the Company
following the Sale;
2. To approve an amendment to the Company's Certificate of Incorporation to
effect a one-for-ten reverse stock split of the Company's Common Stock;
3. To consider and vote upon a proposal to confer and restore full voting
rights to control shares of the Common Stock of the Company held by
Lawrence D. Field in accordance with Section 1153 of the Oklahoma
General Corporation Act;
4. To elect six directors for one-year terms;
5. To consider and act upon a proposal to ratify the appointment of Arthur
Andersen LLP as the independent public accountants of the Company for
1998;
6. To consider and vote upon a proposal to approve an adjournment or
postponement of the Meeting to another date or place for a period of not
more than 30 days for the purpose of soliciting additional proxies if
the number of shares of Common Stock of the Company, represented at the
Meeting or by proxy is insufficient to constitute a quorum or, if a
quorum is present, there are not sufficient votes at the time of the
Meeting to approve the foregoing proposals; and
7. To transact such other business as may properly come before the meeting
or any adjournment thereof.
<PAGE>
All of the above matters are more fully described in the accompanying Proxy
Statement, which you should read carefully.
The Board of Directors has fixed the close of business on November 24,
1998, as the record date for the meeting, and only holders of the Company's
Common Stock of record at such time will be entitled to vote at the meeting or
any adjournment thereof. A complete list of the shareholders entitled to vote
at the meeting will be open to the examination of any shareholder, for any
purpose germane to the meeting, during ordinary business hours for a period of
ten days prior to the date of the meeting at the offices of the Company and at
the time and place of the meeting.
By Order of the Board of Directors,
/s/ DIANE T. WOOD
Diane T. Wood
Secretary
Tulsa, Oklahoma
November 25, 1998
IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED AT THE MEETING. WHETHER OR
NOT YOU PLAN TO ATTEND THE MEETING, PLEASE MARK, SIGN, DATE AND RETURN THE
ACCOMPANYING PROXY IN THE ENCLOSED ENVELOPE. NO POSTAGE IS REQUIRED IF MAILED
IN THE UNITED STATES. IF YOU DO ATTEND THE MEETING, YOU MAY WITHDRAW YOUR PROXY
AND VOTE IN PERSON.
2
<PAGE>
SILVERADO FOODS, INC.
6846 SOUTH CANTON, SUITE 110
TULSA, OKLAHOMA 74136
PROXY STATEMENT
FOR ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD DECEMBER 22, 1998
GENERAL INFORMATION
This Proxy Statement is furnished in connection with the solicitation by
the Board of Directors of Silverado Foods, Inc., an Oklahoma corporation (the
"Company"), of proxies to be voted at the Annual Meeting of Shareholders of the
Company to be held on December 22, 1998, at 10:00 a.m., local time, or at any
adjournment thereof (the "Meeting"), at the AmeriSuites hotel located at 7037
South Zurich Avenue, Tulsa, Oklahoma 74136, for the purposes set forth in the
accompanying Notice of Annual Meeting.
At the Meeting, the shareholders of the Company will be asked to consider
and vote upon a number of important proposals, including a proposal to approve
and adopt (a) the Agreement of Stock Purchase and Sale dated as of August 14,
1998, as amended on October 28, 1998 (as amended, the "Sale Agreement"), by and
among the Company, Mom's Best Services, Inc., a Florida corporation and a
wholly-owned subsidiary of the Company ("Existing Sub"); and Swander Pace
Capital Fund, L.P. ("Swander Capital"), SPC GP Fund, LLC ("SPC GP"), SPC
Executive Advisers Fund, LLC ("SPC Executive"), SPC Associates Fund, LLC ("SPC
Associates," and together with Swander Capital, SPC GP, and SPC Executive,
collectively referred to as "Swander Pace") and Silver Brands Partners, L.P.
("Silver Brands," and together with Swander Pace, collectively referred to as
the "Buyer"), as the buyers, (b) the sale (the "Sale") of substantially all of
the business, operations and assets of the Company's Nonni's/(R)/ Biscotti
business to the Buyer through a recapitalization of Existing Sub, as
contemplated by the Sale Agreement, and (c) the sale of the remaining operating
assets of the Company following the Sale. The value obtainable by the Company
under the Sale Agreement is approximately $28 million, comprised of $17 million
in cash and the 10% equity retention in Existing Sub (the cash portion is
estimated to be approximately $15.9 million), up to $3 million to be paid
following the closing of the Sale and up to $8 million in earn-out payments.
The Company plans to sell its remaining operating assets and discontinue
its business as a manufacturer and marketer of branded specialty baked goods and
as a retail snack tray operator. At such time the Company will have no further
operating business and the Board of Directors intends to concentrate its efforts
on exploring opportunities to acquire a new business. Accordingly, a vote in
favor of the Sale will effectively constitute a vote in favor of selling all of
the operating assets of the Company's business and changing the nature of the
business of the Company. Depending on the structure of a future transaction, if
any, the shareholders of the Company may not have an opportunity to vote upon
any future proposal to acquire a new business. See "Proposal No. 1 - The Sale
Transaction--Conduct of Business Following the Sale; Use of Proceeds."
YOUR BOARD OF DIRECTORS HAS DETERMINED THAT THE SALE IS FAIR AND IN THE
BEST INTERESTS OF THE COMPANY AND ITS SHAREHOLDERS, HAS AUTHORIZED THE SALE
AGREEMENT AND THE OTHER AGREEMENTS AND TRANSACTIONS CONTEMPLATED THEREIN, THE
SALE (SUBJECT TO SHAREHOLDER APPROVAL) AND THE SALE OF THE REMAINING OPERATING
ASSETS OF THE COMPANY (COLLECTIVELY, THE "SALE TRANSACTION") AND RECOMMENDS THAT
SHAREHOLDERS VOTE FOR APPROVAL OF THE SALE TRANSACTION.
The shareholders of the Company will also consider and vote upon the other
proposals set forth in this Proxy Statement and upon such other business as may
properly come before the Meeting or any adjournment or postponement thereof.
This Proxy Statement, the Notice of Annual Meeting and the accompanying
proxy card and related materials are first being mailed to the Company's
shareholders on or about November 30, 1998.
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by the Company can be inspected and
copied at the Public Reference Section of the Commission, Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at certain regional
offices of the Commission located at Suite 1400, 500 West Madison Street,
Chicago, Illinois 60661 and at 7 World Trade Center, 13/th/ Floor, New York, New
York 10048. Copies of such information can be obtained at prescribed rates from
the Public Reference Section of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549. Such material may also be accessed electronically by
means of the Commission's home page on the World Wide Web which can be accessed
over the Internet at (http://www.sec.gov). In addition, material filed by the
Company can also be inspected at the offices of the American Stock Exchange,
Inc., 86 Trinity Street, New York, New York 10006.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
IN ACCORDANCE WITH THE RULES OF THE COMMISSION, THIS PROXY STATEMENT
INCORPORATES BY REFERENCE CERTAIN INFORMATION WITH RESPECT TO THE COMPANY THAT
IS NOT INCLUDED HEREIN. THE COMPANY WILL PROVIDE, WITHOUT CHARGE TO ANY PERSON,
INCLUDING ANY BENEFICIAL OWNER, TO WHOM THIS PROXY STATEMENT IS DELIVERED, AND
UPON WRITTEN OR ORAL REQUEST OF SUCH PERSON, A COPY OF ANY AND ALL OF THE
INFORMATION THAT HAS BEEN INCORPORATED BY REFERENCE IN THIS PROXY STATEMENT (NOT
INCLUDING EXHIBITS TO THE INFORMATION THAT IS INCORPORATED BY REFERENCE UNLESS
SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY REFERENCE INTO THE INFORMATION
THAT THIS PROXY STATEMENT INCORPORATES). SUCH A REQUEST IS TO BE DIRECTED TO
DIANE T. WOOD, SECRETARY, SILVERADO FOODS, INC., 6846 SOUTH CANTON, SUITE 110,
TULSA, OKLAHOMA 74136 (TELEPHONE NUMBER: (918) 496-2400).
This Proxy Statement incorporates by reference the following documents
filed by the Company with the Commission (Commission File No. 1-13260):
1. The Company's Annual Report on Form 10-K for the year ended
December 31, 1997;
2. The Company's Quarterly Reports on Form 10-Q for the quarters
ended March 31, 1998, June 30, 1998, and September 30, 1998; and
3. The Company's Current Reports on Form 8-K dated February 11,
1998, and June 29, 1998.
Any statement contained in a document incorporated by reference herein or
contained herein shall be deemed to be modified or superseded to the extent that
a statement herein or in a document subsequently incorporated by reference
herein shall modify or supersede such statement. Any statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Proxy Statement. Subject to the foregoing, all
information appearing in this Proxy Statement is qualified in its entirety by
the information appearing in the documents incorporated herein by reference.
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
GENERAL INFORMATION................................................................................... 1
AVAILABLE INFORMATION................................................................................. 2
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE..................................................... 2
THE MEETING........................................................................................... 6
Date, Time and Place of the Meeting........................................................... 6
Matters to Be Considered at the Meeting....................................................... 6
Vote Required................................................................................. 6
Voting of Proxies............................................................................. 7
Revocability of Proxy......................................................................... 7
Record Date; Shares Entitled to Vote; Quorum.................................................. 7
Solicitation of Proxies....................................................................... 7
PROPOSAL NO. 1 - THE SALE TRANSACTION................................................................. 7
Background of the Sale........................................................................ 7
Reasons for the Sale; Recommendation of the Board of Directors................................ 10
Certain Information Concerning the Buyer...................................................... 12
Opinion of Financial Advisor.................................................................. 13
Conduct of Business Following the Sale; Use of Proceeds....................................... 15
Risk Factors Relating to the Company's Business After the Sale................................ 18
Accounting Treatment.......................................................................... 21
Material Federal Income Tax Consequences...................................................... 21
Interests of Certain Persons in the Sale...................................................... 21
No Appraisal Rights........................................................................... 22
THE SALE AGREEMENT.................................................................................... 23
General....................................................................................... 23
Year-End Payment.............................................................................. 24
Earn-Out Payments............................................................................. 24
Assets and Liabilities to be Transferred...................................................... 25
Representations and Warranties................................................................ 25
Covenants..................................................................................... 26
Covenant Not to Compete....................................................................... 27
Conditions.................................................................................... 27
Indemnification............................................................................... 28
Termination................................................................................... 28
Expenses...................................................................................... 29
Voting Agreement.............................................................................. 29
Employment Agreement.......................................................................... 29
Additional Agreements......................................................................... 29
PROPOSAL NO. 2 - AMENDMENT OF THE CERTIFICATE
OF INCORPORATION TO EFFECT A REVERSE STOCK SPLIT.............................................. 30
General....................................................................................... 30
Purposes of the Reverse Stock Split........................................................... 30
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
Effectiveness of the Reverse Stock Split...................................................... 31
Certificates and Fractional Shares............................................................ 31
Certain Effects of the Reverse Stock Split.................................................... 31
Material Federal Income Tax Consequences...................................................... 32
Miscellaneous................................................................................. 33
Recommendation and Vote....................................................................... 33
PROPOSAL NO. 3 - APPROVAL OF CONTROL SHARES........................................................... 33
General....................................................................................... 33
Oklahoma Control Share Provisions............................................................. 33
Notice of Control Share Acquisition........................................................... 34
Purpose of Approval of Control Shares......................................................... 34
Shares to be Counted in Determining Quorums and Majorities.................................... 34
No Appraisal Rights........................................................................... 34
Summary of the Control Shares Act Not Definitive.............................................. 34
Recommendation and Vote....................................................................... 35
PROPOSAL NO. 4 - ELECTION OF DIRECTORS................................................................ 35
Nominees for Directors........................................................................ 36
Compensation of Directors..................................................................... 37
Meetings and Committees of the Board of Directors............................................. 37
PROPOSAL NO. 5 - RATIFICATION OF APPOINTMENT OFINDEPENDENT PUBLIC ACCOUNTANTS......................... 38
PROPOSAL NO. 6 - ADJOURNMENT OR POSTPONEMENT OF THE MEETING........................................... 38
SELECTED HISTORICAL AND UNAUDITED PRO FORMA FINANCIAL DATA............................................ 38
Selected Historical Financial Data............................................................ 38
Selected Unaudited Pro Forma Financial Data................................................... 39
COMPARATIVE PER SHARE INFORMATION..................................................................... 40
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS................................................. 40
Period to Period Comparisons.................................................................. 41
Liquidity and Capital Resources............................................................... 44
Inflation..................................................................................... 46
Year 2000..................................................................................... 46
RECENT DEVELOPMENTS................................................................................... 46
DESCRIPTION OF BUSINESS............................................................................... 47
Company History............................................................................... 47
Current Business.............................................................................. 47
Property...................................................................................... 48
Future Business Strategy...................................................................... 48
FORWARD LOOKING STATEMENTS............................................................................ 48
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
PRINCIPAL SHAREHOLDERS AND
SECURITY OWNERSHIP OF MANAGEMENT.............................................................. 49
MARKET PRICE DATA AND DIVIDEND POLICY................................................................. 50
EXECUTIVE COMPENSATION................................................................................ 51
Summary Compensation Table.................................................................... 51
Options/SAR Grants in the Last Fiscal Year.................................................... 52
Aggregated Option/SAR Exercises in Last Fiscal Year
and FY-End Option/SAR Values.......................................................... 52
Employment Agreements and Change
in Control Arrangements............................................................... 52
Report of the Compensation Committee of the
Board of Directors on Executive Compensation.......................................... 52
Compensation Committee Interlocks and Insider Participation................................... 54
Performance Graph............................................................................. 54
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE............................................... 55
OTHER MATTERS......................................................................................... 55
Matters Which May Come Before the Meeting..................................................... 55
Proposals of Shareholders..................................................................... 55
INDEX TO PRO FORMA FINANCIAL STATEMENTS AND FINANCIAL STATEMENTS...................................... F-1
APPENDIX A - SALE AGREEMENT........................................................................... A-1
APPENDIX B - FAIRNESS OPINION OF PENN HUDSON FINANCIAL GROUP, INC..................................... B-1
APPENDIX C - ACQUIRING PERSON STATEMENT............................................................... C-1
</TABLE>
5
<PAGE>
THE MEETING
DATE, TIME AND PLACE OF THE MEETING
The Meeting will be held on December 22, 1998, at 10:00 a.m., local time,
or at any adjournment or postponement thereof, at 7037 South Zurich Avenue,
Tulsa, Oklahoma 74136, for the purposes set forth in the accompanying Notice of
Annual Meeting of Shareholders.
MATTERS TO BE CONSIDERED AT THE MEETING
At the Meeting the Company's shareholders will be asked to consider and
vote upon the following matters: (i) a proposal to approve the Sale Transaction;
(ii) a proposal to approve an amendment to the Company's Certificate of
Incorporation to effect a one-for-ten reverse stock split of the Company's
Common Stock; (iii) a proposal to confer and restore full voting rights to
control shares of the Common Stock of the Company held by Lawrence D. Field in
accordance with Section 1153 of the Oklahoma General Corporation Act ("OGCA");
(iv) the election of six directors for one-year terms; (v) a proposal to ratify
the appointment of Arthur Andersen LLP as the independent public accountants of
the Company for 1998; and (vi) a proposal to approve an adjournment or
postponement of the Meeting to another date or place for a period of not more
than 30 days for the purpose of soliciting additional proxies if the number of
shares of Common Stock of the Company, represented at the Meeting or by proxy is
insufficient to constitute a quorum or, if a quorum is present, there are not
sufficient votes at the time of the Meeting to approve the foregoing proposals.
The shareholders will also consider and vote upon such other matters as may
properly be brought before the Meeting or any adjournment or postponement
thereof.
VOTE REQUIRED
With regard to the Sale Transaction and the proposal to effect a reverse
stock split of the Common Stock, the favorable vote of the holders of a majority
of the outstanding shares of Common Stock entitled to vote at the Meeting, in
person or by proxy, is required for the approval and adoption of such proposals.
Abstentions and broker non-votes will have the same effect as a vote against the
Sale Transaction and the proposal to effect a reverse stock split.
Directors will be elected at the Meeting by a plurality of the votes cast
by the shareholders present in person or by proxy and entitled to vote. With
regard to the election of directors, votes may be cast in favor of or withheld
from each nominee; votes that are withheld will be excluded entirely from the
vote and will have no effect. There is no cumulative voting with respect to the
election of directors. Under applicable Oklahoma law, a broker non-vote will
have no effect on the outcome of the election of directors.
With respect to the proposal to confer and restore the voting rights of
control shares of Common Stock of the Company, the proposal will be approved if
authorized by an affirmative vote of a majority of the voting power entitled to
vote in the election of directors and represented in person or by proxy at the
Meeting, excluding all "interested shares" (as defined under "Proposal No. 3 -
Approval of Control Shares"). Abstentions and broker non-votes will have the
same effect as a vote against the proposal to approve the control shares.
Approval of the proposal to ratify the appointment of Arthur Andersen LLP
as the independent public accountants of the Company for 1998, and the proposal
to adjourn or postpone the Meeting will each require the affirmative vote of the
holders of a majority of the shares of Common Stock present in person or
represented by proxy at the Meeting entitled to vote thereon. Abstentions will
have the same effect as a vote against and broker non-votes will have no effect
on the outcome of the vote with respect to such matters to be acted upon.
6
<PAGE>
VOTING OF PROXIES
Shares of Common Stock of the Company represented by properly executed
proxies received in time for the Meeting, unless previously revoked, will be
voted at the Meeting as specified by the shareholders on the proxies. If no
such specification is made, shares represented by such proxies will be voted as
recommended by the Board of Directors.
If any other matters are properly presented at the Meeting for
consideration, the person or persons named in the form of proxy enclosed
herewith and acting thereunder will have discretion to vote on such matters in
accordance with their best judgment, unless the proxy indicates otherwise. The
Company has no knowledge of any matters to be presented at the Meeting other
than those matters referred to and described herein.
REVOCABILITY OF PROXY
The grant of a proxy on the enclosed form of proxy does not preclude a
shareholder from voting in person or otherwise revoking a proxy. Attendance at
the Meeting will not in and of itself constitute revocation of a proxy. A
shareholder may revoke a proxy at any time prior to its exercise by delivering
to Diane T. Wood, Secretary of the Company, 6846 South Canton, Suite 110, Tulsa,
Oklahoma 74136, a duly executed revocation or a proxy bearing a later date or by
voting in person at the Meeting.
RECORD DATE; SHARES ENTITLED TO VOTE; QUORUM
Only shareholders of record at the close of business on November 24, 1998
(the "Record Date"), will be entitled to receive notice of and to vote at the
Meeting. As of the Record Date, there were issued and outstanding 15,361,553
shares of Common Stock. Each share of Common Stock is entitled to one vote on
each matter on which the holders of such shares are entitled to vote. A
majority of the outstanding shares of Common Stock entitled to vote must be
represented in person or by proxy at the Meeting in order for a quorum to be
present.
SOLICITATION OF PROXIES
The solicitation of proxies pursuant to this Proxy Statement is being made
by the Company. Solicitation of proxies may be made by mail, telephone,
personal interviews or by other means by the Board of Directors or employees of
the Company who will not be additionally compensated therefor, but who may be
reimbursed for their out-of-pocket expenses in connection therewith.
The Company has retained Shareholder Communications Corporation for
solicitation services in connection with this solicitation, for which
Shareholder Communications Corporation will receive a fee of $5,000 together
with reimbursement for its out-of-pocket expenses, which are estimated to be up
to $3,000.
The expenses of this proxy solicitation, including the fee to Shareholder
Communications Corporation and the cost of preparing and mailing this Proxy
Statement and accompanying materials will be borne by the Company. Such
expenses will also include the charges and expenses of banks, brokerage firms,
and other custodians, nominees or fiduciaries for forwarding solicitation
material regarding the Meeting to beneficial owners of the Company's Common
Stock.
PROPOSAL NO. 1 - THE SALE TRANSACTION
BACKGROUND OF THE SALE
Following the Company's organization in 1990, it made numerous acquisitions
in the food industry. By 1996, the Company had focused on two primary areas of
concentration: specialty baked goods and retail snack tray operations.
7
<PAGE>
Since its inception, the Company has incurred operating losses resulting in
an accumulated deficit of $36,274,813 as of December 31, 1997. The Company
incurred a net loss in 1997 of $18,501,664. Such losses, combined with ongoing
capital requirements, left the Company in a highly leveraged financial position
at the end of 1997, with most of the Company's debt classified as current.
Although sales from the Company's biscotti business continued to increase (sales
increased by 14% to $14,747,000 in 1997), the Company was having difficulty
obtaining necessary financing as a result of its financial difficulties.
Lawrence D. Field, the Company's Chairman, has personally guaranteed the
Company's bank credit lines and has loaned operating funds to the Company. In
addition, it was necessary for the Company to pursue certain high cost
financings. In an effort to narrow the Company's operations to its most
profitable businesses, in September 1997, the Company's Board of Directors (the
"Board of Directors" or the "Board") voted to divest a significant part of the
Company's snack tray operations. In January 1998, the Board of Directors voted
to divest the entire snack tray business.
At its meeting in January 1998 attended by all directors, the Board of
Directors and senior management (specifically, Lawrence D. Field, Timothy G.
Bruer and Dorvin D. Lively, the Company's Chairman, President and former Chief
Financial Officer, respectively) reviewed the financial results for the year
ended December 31, 1997. The Board also reviewed the alternatives for financing
the Company's operations in 1998, which included the factoring of receivables,
other short term loans at above market interest rates, and a complete
refinancing of the Company's debt with an institutional lender. The Company's
alternatives for financing were limited by its poor financial condition. At
such meeting, senior management reported that a party had expressed an interest
in purchasing the Company's Nonni's(R) Biscotti business (the "Biscotti
Business"). The Board discussed the growth of the Biscotti Business over prior
years and the potential for future growth in light of the Company's production
capabilities and senior management's belief that the market for biscotti was
increasing along with the growing popularity of coffee. The Board also
discussed the difficulty of realizing such growth potential in light of the
Company's limited financial resources. Based on such discussions, the Board
unanimously authorized the Company's management to pursue discussions with
potential purchasers.
Following the Board's directive, the Company's senior management identified
a number of potential purchasers who senior management believed, based on their
collective experience and contacts in the food industry, were the parties most
likely to have an interest in purchasing the Biscotti Business. Thereafter, the
Company discussed the possible sale of the Biscotti Business with a number of
potential purchasers. At least four entities expressed a significant level of
interest in purchasing such assets, each of which executed confidentiality
agreements and conducted due diligence reviews of the Biscotti Business. The
Company provided information regarding the Biscotti Business to each of such
entities, including non-public information regarding product category growth,
competitive position, marketing plans (including brand positioning, pricing,
distribution and promotion), cost reduction programs, and the Company's 1998
budget and sales forecast. By the end of March 1998, the Company had received
the following preliminary offers from the four entities: (i) an offer valued at
$32 million in the form of a proposed letter of intent from LF Capital Partners
LLC ("LF Capital"), an affiliate of the investment banking firm of Lazard Freres
& Co., (ii) a verbal offer valued at $32 million from Swander Pace (as discussed
below, Swander Pace submitted a letter of intent at a later date), (iii) an
offer valued at $30 million in the form of a proposed letter of intent from a
third entity, and (iv) a verbal offer valued at $23.5 million from the potential
purchaser mentioned at the January Board of Directors meeting. Each of the
potential purchasers was encouraged to submit a letter of intent. Each of such
offers was preliminary and subject to further due diligence by the offering
party. In order to assist it in evaluating and negotiating the offers for the
purchase of the Biscotti Business, the Company engaged Growth Capital Partners,
Inc., a Houston, Texas based financial advisory firm ("Growth Capital
Partners"). Also, certain potential purchasers were introduced to the Company
by business brokers, including Concordia Financial Group, which introduced
Swander Pace to the Company and will earn a fee equal to 1% of the Purchase
Price upon the closing of the Sale.
In March of 1998, LF Capital submitted a letter of intent which provided
for an acquisition of the Biscotti Business in a recapitalization transaction
valued at approximately $32 million which included a payment of cash at closing,
a 10% minority interest in the common equity of the Biscotti Business and $4.5
million in an earn-out (the cash and the equity retention was valued at $27.5
million). The Board of Directors held a special meeting attended by all
8
<PAGE>
directors on April 6, 1998, and reviewed LF Capital's offer in detail and
reviewed the history of the Company's contacts with other potential purchasers,
including each of the offers received by the Company. The Board noted that the
LF Capital offer was the highest offer received by the Company (along with the
preliminary offer of $32 million submitted by Swander Pace), that LF Capital had
already conducted the most thorough due diligence of any of the potential
purchasers (indicating a commitment to the transaction and providing some
assurance that the transaction could be completed in an expeditious manner), and
that LF Capital, as an affiliate of a large investment banking firm, had
significant financial resources (providing further comfort that such purchaser
could successfully complete the transaction). Based on such factors, the Board
determined that the LF Capital offer was the best offer received by the Company,
and unanimously authorized management to execute the letter of intent with LF
Capital. The other offerors were notified of the Company's decision. The
Company and LF Capital proceeded to negotiate the terms of a definitive purchase
and sale agreement. After extensive negotiations, LF Capital requested that the
consideration to the Company be revised such that the cash and equity retention
portion would be reduced from $27.5 million to $19 million, and the amount
subject to earn-out provisions would be increased from $4.5 million to $10
million. The Board of Directors held meetings on June 29, 1998, at which all
directors were present, in order to discuss the proposed change in
consideration. Growth Capital participated in the discussions at such meetings.
In light of the change in consideration proposed by LF Capital, and following
the rejection of a counter-offer by the Company, the Board unanimously
determined that it was appropriate to reopen negotiations with another of the
original bidders for the Biscotti Business. Consequently, following the
expiration of the exclusive period under the LF Capital letter of intent, the
Company began negotiations with Swander Pace.
On July 2, 1998, the Company and Swander Pace executed a letter of intent
which provided for the purchase of the Biscotti Business by Swander Pace in a
recapitalization transaction valued at approximately $32 million, including a
payment of cash at closing, a 10% minority interest in the common equity of the
Biscotti Business and $5 million in earn-out payments. Thereafter, management
of the Company, together with its legal counsel, Conner & Winters, A
Professional Corporation, proceeded to negotiate the terms of the Sale Agreement
with Swander Pace, more particularly described below, including, without
limitation, the amount of the purchase price, the terms of the earn-out
payments, the representations and warranties to be included in the Sale
Agreement, the indemnification provisions relating thereto, the working capital
purchase price adjustments and the conditions of Closing. In order to secure
the Company's indemnification obligations under the Sale Agreement and avoid a
hold-back of a portion of the purchase price, the Company's Chairman, Lawrence
D. Field, agreed to provide a personal guarantee in the amount of $750,000. One
of the conditions of the Sale requested by Swander Pace was that Timothy G.
Bruer, the Company's President and Chief Executive Officer, become employed by
the entity which will operate the Biscotti Business following the sale. The
value obtainable by the Company under the original Sale Agreement was
approximately $32 million, comprised of $24 million in cash and the 10% equity
retention (the cash portion was estimated to be approximately $22.6 million) and
up to $8 million in earn-out payments. The principal economic change from the
transaction proposed in the letter of intent was that the cash portion of the
purchase price was reduced by approximately $3 million and the amount obtainable
in earn-out payments was increased by $3 million. Such change was requested by
Swander Pace in light of its financial projections regarding the Biscotti
Business. The Sale Agreement was executed on August 14, 1998. Pursuant to a
Memorandum of Action of the Board of Directors dated September 1, 1998, in
accordance with previous discussions of the Board, the Board approved a bonus to
Mr. Bruer of $265,625 upon the closing of the Sale and an additional bonus based
upon the amount of the earn-out payments ultimately received by the Company. On
September 1, 1998, the Board of Directors met (with board member Sam L. Susser
being absent) to review the terms of the Sale Agreement in detail and was
informed that Penn Hudson Financial Group, Inc. ("Penn Hudson"), a financial
advisor to the Company, would deliver an opinion to the Board to the effect that
the proposed Sale as set forth in the original Sale Agreement was fair to the
Company and its shareholders, from a financial point of view. Penn Hudson was
initially retained by the Company for the sole purpose of rendering a fairness
opinion regarding the sale of the Biscotti Business pursuant to a letter
agreement dated April 7, 1998. After full discussion, the Board unanimously
voted to approve the Sale as reflected in the original Sale Agreement and to
recommend that the shareholders approve the sale at the meeting.
9
<PAGE>
Following the execution of the Sale Agreement, Swander Pace continued its
due diligence review of the Company. In addition, pursuant to the Sale
Agreement, the Company provided Swander Pace with current information as to its
financial results. In late October 1998, its became apparent that the Company
would not satisfy the buyer's condition of closing which required that the
Biscotti Business achieve EBITDA of no less than that reflected in the Company's
budget. To enable the closing of the Sale to occur, Swander Pace requested that
the consideration for the Sale be reduced to reflect the Company's under budget
performance. Consequently, the parties entered into negotiations to amend the
original Sale Agreement to reflect a downward adjustment of the consideration to
be received in the Sale. The value obtainable by the Company under such
amendment to the Sale Agreement is approximately $28 million, comprised of $17
million in cash and the 10% equity retention (the cash portion is estimated to
be approximately $15.9 million), up to $3 million to be paid after completion of
1998 audited financials based upon the amount of the Company's EBITDA in 1998
relating to the Biscotti Business, and up to $8 million in earn-out payments.
The principal economic change from the transaction contemplated by the original
Sale Agreement is that the amount of cash and the 10% equity interest was
reduced from $24 million to $20 million, with $3 million of such amount being
conditioned on the Biscotti Business achieving certain EBITDA targets. The
Company believes that such reduced purchase price remains consistent with the
multiple of earnings on which the original purchase price was based. The
amendment to the Sale Agreement provides for, among other things, (i) a $4
million dollar reduction in the value obtainable by the Company under the Sale
compared to the original Sale Agreement, with $3 million of the amount
obtainable now being conditioned upon the Biscotti Business achieving certain
EBITDA targets, (ii) the $3 million earn-out based on the twelve-month period
ending March 31, 1999, will now be based upon the proportion of the earnings
target achieved, rather than being on an all or nothing basis, (iii) the period
for the $5 million earn-out originally based on the twelve-month period ending
September 30, 1999, is now based on the twelve-month period ending October 31,
1999, (iv) the removal of the obligation of Lawrence D. Field to purchase a
warrant from Existing Sub for $2 million in cash that would have entitled Mr.
Field to purchase shares of Existing Sub's common stock, and (v) the addition of
SPC Associates Fund, LLC, an affiliate of Swander Pace, as a party to the Sale
Agreement. A copy of the amendment to the Sale Agreement is attached as
Appendix A to this Proxy Statement, which shareholders are urged to read in its
entirety.
A Board of Directors meeting was held on October 28, 1998, with all
directors present, for the purpose of reviewing the amendment to the Sale
Agreement. At such meeting, the Board received an updated opinion from Penn
Hudson to the effect that the proposed Sale as provided for in the amendment to
the Sale Agreement was fair to the Company and its shareholders from a financial
point of view. After full discussion, the Board unanimously voted to approve
the amendment to the Sale Agreement. On November 20, 1998, Swander Pace
notified the Company that Silver Brands would countersign the Sale Agreement and
was to participate in Sale with Swander Pace.
REASONS FOR THE SALE; RECOMMENDATION OF THE BOARD OF DIRECTORS
The Board of Directors believes that the Sale represents a favorable
valuation for the Biscotti Business, especially in light of the Company's
inability to obtain the financing necessary to expand the Biscotti Business to
more profitable levels. The Company is currently experiencing cash flow
difficulties and most of the proceeds of the Sale will be used to pay the
Company's current and long-term debt. See "Conduct of Business Following Sale;
Use of Proceeds." The Company's capital expenditures and continuing losses have
required substantial capital and have left the Company in a highly leveraged
financial position. The Company continues to experience cash flow difficulties
in connection with funding current working capital requirements and meeting
commitments for trade payables, which include $4,609,000 of past due amounts as
of September 30, 1998. The Company's poor financial condition has adversely
affected the Company's ability to obtain financing on commercially reasonable
terms. The Sale will enable the Company to preserve its remaining cash
resources while the Board of Directors explores opportunities to acquire a new
business which may have greater potential to provide a return to the
shareholders of the Company. Although the Board believes the Sale and the
strategy of acquiring a new business is in the best interests of the
shareholders, there are significant risks inherent in this strategy which are
more particularly described under "Risk Factors Relating to the Company's
Business After the Sale" below.
10
<PAGE>
In the event the Sale is not consummated, the Company would be forced to
find additional sources of financing in order to satisfy its debt obligations.
There can be no assurance that such additional financing would be available on
commercially reasonable terms, and the inability to obtain financing on
commercially reasonable terms would have a material adverse effect on the
Company.
The Board of Directors believes that the Sale Transaction is in the best
interests of, and is fair to, the Company and its shareholders. The Board of
Directors unanimously approved the Sale Transaction, and unanimously recommends
that the shareholders vote FOR approval of the Sale Transaction at the Meeting.
In considering the recommendations of the Board of Directors with respect
to the Sale Transaction, shareholders should be aware that certain members of
the management of the Company and the Board of Directors have certain interests
in the Sale Transaction that are separate from the interests of shareholders of
the Company. Such interests include the anticipated employment of Timothy G.
Bruer, the President and Chief Executive Officer of the Company with the entity
that will operate the Biscotti Business following the Sale, the payment of
bonuses by the Company to Mr. Bruer, and the payment of indebtedness owed by the
Company to Mr. Bruer and Lawrence D. Field, the Chairman of the Board of
Directors. See "--Interests of Certain Persons in the Sale."
The terms of the Sale were the result of arm's length negotiations between
the Company, Swander Pace and their respective representatives. The structure
of the Sale was dictated by the desire of Swander Pace (and, previously, LF
Capital) to have the Sale be accounted for as a recapitalization. In the course
of reaching their decision to approve the Sale Transaction, the Board of
Directors consulted with the Company's financial advisor, Growth Capital
Partners, as well as with management, and reviewed the written materials and
fairness opinion provided by Penn Hudson. In voting upon the Sale Transaction
(including the amendment to the Sale Agreement), the Board considered in detail
all the factors they deemed relevant to their decision, including the amount and
nature of the consideration to be received for the Biscotti Business, the past
financial results of the Company, the current cash flow difficulties, the
current and historical stock prices for the Common Stock, the likelihood of the
Company achieving profitability if the Biscotti Business were retained in view
of the limited financial resources available to the Company to expand the
Biscotti Business to more profitable levels, the limited number of companies
which may be interested in acquiring the Biscotti Business and the likelihood of
selling the Biscotti Business to another buyer on more favorable terms, the
advantages of preserving the Company's cash resources, and the opportunity to
acquire a new business in an unrelated industry which may have greater potential
for generating a return to the Company's shareholders than the Company's current
business. The Board considered that all of the factors cited above were
supportive of a recommendation to approve the Sale Transaction.
The Board has elected at this time not to liquidate the Company and
distribute its cash to the shareholders upon consummation of the Sale
Transaction, as the Board believes that the acquisition of a business with
growth potential has the potential to create a greater return for the
shareholders than the distribution of the Company's cash. Although the Board
also considered the risks inherent in the strategy to acquire a new unidentified
business, such as competition for attractive acquisition candidates given the
Company's limited resources, the risks and uncertainties of investing in a new
business and the dependence on future management, the Board did not consider
these negative factors to be significant compared with the advantages of
proceeding with the Sale Transaction and the prospects for the Company if the
Biscotti Business were retained. For a more particular description of the risks
inherent in the strategy to acquire a new business, see "Risk Factors Relating
to the Company's Business After the Sale." As discussed below under "Conduct of
Business Following the Sale; Use of Proceeds," depending upon the structure of
the transaction in which a new business is acquired, the shareholders may not
have an opportunity to vote on such transaction and the change in the nature of
the Company's business.
Although the Company has begun an initial investigation of opportunities
for a new business to be acquired, the Company has not yet identified a specific
opportunity or a specific industry in which it intends to invest. The Company
intends to utilize the talents of the Board of Directors in identifying and
pursuing acquisition opportunities. Three Board members, Messrs. Field, Bruer
and Susser, have significant prior employment experience with financial
11
<PAGE>
and investment firms. In addition, the Company's other Board members have
significant experience in the development of various business enterprises.
Based on the information available to the Board, the Board concluded that
it was unlikely another party would consummate a transaction on terms more
favorable to the Company's shareholders than the terms offered by Swander Pace.
The information available included the opinion of Penn Hudson regarding the
fairness of the Sale to the Company and its shareholders from a financial point
of view, the advice previously received from Growth Capital regarding the offers
received from potential purchasers, the current financial status of the Company,
the Board's knowledge regarding the Company's various negotiations regarding the
Sale, and the report of senior management that they had identified and contacted
a significant number of potential purchasers who senior management believed,
based on their collective experience and contacts in the food industry, to be
the parties most likely to have an interest in purchasing the Biscotti Business.
After considering the factors discussed above (to which the Board did not
assign specific weights), the Board unanimously approved the Sale Transaction,
and recommends that the shareholders approve the Sale Transaction at the
Meeting.
A VOTE BY THE SHAREHOLDERS OF THE COMPANY FOR THE APPROVAL OF THE SALE
TRANSACTION WILL HAVE THE EFFECT OF AUTHORIZING THE COMPANY TO MAKE CURRENTLY
UNKNOWN BUSINESS ACQUISITIONS THAT MAY CHANGE THE NATURE OF THE COMPANY'S
BUSINESS IN THE FUTURE.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS
THAT THE SHAREHOLDERS VOTE TO APPROVE AND ADOPT THE SALE TRANSACTION
CERTAIN INFORMATION CONCERNING THE BUYER
The Swander Pace entities are affiliates of Swander Pace Capital, L.L.C.
("SPC"), a San Francisco-based private investment firm specializing in value-
added investing in consumer products companies. SPC maintains a strategic
partnership with Swander Pace & Company, a leading strategic management
consulting firm dedicated to serving consumer products companies. SPC draws
upon the experience, analytical resources and industry relationships of Swander
Pace & Company to evaluate acquisition opportunities and to support strategic
initiatives of portfolio companies. SPC makes investments through Swander Pace
Capital Fund, L.P.
Swander Pace's principal executive offices are located at 345 California
Street, Suite 2500, San Francisco, California 94104, and its telephone number is
(415) 477-8500.
Silver Brands is a Texas limited partnership, the general partner of which
is Silver Brands, Inc., a Delaware corporation. Silver Brands is a private
investment firm headquartered in San Antonio, Texas, specializing in investments
in small food companies with high quality products and growth potential. Silver
Brands utilizes the experience of its management team to provide resources
related to a number of diverse operational areas, including brand building and
category management.
Silver Brands' principal executive offices are located at 5121 Broadway,
San Antonio, Texas 78209, and its telephone number is (210) 930-1251.
All information contained in this Proxy Statement relating to Swander Pace
and Silver Brands has been supplied to the Company by Swander Pace and Silver
Brands, respectively.
12
<PAGE>
In accordance with the terms of the Sale Agreement, other investors that
are not yet identified, including other significant investors, may countersign
the Sale Agreement prior to the closing of the Sale and participate in the Sale
together with Swander Pace, Swander Pace affiliates and Silver Brands.
OPINION OF FINANCIAL ADVISOR
Pursuant to the Engagement Letter dated April 7, 1998, between the Company
and Penn Hudson, the Board of Directors retained Penn Hudson to render its
opinion to the Board of Directors as to the fairness of the consideration to be
received by the Company pursuant to the Sale, from a financial point of view, to
the Company and its shareholders.
In a written opinion dated September 4, 1998, Penn Hudson advised the Board
of Directors that, as of such date and based upon the assumptions made, matters
considered and limits of the review taken, as described in the Opinion, Penn
Hudson was of the view that the consideration to be received by the Company in
the Sale was fair, from a financial point of view, to the Company and its
shareholders. As a result of the amendment to the Sale Agreement on October 28,
1998, which, among other things, resulted in a reduction of the consideration to
be received by the Company for the Sale, a subsequent written opinion dated as
of October 28, 1998 (the "Opinion"), was also delivered by Penn Hudson to the
Board of Directors, which opinion is substantially identical to the September 4,
1998, opinion.
As described above, Penn Hudson's Opinion to the Board was one of many
factors taken into consideration by the Board in making its determination to
approve the Sale Transaction. See "Proposal No. 1 - The Sale Transaction--
Reasons for the Sale; Recommendation of the Board of Directors."
THE SUMMARY OF THE OPINION SET FORTH HEREIN IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE FULL TEXT OF SUCH OPINION ATTACHED HERETO AS APPENDIX B. THE
COMPANY'S SHAREHOLDERS ARE URGED TO, AND SHOULD, READ THE OPINION CAREFULLY IN
ITS ENTIRETY IN CONJUNCTION WITH THIS PROXY STATEMENT FOR THE ASSUMPTIONS MADE,
MATTERS CONSIDERED AND LIMITS OF THE REVIEW UNDERTAKEN BY PENN HUDSON. THE
OPINION ADDRESSES ONLY THE FAIRNESS OF THE CONSIDERATION TO BE RECEIVED BY THE
COMPANY PURSUANT TO THE SALE FROM A FINANCIAL POINT OF VIEW AND DOES NOT
CONSTITUTE A RECOMMENDATION TO THE SHAREHOLDERS AS TO WHETHER SUCH SHAREHOLDERS
SHOULD APPROVE OR DISAPPROVE THE SALE.
As set forth in the Opinion, Penn Hudson discussed with the Company's
President and Chief Executive Officer the prospects for the Biscotti Business.
In connection with Penn Hudson's review and analysis and in arriving at the
Opinion, Penn Hudson relied upon the accuracy and completeness of the financial
and other information provided to it by the Company and did not undertake any
independent verification of such information or undertake an independent
appraisal of the assets or liabilities of the Company. With respect to the
financial forecasts provided to Penn Hudson prepared by the Company and Swander
Pace, Penn Hudson assumed that such forecasts (and assumptions and bases
therefor) had been reasonably prepared and represented management's best
currently available estimates as to the future financial performance of the
Company. Further, the Opinion is necessarily based on economic, financial and
market conditions as they exist and could be evaluated as of the date of the
Opinion.
In connection with its engagement and the preparation of the Opinion, (i)
Penn Hudson was not authorized by the Company or its Board of Directors to
solicit, nor has Penn Hudson solicited indications of interest from third
parties for the acquisition of the Biscotti Business, and (ii) Penn Hudson was
not given any instructions by the Company or the Board to investigate
alternative purchasers or transactions relating to the Biscotti Business. The
Opinion does not address nor should it be construed to address the relative
merits of the Sale and any alternative business strategy available to the
Company, nor the appropriateness of the Sale Agreement.
In conducting its analysis and arriving at the Opinion, Penn Hudson
reviewed and considered the following materials: (i) a summary of the financial
terms of the Sale Agreement provided by the Company, (ii) certain publicly
13
<PAGE>
available historical financial and operating data concerning the Company
including the Annual Report on Form 10-K for the year ended December, 1997 and
the Quarterly Reports on Form 10-Q for the quarters ended June, 1998 and March,
1998, (iii) certain information of the Company, including financial forecasts
relating to the business, earnings, cash flow, assets and prospects of the
Biscotti Business prepared by management of the Biscotti Business and Swander
Pace, (iv) certain industry information prepared by management of the Biscotti
Business and LF Capital Partners LLC, (v) publicly available financial,
operating and stock market data concerning certain companies engaged in business
Penn Hudson deemed relatively comparable to the Biscotti Business or otherwise
relevant to their inquiries, (vi) the financial terms of certain recent
transactions Penn Hudson deemed relevant to their inquiry, and (vii) the
historical market prices of common shares of the Company.
In arriving at the Opinion, Penn Hudson performed a variety of financial
analyses, which are summarized herein. The summary set forth below of the
analyses does not purport to be a complete description of the analyses
performed. The preparation of a fairness opinion is a complex process that
involves various determinations as to the most appropriate and relevant methods
of financial analysis and the application of these methods to the particular
circumstance and, therefore, such an opinion is not necessarily susceptible to
partial analysis or summary description. Penn Hudson believes that its analysis
must be considered as a whole and that selecting portions thereof or portions of
the factors considered by it, without considering all analyses and factors,
could create an incomplete view of the evaluation process underlying the
Opinion. Penn Hudson relied upon numerous assumptions with respect to industry
performance and performance by the Biscotti Business provided by the Company.
Subject to the foregoing, the following is a summary of the material financial
analyses prepared by Penn Hudson.
Comparable Company Analysis. A comparable company analysis was employed by
Penn Hudson to establish implied ranges for the valuation of the Biscotti
Business. Penn Hudson analyzed publicly-available historical and current
financial results, including multiples of aggregate value (defined as current
stock price multiplied by the number of share outstanding plus indebtedness) to
latest twelve months ("LTM") EBIT (earnings before interest and taxes), LTM
EBITDA (earnings before interest, taxes, depreciation and amortization) and LTM
revenues of certain companies considered by Penn Hudson to be reasonably
comparable to the Biscotti Business. The companies analyzed were: J&J Snack
Foods Corp., Lance, Inc., and Tasty Baking Company (the "Comparable Companies").
Penn Hudson analyzed numerous companies in the food processing industry and
eliminated those whose major lines of business were unrelated to the sale of
packaged specialty snack foods or whose company size was materially different
than the Biscotti Business. Penn Hudson selected the Comparable Companies
primarily based on the reasonable similarity of their business to the Biscotti
Business in terms of product and the level of sales. All of the LTM multiples
of the Comparable Companies were based on closing stock prices on October 23,
1998 and 10-Q reports as of June 30, 1998.
The Comparable Companies were found to have an aggregate value estimated to
be in the range of 12.5x to 14.7x LTM EBIT, 5.6x to 8.7x LTM EBITDA and 0.9x to
1.2x LTM revenues. Applying such multiples to the Biscotti Business estimated
LTM EBIT of $1.5 million, LTM EBITDA of $2.3 million and LTM revenues of $21.7
million resulted in a valuation of the Biscotti Business of $12.9 million to
$25.3 million. The offer to the Company for the Biscotti Business pursuant to
the sale is above the range for the offer implied by Penn Hudson's comparable
company analysis.
None of the companies utilized in the above analysis for comparative
purposes is, of course, identical to the Biscotti Business. Accordingly, a
complete analysis of the results of the foregoing calculations cannot be limited
to a quantitative review of such results and involves complex considerations and
judgments concerning differences in financial and operating characteristics of
the Comparable Companies and other factors that could affect the public trading
value of the Comparable Companies. The comparable company analysis was one
method to determine a range of values that may be applicable to the Biscotti
Business based on multiples to revenues and earnings.
Comparable Transactions Analysis. Penn Hudson also investigated whether
there were transactions comparable to the offer. There were no comparable
transactions deemed by Penn Hudson to be relevant in applying a comparable
transactions analysis.
14
<PAGE>
Discounted Cash Flow. A discounted cash flow analysis was employed by Penn
Hudson to establish an implied aggregate value for the Biscotti Business. Based
on the Company's projections of unlevered free cash flows and projected fiscal
year 2003 terminal values (collectively, the "Total Free Cash Flows"), which, in
turn, were capitalized at the discount rates applied by Penn Hudson, we
estimated the net present value of the Total Free Cash Flows. For purposes of
our analysis, Penn Hudson applied discount rates to the Total Free Cash Flows
ranging from 11.5% to 17.9%, resulting in an implied aggregate valuation of the
Biscotti Business of $23.8 million to $39.3 million. The offer to the Company
for the Biscotti Business pursuant to the Sale is within the range for the offer
implied by Penn Hudson's discounted cash flow analysis.
Projected financial and other information concerning the Biscotti Business
are not necessarily indicative of future results. All projected financial
information is subject to numerous contingencies, many of which are beyond the
control of management of the Company. Most recently, the Company had revised
downward its May, 1998 projections for 1998 revenues, EBIT and EBITDA by 12%,
50% and 39%, respectively, versus its revised projections as of August, 1998.
Stock Trading History. Penn Hudson also analyzed the recent history of the
trading prices for the Company's outstanding Common Stock. As of October 23,
1998, and based on total debt as of June 30, 1998 as provided in the Company's
10-Q, the aggregate value of the Company was approximately $22.1 million. The
offer to the Company for the Biscotti Business pursuant to the Sale exceeded the
aggregate value of the Company by approximately 27%.
Penn Hudson, as part of its investment banking services, is regularly
engaged in the valuation of businesses and securities. In connection with Penn
Hudson's services as financial advisor to the Board, the Company agreed to pay
and has paid to Penn Hudson a fee of $50,000. The Company has also agreed to
reimburse Penn Hudson for all of its reasonable out-of-pocket expenses,
including, subject to prior approval, the fees and expenses of its legal
counsel, incurred in connection with its services. In addition, the Company has
agreed to indemnify Penn Hudson and its employees, directors, officers, agents,
affiliates and each person, if any, controlling Penn Hudson against certain
liabilities and expenses, including certain liabilities under federal securities
laws, incurred in connection with its services.
CONDUCT OF BUSINESS FOLLOWING THE SALE; USE OF PROCEEDS
If the Sale is approved, substantially all of the assets associated with
the Company's Biscotti Business will be sold to the Buyer and most of the
Company's current management team, including Timothy G. Bruer, the President and
Chief Executive Officer, will leave the Company and join the entity operating
the Biscotti Business. The Company plans to sell its remaining operating assets
and discontinue its business as a manufacturer and marketer of branded specialty
baked goods and as a retail snack tray operator, leaving the Company with no
further operating business. Following the Sale Transaction the management and
administrative staff of the Company will be reduced to the minimum required to
maintain the Company's investments and to fulfill its reporting obligations. It
is anticipated that Lawrence D. Field will continue to serve as the Company's
Chairman and will also serve as the Company's Chief Executive Officer following
the Sale. In addition, it is anticipated that Jason Bryan will join the Company
as its Chief Financial Officer on November 15, 1998, to fill the vacancy left by
the resignation of Dorvin D. Lively on September 25, 1998. Since June 1996, Mr.
Bryan has served as Chief Financial Officer of the Military Community Youth
Ministries Europe in Heidelberg, Germany. Mr. Bryan worked for the American
Junior Golf Association in Roswell, Georgia from January 1992 through June 1996
as Tournament Director and subsequently as Director of Financial Affairs. From
September 1990 to October 1991, Mr. Bryan was with Price Waterhouse in Dallas,
Texas as an auditor. Mr. Bryan is a graduate of Baylor University with a BBA in
Accounting.
After the consummation of the Sale Transaction, Messrs. Field and Bryan,
and the Board of Directors intend to concentrate their efforts on exploring
opportunities to effect an acquisition, whether by merger, exchange or issuance
of capital stock, acquisition of assets or other similar business combination (a
"Business Combination"), with a business which the Board believes may have
significant growth potential. The Board of Directors has elected at this time
not
15
<PAGE>
to liquidate the Company and distribute its cash to the shareholders upon
consummation of the Sale Transaction, as the Board believes that the acquisition
of a business with growth potential has the potential to create a greater return
for the shareholders than the distribution of the Company's cash.
The Company anticipates that the proceeds from the Sale (which are
estimated to be $26,900,000), along with the estimated proceeds from its other
assets sales (which are estimated to be $5,645,000), will be used to repay all
current and long-term debt of the Company as well as other Company obligations.
These obligations include notes payable to the Bank of Oklahoma, the Company's
Chairman and certain others, past due trade accounts payable and accrued
liabilities. Subsequent to the closing of the Sale and upon receipt of the
proceeds from the other asset divestitures, the Company estimates that its cash
and notes receivable will total approximately $1,000,000. The foregoing
includes the year-end payment of up to $3,000,000, subject to adjustment, to be
paid to the Company following the closing of the Sale, and the earn-out payments
to be paid to the Company in connection with the Sale of up to $8,000,000 based
on future earnings. Such amount does not include any proceeds relating to the
10% equity interest in the Biscotti Business to be retained by the Company. See
"The Sale Agreement--Year-End Payment" and "--Earn-Out Payments." However, the
foregoing does assume the collection in full of the year-end payment and each of
the earn-out payments relating to the Sale. Because the collection of such
amounts is contingent upon the achievement of earnings targets, there can be no
assurance that the Company will receive full payment of such amounts. The
foregoing also assumes the collection in full by the Company of $2,500,000
pursuant to a promissory note delivered to the Company by Gourmet Specialty
Bakers, Inc. ("GSBI") in connection with the sale on June 12, 1998, of the
Company's bagel bar manufacturing business located in Santa Ana, California.
Such promissory note is due on November 30, 1998, but its due date may be
extended until March 31, 1999, by the payment to the Company of $500,000. The
Company understands that it will be necessary for GSBI to obtain financing in
order to pay the amount due under such promissory note. Consequently, there can
be no assurance that the Company will receive timely payment of such amount. To
the extent proceeds from the Sale are insufficient to cover all of the Company's
obligations, payments for the borrowings from the Company's chairman will be
delayed. The following table summarizes the Company's use of proceeds for all
amounts estimated to be received in connection with the Sale and the Company's
other asset sales:
<TABLE>
<CAPTION>
LIABILITIES ESTIMATED
OUTSTANDING ESTIMATED PROCEEDS OTHER
AS OF PROCEEDS FROM GSBI ASSET SALES TOTAL
SEPT. 30 AT CLOSING OTHER YEAR-END INITIAL NOTE NOTE ADDITIONAL ESTIMATED
1998 OF THE SALE ASSET SALES PAYMENT EARN-OUT RECEIVABLE RECEIVABLE EARN-OUT PROCEEDS
----------- ----------- ----------- ------- -------- ---------- ------------ ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Estimated Proceeds....... $15,900 $ 3,000 $ 3,000 $ 3,000 $ 2,500 $ 145 $ 5,000 $32,545
COMPANY LIABILITIES:
Notes Payable:........... -
Bank of
Oklahoma................ $ 7,864 (7,864) -
Lawrence Field.......... 12,649 (3,000) (1,736) (3,000) (2,500) (145) (2,268) -
Accord Capital........... 1,658 (1,658) -
King Financial........... 665 (665) -
CAPMAC................... 250 (250) -
Other Notes
Payable................. 672 (672) -
Accrued Liabilities...... 1,446 (182) (1,264) -
Accrued Interest -
Lawrence Field.......... 1,691 (1,691) -
Accounts Payable -
overdue................. 4,609 (1,791) (2,818) -
---------------------------------------------------------------------------------------------------------
$31,504 -0- -0- -0- -0- -0- -0- $ 1,041 $32,545
=========================================================================================================
</TABLE>
Pending a Business Combination, the proceeds from the Sale will be invested
as management of the Company deems prudent, which may include, but will not be
limited to, certificates of deposit, money-market accounts, bonds, United States
Government or municipal securities or other short-term instruments; provided,
however, that the Company
16
<PAGE>
will attempt to invest the proceeds in a manner which will not result in the
Company being deemed to be an investment company under the Investment Company
Act of 1940 (the "Investment Company Act"). In this regard, while the foregoing
investments are intended to be temporary, pending the use of the proceeds as
outlined above, any such investments deemed by the Commission not to be
temporary may result in the Company being required to register as an investment
company under the Investment Company Act, thereby subjecting the Company to
extensive regulation and significant registration and compliance costs. See
"Risk Factors Relating to the Company's Business After the Sale--Regulation."
The Board of Directors may utilize cash, equity, debt or a combination
thereof in effecting a Business Combination. While the Board may, under certain
circumstances, explore possible Business Combinations with more than one
prospective candidate, in all likelihood, unless additional financing is
available, the Board expects that the Company will seek to enter one business,
although the Board may seek to enter into a Business Combination with more than
one entity in such business over a period of time. As the Company expects to
encounter significant competition in its search for an appropriate candidate,
the Company cannot be assured that any such transaction will be effected. Also,
depending on the type of Business Combination, the Company may be acquired by
another entity or hold only a minority interest in an acquisition candidate,
whereby the Company would not control the operations of the new business. No
agreements, commitments or understandings have been made with any candidates for
a proposed Business Combination.
After the Sale, the Company plans to use its cash to pay ongoing general
and administrative expenses, which are anticipated to be minimal, and to seek
Business Combination candidates. Depending on the size and nature of the
entity, if any, which may be acquired, the Company may borrow funds to increase
the amount of capital available for a Business Combination or otherwise finance
the operation of the acquired business. Although the Company believes
additional capital may be required, the necessity for and the amount and nature
of any future borrowings or other financings by the Company will depend on
numerous considerations including the Company's capital requirements, its
perceived ability to service such debt and prevailing conditions in the
financial markets and the general economy. No assurance can be made that
additional capital will be available on terms acceptable to the Company. In
addition, a failure to collect the year-end payment or the earn-outs under the
Sale Agreement, or the failure to collect the $2,500,000 due under the GSBI
promissory note described above would adversely affect the Company's ability to
consummate a Business Combination.
As the Company has not had, and does not expect to have, any earnings for
the foreseeable future, shareholders will receive no dividends for some time, if
at all. Shareholders will not receive any payments as a result of the Sale
Transaction.
A vote in favor of the Sale Transaction will effectively constitute a vote
in favor of changing the nature of the Company's business. Depending on the
structure of the subsequent Business Combination, if any, the shareholders may
not have an opportunity to vote on the subsequent Business Combination and the
change in the nature of the Company's business. See "Risk Factors Relating to
the Company's Business After the Sale." The vote of the shareholders would be
required if the Business Combination involves the issuance of shares of stock
exceeding 20% of the number of outstanding shares of stock of the Company, or if
the Business Combination involves a merger of the Company itself (although a
merger of a subsidiary of the Company may not require a shareholder vote, unless
it involves the issuance of more than 20% of the Company's stock). A Business
Combination structured as a purchase by the Company of stock or assets for cash,
including one in which the Company incurs indebtedness, would most likely not
require a shareholder vote.
17
<PAGE>
RISK FACTORS RELATING TO THE COMPANY'S BUSINESS AFTER THE SALE
IF THE SALE TRANSACTION IS CONSUMMATED, THE COMPANY WILL HAVE NO OPERATING
BUSINESS. DEPENDING ON THE STRUCTURE OF THE SUBSEQUENT BUSINESS COMBINATION, IF
ANY, THE SHAREHOLDERS OF THE COMPANY MAY NOT HAVE AN OPPORTUNITY TO VOTE ON ANY
BUSINESS COMBINATION AND THE CHANGE IN THE NATURE OF THE COMPANY'S BUSINESS IN
THE FUTURE. CONSEQUENTLY, THE FOLLOWING RISK FACTORS SHOULD BE TAKEN INTO
CONSIDERATION BY EACH SHAREHOLDER IN DETERMINING WHETHER TO APPROVE THE SALE
TRANSACTION.
Limited Resources. The Company's only significant assets after the Sale
Transaction will be cash, notes receivable and short-term investments which the
Company intends to use for general corporate purposes and to seek acquisition
candidates. The success of the Company, after the Sale Transaction, will be
dependent on its ability to complete a Business Combination with an attractive
acquisition candidate and its ability to finance and develop a future business.
Given the Company's limited resources, the Company cannot be assured that it
will succeed in its efforts to conclude a Business Combination. In addition,
since the Company does not know the type of business, if any, in which it will
eventually engage the Company's ultimate capital needs, or the availability of
such capital, cannot be assessed at this time. The inability of the Company to
complete a Business Combination following the Sale Transaction would have a
material adverse effect on the Company. In addition, the failure to collect the
year-end payment or the earn-outs under the Sale Agreement, or the failure to
collect amounts for remaining asset sales or the $2,500,000 due to the Company
from GSBI for the sale of the Company's bagel bar manufacturing business would
adversely affect the Company's ability to consummate a Business Combination.
Competition for Business Combination Prospects. The Company will not be a
significant participant in the business of seeking mergers with, and
acquisitions of, small private entities and will have very limited resources to
support an acquisition. The Company will be required to compete for desirable
acquisition candidates with a large number of established and well financed
entities, including venture capital firms, with significantly greater financial
resources and technical expertise than the Company. The inability of the
Company to complete a Business Combination following the Sale Transaction would
have a material adverse effect on the Company.
Business Risks. If a Business Combination is effected, the success of the
Company will depend to a great extent on the operations, financial condition,
management and prospects of the entity, if any, with which the Company may merge
or which it may acquire. As the Company has no arrangement, agreement or
understanding with a particular business entity, the specific risks presented by
such business cannot be described or assessed at this time. Such business may
involve an unproven product, technology or marketing strategy, the ultimate
success of which cannot be assured and such business may be in competition with
larger, more established firms over which it will have no competitive advantage.
The Company's investment in a new business opportunity may be highly illiquid
and could result in a total loss to the Company if the opportunity is
unsuccessful. Given the Company's limited resources, it is expected that the
Company will not be in a position to diversify this risk by investing in more
than one business.
AMEX Delisting; Adverse Effects on Marketability. On November 18, 1998,
the Company received notification from the American Stock Exchange, Inc.
("AMEX") that AMEX intends to file an application with the Commission to strike
the Company's Common Stock from listing and registration on AMEX effective as of
the close of the exchange on December 11, 1998, for failing to meet AMEX's
continued listing guidelines due to the Company's unsatisfactory operating
results and impaired financial condition. The Company has consented to the
removal of its Common Stock from listing on AMEX, and, accordingly, the last day
for trading of the Common Stock on AMEX will be December 11, 1998. Upon removal
of the Common Stock from listing on AMEX, trading in the Common Stock, if any,
will likely be conducted in the over-the-counter market in the so-called "pink
sheets" or the NASD's "Electronic Bulletin Board." Consequently, the liquidity
of the Common Stock may be impaired, not only in the number of shares of Common
Stock that could be bought and sold, but also through delays in the timing of
transactions, reduction in security analyst coverage of the Company, if any, and
lower prices for the Common Stock than might otherwise be attained. As a
result,
18
<PAGE>
investors could find it more difficult to dispose of or obtain accurate
quotations as to the market value of the Company's Common Stock, and it may
prove to be more difficult for the Company to raise future capital to meet its
obligations or effect a business acquisition. The delisting of the Company's
Common Stock from AMEX may result, in certain circumstances, in the Common Stock
becoming characterized as low-priced or "penny stock" subject to the "penny
stock restrictions" discussed below under "Penny Stock Regulations."
Penny Stock Regulations. Due to the delisting from AMEX, the Company's
Common Stock may, from time to time, be subject to certain restrictions pursuant
to the "penny stock" regulations under the Exchange Act. Stocks selling for
less than $5.00 per share that are not listed on a national securities exchange
or quoted in the Nasdaq Stock Market may be designated as "penny stocks" and may
be subject to certain requirements imposed by Rules 15g-1 through 15g-9 under
the Exchange Act. Among other things, Rule 15g-3 requires a broker or dealer to
advise potential purchasers of a penny stock of the lowest offer and highest bid
quotations for such stock, and Rule 15g-4 requires a broker or dealer to
disclose to the potential purchaser its compensation in connection with such
transaction. Under Rule 15g-9, a broker or dealer who recommends such
securities to persons other than established customers must make a special
written suitability determination for the purchaser and receive the purchaser's
prior agreement to such a transaction. The effect of these regulations could
limit the ability of broker-dealers to sell the Company's Common Stock and, in
turn, the ability of the Company's shareholders to sell their Common Stock.
Rule 3a51-1 under the Exchange Act provides certain exemptions from the
"penny stock restrictions" for any security trading at a price less than $5.00
if, among other exemptions, the issuer has average revenues of at least
$6,000,000 for the last three years.
Dependence on Current and Future Management; No Operating History. The
success of the Company is largely dependent on the personal efforts and
abilities of senior management, including Lawrence D. Field, Chairman of the
Company. It is anticipated that Mr. Field will continue to serve as the
Company's Chairman and will also serve as the Company's Chief Executive Officer
following the Sale. In addition, it is anticipated that Jason Bryan will join
the Company on November 15, 1998, to serve as the Company's new Chief Financial
Officer. After the consummation of the Sale Transaction, Messrs. Field and
Bryan, and the Board of Directors intend to concentrate their efforts on
exploring opportunities to effect a Business Combination. The loss of any of
these key persons could have an adverse affect on the Company's ability to
complete a Business Combination. The inability of the Company to complete a
Business Combination following the Sale Transaction would have a material
adverse effect on the Company. If a Business Combination is effected, the
success of the Company's operations may be dependent, wholly or partly, upon
management of the successor firm and numerous other factors beyond the Company's
control. Although the Board of Directors will seek to effect a Business
Combination with an entity that has an established operating history and
experienced management, the Company cannot be assured that it will be successful
in locating an acquisition candidate meeting such criteria. In addition, as the
Company may not have any experience, and is not expected to have any operating
history, in its new line of business, which is yet to be determined, the Company
cannot be assured that the Company's activities will be profitable.
No Dividends Anticipated. At the present time management does not
anticipate that the Company will pay dividends, cash or otherwise, on its Common
Stock in the foreseeable future. Future dividends will depend on earnings, if
any, of the Company, its financial requirements and other factors.
Issuance of Additional Shares; Possible Change of Control. Approximately
3,552,447 shares of Common Stock and 1,000,000 shares of Preferred Stock have
not yet been issued, or reserved for issuance upon exercise of outstanding
options and warrants, and thus are available for issuance in connection with a
Business Combination. The Board of Directors is authorized to approve the
issuance of such shares to raise additional capital or to effect a Business
Combination, in some cases, without the approval of the Company's shareholders.
As shareholders do not have preemptive rights with respect to the issuance of
shares of the Common Stock, any additional issuance by the Company from its
authorized but unissued shares would have the effect of reducing the percentage
ownership of the shareholders and may result in a change of control of the
Company. The resulting change in control of the Company could result
19
<PAGE>
in a change in the Company's officers and directors and a corresponding
reduction in their participation in the future affairs of the Company. A change
in control of the Company could, under certain circumstances, adversely affect
the Company's ability to use the Company's net operating loss carryforwards. In
addition, the proposal to effect a one-for-ten reverse stock split of the
Company's Common Stock would have the effect of increasing the amount of shares
of Common Stock available for issuance. The principal effect of the reverse
stock split would be to decrease the number of shares of Common Stock
outstanding, while the number of authorized shares of Common Stock would remain
the same.
Regulation. Although the Company will continue to be subject to regulation
under the Securities Act of 1933, as amended, and the Exchange Act, after the
consummation of the Sale Transaction, management believes the Company will not
be subject to regulation under the Investment Company Act insofar as the Company
will not be engaged in the business of investing or trading in securities and
will only invest in securities pending the consummation of a Business
Combination. If any such investments are deemed by the Commission not to be
temporary or in the event the Company engages in Business Combinations which
result in the Company holding passive investment interests in a number of
entities, the Company could be subject to regulation under the Investment
Company Act. In such event, the Company would be required to register as an
investment company, could be expected to incur significant registration and
compliance costs and would be subject to extensive regulation. Management has
obtained no formal determination from the Commission as to the status of the
Company following the Sale Transaction under the Investment Company Act and,
consequently, any violation of such Act would subject the Company to material
adverse consequences.
No Appraisal Rights. The OGCA governs shareholders' rights in connection
with the Sale. Under the applicable provisions of OGCA, the Company's
shareholders will have no right in connection with the Sale to seek appraisal of
their shares of Common Stock.
Dilution With Respect to Issuance of Additional Shares. In December 1993,
the Company purchased certain assets relating to the Nonni's/(R)/ Biscotti
Business for a purchase price of approximately $990,000. As consideration for
the purchase, the Company paid approximately $295,000 in cash, issued $180,000
of notes payable, assumed certain liabilities, issued 78,750 shares of the
Company's Common Stock and entered into a seven-year royalty agreement.
Approximately $272,000 of the assumed liabilities were paid at the acquisition
date. The royalty agreement was with the three shareholders of the seller,
Steve Sirianni, Tim Soldati and Rich Martin (the "Nonni's Shareholders"), which
was amended in October 1994 and was terminated in July 1996.
The original royalty agreement provided that for seven years following the
closing of the acquisition, the Company would pay six percent of the gross
sales, less returns, allowances and bad debts attributable to such sales, of the
products related to the assets purchased in the Nonni's acquisition. The
payment of the royalty was also conditioned upon the Company achieving a gross
margin threshold on the products sold.
The amended royalty agreement 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 recognizing an additional $2,000,000 of goodwill.
Additionally, the agreement provided for the issuance of an additional 200,000
shares of Common Stock if sales of products, which were subject to the original
royalty, exceeded $10,000,000 for any twelve month period beginning July 1996
through July 1999. This target was met and an additional 200,000 shares were
issued in 1997. The Company guaranteed a market price of $5.71 per share for
both the 700,000 and 200,000 shares under certain circumstances. Such guarantee
is payable in cash or Common Stock, at the option of the Company. As of
September 30, 1998, the Company was obligated to pay $3,980,000 under this price
guarantee. Due to the Company's current cash flow difficulties, the Company
plans to issue Common Stock in lieu of cash to satisfy its obligations under the
price guarantee. As of September 30, 1998, the Company was obligated to issue
4,325,000 additional shares. Under the price guarantee, the Company will be
obligated to issue additional shares if the market price of the Common Stock
decreases.
20
<PAGE>
Also in connection with the Nonni's acquisition, the Company entered into
seven-year employment agreements with the Nonni's Shareholders. Effective
October 1, 1994, these agreements were amended and then terminated in 1997 by
the Company paying $1,125,000 and issuing 840,000 shares of Common Stock to the
Nonni's Shareholders. The Company guaranteed a market price of $1.25 per share
for the 840,000 shares under certain circumstances. As of September 30, 1998,
none of these shares had been sold, thus the Company is not obligated to pay any
amount or issue any additional shares under this price guarantee at this time.
The issuance of the shares of Common Stock to the Nonni's Shareholders to
satisfy the Company's current obligation under the price guarantee will have the
effect of reducing the percentage ownership of the Company's existing
shareholders. If the Company issued the 4,325,000 shares it is currently
obligated to issue as of September 30, 1998, such amount would equal
approximately 22% of the Company's currently issued and outstanding Common
Stock. The number of shares of Common Stock actually issued to satisfy the
obligation to the Nonni's Shareholders will depend on the market price of the
Common Stock as of the date of issuance. It is possible that, due to declines
in the market price of the Common Stock, the actual number of shares that will
be issued will be in excess of 4,325,000 shares which would result in greater
reduction in the percentage ownership of the Company's existing shareholders.
See "Market Price Data and Dividend Policy."
ACCOUNTING TREATMENT
The Sale will be treated as a recapitalization for accounting purposes and
a taxable purchase of assets for tax purposes. For accounting purposes, upon
transfer of the assets related to the Biscotti Business to Existing Sub,
Existing Sub will carry such assets at the same accounting basis as the Company
held such assets prior to their transfer. Such accounting treatment will only
have an indirect effect upon the Company's shareholders since the Company will
carry the 10% equity retention of Existing Sub at its original accounting basis.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The Sale should have no direct income tax consequences to the Company's
shareholders. The Sale will be reported as a sale of assets for federal income
tax purposes in 1998. The resulting tax gain from the Sale is not expected to
result in significant federal income tax liability but will reduce the Company's
net operating loss carryforwards.
THE COMPANY WILL NOT SEEK AN OPINION OF COUNSEL WITH RESPECT TO THE
ANTICIPATED TAX CONSEQUENCES. THE FOREGOING SUMMARY OF MATERIAL FEDERAL INCOME
TAX CONSEQUENCES DOES NOT CONSTITUTE LEGAL ADVICE TO ANY SHAREHOLDER. THE
COMPANY RECOMMENDS THAT EACH SHAREHOLDER CONSULT HIS OR HER OWN TAX ADVISER
REGARDING THE TAX CONSEQUENCES OF THE SALE.
INTERESTS OF CERTAIN PERSONS IN THE SALE
In considering the recommendations of the Board of Directors with respect
to the Sale Transaction, shareholders should be aware that certain members of
the management of the Company and the Board of Directors have certain interests
in the Sale Transaction that are separate from the interests of shareholders of
the Company generally.
From time to time, Lawrence D. Field, the Chairman of the Board of
Directors, and his spouse have provided financing to the Company. On April 10,
1998, Bank One of Tulsa, Mr. Field and his spouse entered into a note agreement
whereby the liability for the remaining $6,000,000 owed to the bank for the
Company's revolving line of credit was transferred from the Company to Mr. Field
and his spouse, and the bank released its lien on the Company's accounts
receivables and inventories. The Company then delivered a promissory note to
Mr. Field and his spouse in the amount of $6,000,000 due in August 1998;
however, if excess cash is not available to repay the note, the due date will be
extended. The due date has been extended until the closing of the Sale.
Interest on such note is based on the local bank prime rate plus 1 1/2%. In
addition, the Company is obligated to Mr. Field and his spouse in the principal
21
<PAGE>
amount of $4,371,000 pursuant to amounts loaned to the Company. Accordingly, as
of September 30, 1998, the total amount of indebtedness, including accrued
interest, to Mr. Field and his spouse was $14,340,000.
Also, from time to time, Mr. Field and his wife have guaranteed obligations
of the Company. Currently, Mr. Field has guaranteed the Company's obligations
with respect to a vehicle lease agreement with Timmer Leasing, and Mr. Field and
his wife have guaranteed the Company's term note with Bank of Oklahoma which has
$7,900,000 outstanding. Another family member of Mr. Field has also guaranteed
the term note with Bank of Oklahoma. Upon consummation of the Sale, a portion
of the indebtedness owed to Mr. Field will be paid by the Company and all of the
guaranteed obligations of Mr. Field, his wife and his other family member will
be released.
Under the terms of the Sale Agreement, Mr. Field has agreed to provide the
Buyer with a guarantee in the amount of $750,000, which secures the Company's
indemnification obligations under the Sale Agreement.
CAPMAC Eighty-Two Limited Partnership ("CAPMAC"), a limited partnership of
which Milton D. McKenzie, a shareholder and Director of the Company, has sole
voting and investment control as the general partner, holds $250,000 in
principal amount of the Company's 14% notes. ML Oklahoma Venture Partners,
Limited Partnership ("ML Oklahoma"), a holder of 5.1% of the Company's Common
Stock, holds $250,000 in principal amount of the Company's 14% notes. Upon
consummation of the Sale, all of the indebtedness owed to CAPMAC and ML Oklahoma
will be paid in full by the Company.
In considering the Sale Transaction shareholders should be aware, and
should carefully consider that, certain officers and employees of the Company,
including Tim Bruer, the President and Chief Executive Officer of the Company,
may be deemed to have interests in the Sale Transaction that may create
potential conflicts of interest, by virtue of their anticipated departure of
employment with the Company and anticipated employment with the entity that will
operate the Company's Biscotti Business following the consummation of the Sale.
In addition, in connection with the Sale, the Company will make certain bonus
payments to Mr. Bruer. Upon the closing of the Sale, the Company will pay Mr.
Bruer a bonus of $265,625. Following the earn-out periods in connection with
the Sale, if Mr. Bruer remains employed with the Biscotti Business, the Company
will pay an additional bonus to Mr. Bruer based on the percentage of the amount
of earn-out payments made to the Company under the Sale Agreement. Mr. Bruer
will receive 75% of his 1998 annual base salary with the Company multiplied
times the percentage of the full amount of the earn-out payment paid to the
Company in connection with the Sale. Accordingly, if the Company receives the
full amount of the earn-out payments in connection with the Sale, Mr. Bruer will
receive an additional bonus of $187,500. See also "The Sale Agreement--
Employment Agreement." In addition, Mr. Bruer has purchased from Mr. Field
certain indebtedness in the principal amount of $1,950,000 owed by the Company
to Mr. Field. The purchase price for such indebtedness was $1,365,000; and thus
Mr. Bruer will realize a gain of $585,000 upon the repayment of said
indebtedness following the closing of the Sale. Further, although there is
currently no agreement on the subject, Swander Pace has discussed with certain
members of management of the Biscotti Business the possibility that such
individuals, including Mr. Bruer, may directly purchase up to approximately 2%
of the common equity of Existing Sub on the same terms as Swander Pace. The
Board of Directors was aware of such interests and considered them, among other
matters, in approving the Sale Transaction.
NO APPRAISAL RIGHTS
The OGCA governs shareholders' rights in connection with the Sale. Under
the applicable provisions of OGCA, the Company's shareholders will have no right
in connection with the Sale to seek appraisal of their shares of Common Stock.
22
<PAGE>
THE SALE AGREEMENT
Although the following is a summary of all material elements of the Sale
Agreement, it is not complete and is qualified in its entirety by reference to
the copy of the Sale Agreement attached as Appendix A to this Proxy Statement,
which shareholders are urged to read in its entirety. Capitalized terms used
but not defined herein shall have the respective meanings set forth in the Sale
Agreement.
GENERAL
Pursuant to the terms of the Sale Agreement, on the Closing Date, the
Company will contribute the assets and properties related to the Company's
Biscotti Business to the Existing Sub and, in exchange, Existing Sub will issue
shares of its capital stock to the Company and will assume certain liabilities
related to the Biscotti Business. Immediately thereafter, Existing Sub will
repurchase 450,000 shares of capital stock owned by the Company and the Buyer
will purchase 90% of the shares of the capital stock of Existing Sub then owned
by the Company. The effect of the above transactions is that following the
Closing, Existing Sub will own the assets related to the Biscotti Business and
will be obligated for certain liabilities related thereto, and the Buyer will
own 90% of the capital stock of Existing Sub while the Company will own the
remaining 10% of the capital stock of Existing Sub. In order to fund the
repurchase of its capital stock from the Company and to pay the Buyer's expenses
relating to the Sale, Existing Sub will borrow funds from banks (the "Debt
Financing"). The amount to be paid by Existing Sub to the Company for Existing
Sub's capital stock (the "Repurchase Price") will be determined prior to closing
and is subject to adjustments as provided in the Sale Agreement. The Repurchase
Price is based on a formula that equals one-third of the difference of (i)
$17,000,000, and (ii) 10% of the result of (A) subtracting the amount of the
Debt Financing from, and (B) adding the amount of Buyers' Expenses, including
any Expenses related to the Financing to, $17,000,000. In other words, the
Repurchase Price shall be equal to: [$17,000,000 - (10%)($17,000,000 - Debt
Financing + Buyers' Expenses)].
In consideration of the purchase of the shares of capital stock of Existing
Sub by the Buyer from the Company, the Buyer will pay an amount in cash to the
Company (the "Purchase Price"). The amount of the Purchase Price will be
determined prior to closing and is based on a formula that equals two-thirds of
the difference of (i) $17,000,000, and (ii) 10% of the result of (A) subtracting
the amount of the Debt Financing from, and (B) adding the amount of Buyers'
Expenses, including any Expenses related to the Financing to, $17,000,000. In
other words, the Purchase Price shall be equal to: [$17,000,000 -
(10%)($17,000,000 - Debt Financing + Buyers' Expenses)]. After giving effect to
the Sale, the Company's organizational structure will be as shown on the
following chart:
[CHART APPEARS HERE]
23
<PAGE>
It is currently anticipated that the amount of the Debt Financing will be
approximately $7,000,000 and the amount of the Buyer's expenses will be
$1,000,000. Accordingly, the total amount estimated to be received by the
Company at closing for the Repurchase Price and the Purchase Price is
approximately $15,900,000, subject to the adjustments described below.
The Purchase Price will be paid by the Buyer to the Company at the Closing
by wire transfer or delivery of other immediately available funds. At the
Closing, the Repurchase Price will be adjusted based on the calculation of
Specified Net Assets (as defined below) (x) upward by 90% of the amount in
dollars by which the sum of (1) the book value of Net Working Capital at
Closing, and (2) the book value of the New Equipment at Closing (the "Specified
Net Assets") is more than the sum of (a) $2,696,475, plus (b) the greater of the
final amount actually expended on the New Equipment and $262,000 (the "Target
Specified Net Assets") and (y) downward by 90% of the amount in dollars by which
the Target Specified Net Assets is more than the Specified Net Assets. The
Specified Net Assets at Closing will be preliminarily estimated in good faith by
the Company, which must be reasonably satisfactory to the Buyer, prior to the
Closing Date. If the Closing had occurred on September 30, 1998, management of
the Company estimates that the Specified Net Assets would have been
approximately $400,000, on such date.
Within 30 days after the Closing Date, Existing Sub will prepare and
deliver to the Company a calculation of Specified Net Assets as of the close of
business on the Closing Date. The Company will have an opportunity to accept or
object to Existing Sub's calculation of the Specified Net Assets. In the event
that the Specified Net Assets as finally determined and agreed upon is less than
the Specified Net Assets originally calculated by the Company, then the
Repurchase Price will be adjusted downward, by an amount equal to 90% of the
amount of such difference to reflect the difference in such amounts and the
Company will pay Existing Sub such difference. Conversely, in the event final
Specified Net Assets is more than the preliminary Specified Net Assets, the
Repurchase Price will be adjusted upward, on the same basis and Existing Sub
will pay to the Company such difference. Any such post-closing adjustment to
the Repurchase Price will accrue interest as specified in the Sale Agreement and
must be paid within ten days of the earlier of delivery of the final calculation
of Specified Net Assets by the arbitrating accountants, the resolution of any
dispute between Existing Sub and the Company, or the expiration of the period to
object to the calculation of Specified Net Assets.
YEAR-END PAYMENT
For the twelve month period ending on December 31, 1998 (the "Year-End
Payment Period"), the Buyer will pay to the Company an amount in cash up to
$3,000,000 (the "Year-End Payment") calculated by taking the product of (i) a
fraction, the numerator of which is equal to (1) EBITDA for the Year-End Payment
Period, minus (2) $2,000,000, and the denominator of which is equal to $300,000
and (ii) $3,000,000. The effect of this calculation is that once EBITDA reaches
$2,300,000, the entire Year-End Payment will be earned. Any Year-End Payment
must be delivered from the Buyer to the Company as soon as reasonably
practicable following the availability of unaudited financial statements
relating to the relevant Year-End Payment Period. In addition, if any Year-End
Payment is due to the Company and there exists any outstanding claim for
indemnification by the Buyer under the Sale Agreement, then the Buyer may hold
back a portion of any such amount equal to the amount of the claim for
indemnification until such claim is resolved.
EARN-OUT PAYMENTS
For the twelve month period ending on March 31, 1999 (the "Initial Earn-Out
Period"), Existing Sub will pay to the Company an amount in cash up to
$3,000,000 (the "Initial Earn-Out Payment") calculated by taking the product of
(i) a fraction, the numerator of which is equal to (1) EBITDA for the Initial
Earn-Out Period, minus (2) $3,000,000, and the denominator of which is equal to
$1,000,000 and (ii) $3,000,000. The effect of this calculation is that once
EBITDA reaches $4,000,000, the entire Initial Earn-Out Payment will be earned.
24
<PAGE>
For the twelve month period ending on October 31, 1999 (the "Additional
Earn-Out Period"), Existing Sub will pay to the Company an amount in cash up to
$5,000,000 (the "Additional Earn-Out Payment") calculated by taking the product
of (i) a fraction, the numerator of which is equal to (1) Plant-Level EBITDA for
the Additional Earn-Out Period, minus (2) $8,600,000, and the denominator of
which is equal to $1,000,000 and (ii) $5,000,000. The effect of this
calculation is that once Plant-Level EBITDA reaches $9,600,000, the entire
Additional Earn-Out Payment will be earned.
Any Initial Earn-Out Payment or Additional Earn-Out Payment must be
delivered from Existing Sub to the Company as soon as reasonably practicable
following the availability of unaudited financial statements relating to the
relevant Initial Earn-Out Period or Additional Earn-Out Period, but in no event
later than 60 days after March 31, 1999, or October 31, 1999, as the case may
be. In addition, if any Initial Earn-Out Payment or Additional Earn-Out Payment
is due to the Company and there exists any outstanding claim for indemnification
by the Buyer under the Sale Agreement, then the Buyer may hold back a portion of
any such earn-out amount equal to the amount of the claim for indemnification
until such claim is resolved.
ASSETS AND LIABILITIES TO BE TRANSFERRED
The assets to be transferred to the Existing Sub include the assets and
properties entirely or primarily related to or used or held for use in
connection with, the Company's Biscotti Business, which include without
limitation, all of the Company's rights, title and interest in (i) all
machinery, equipment, furniture, tools, spare parts, maintenance equipment and
supplies, materials, computer hardware and peripherals, construction-in-process,
communications equipment, transportation assets and other personal property that
are Related to the Business, and any fixtures, leasehold or other improvements
relating to any of the foregoing and all personal property on the Leased Real
Property; (ii) all Real Property Leases Related to the Business; (iii) all
leases or other rights to use or possess personalty Related to the Business,
including leases of machinery, equipment, furniture, tools, supplies, computer
hardware and software and communications equipment; (iv) all Intellectual
Property Rights Related to the Business; (v) all of the Company's Commitments
and rights and claims under the Assigned Contracts; (vi) all books and records
that are entirely or in substantial part Related to the Business or related to
Existing Sub; (vii) all Permits Related to the Business; (viii) all known and
unknown, liquidated or unliquidated, contingent or fixed, rights, claims,
credits, rights of setoff against third parties, choses in action, causes of
action or rights to commence any causes of action which Existing Sub has at the
Closing or may acquire after the Closing relating to the Contributed Assets or
Related to the Business; (ix) all Working Capital Assets; and (x) all goodwill
associated with the Business.
Excluded Assets consist of (i) any deferred income taxes, intercompany
receivables between the Business and the Company or cash or cash equivalents;
(ii) any consideration received by, and the rights of, the Company under or
pursuant to the Sale Agreement and the Ancillary Documents; and (iii) certain
assets located in the Company's Tulsa corporate offices.
Assumed Liabilities consist of (i) the Working Capital Liabilities; (ii)
the Company's obligations after the Closing under the Assigned Contracts and
outstanding purchase order contracts and sale order contracts; (iii) the
Company's obligations after the Closing under the Personalty Leases; (iv) the
Company's obligations after the Closing under the Real Property; (v) the
Company's obligations after the Closing under the Permits; and (vi) the
Company's obligations after the Closing under the Intellectual Property Rights.
REPRESENTATIONS AND WARRANTIES
The Sale Agreement contains various representations and warranties of the
Company including, among others, representations and warranties related to
corporate organization and similar corporate matters relating to the Company and
Existing Sub; authorization and enforceability; non-contravention of
transactions contemplated by the Sale Agreement of the certificate of
incorporation or by-laws of the Company and Existing Sub, and non-violation of
laws and binding agreements; ownership of shares of capital stock of Existing
Sub by the Company; capitalization of Existing
25
<PAGE>
Sub; accuracy of information to be contained in this Proxy Statement; accuracy
of reports filed with the Commission; accuracy of financial statements provided
to the Buyer; insurance relating to the Business; absence of certain changes or
events relating to the Business since December 31, 1997; ownership and title to
Contributed Assets; condition of buildings, structures and equipment;
agreements, plans or arrangements; absence of legal proceedings and violation of
laws; intellectual property; compliance with laws, licenses and permits
pertaining to the Business; prior business of Existing Sub; employment matters;
tax matters; employee benefit plans; accounts and notes receivable;
environmental matters; inventories; books and records; transactions with
affiliates; absence of brokers; major customers; trade deals and promotions;
disclosure omissions; and securities law matters.
The Sale Agreement contains various representations and warranties of the
Buyer including, among others, representations and warranties related to
organization and similar matters relating to the existence of the Buyer;
authorization and enforceability; absence of governmental consents; non-
contravention of transactions contemplated by the Sale Agreement of the
respective organizational documents of the Buyer, and non-violation of laws and
binding agreements; investment intent and absence of brokers.
The representations and warranties survive the Closing for a period of two
years from the Closing Date except for (i) those relating to the condition of
equipment and inventory which expire six months from the Closing Date, (ii)
those relating to inventory which expire on the later of four and a half months
from the Closing Date or February 15, 1999, and (iii) those relating to title
matters, tax matters, employee benefit plans and environmental matters, which
expire 60 days after the expiration of the applicable statutes of limitations.
COVENANTS
Pursuant to the Sale Agreement, prior to Closing, the Company and Existing
Sub, as the case may be, have made certain covenants, including among others,
(i) to operate the Business in the ordinary course, in accordance with past
practice, and to use all reasonable efforts to maintain its relationships with
employees, suppliers, customers, licensors, licensees, brokers, distributors and
others having business dealings involving the Business; (ii) to not permit
Existing Sub to acquire assets exceeding $25,000; (iii) to not vary or amend the
terms of any Assumed Liability; (iv) to not sell, lease transfer or dispose of
any of the Contributed Assets; (v) to not grant certain increases in
compensation for certain employees; (vi) to not sell or redeem, purchase or
acquire any capital stock of Existing Sub, except in accordance with the Sale
Agreement; (vii) to not amend or alter the organizational documents of the
Company or Existing Sub; (viii) to permit representatives of the Buyer and any
funding sources to have full access during normal business hours to assets,
properties, offices and other facilities of Existing Sub and the Company; (ix)
to not solicit or encourage any inquiries, discussions or proposals, unless
required to do so by any applicable fiduciary duties, from any Person relating
to an Acquisition Proposal; (x) to take all action necessary to convene a
meeting of the Company's shareholders to consider and vote upon the approval of
the Sale Transaction and for the Company's Board of Directors to recommend,
subject to their fiduciary duties, such approval to the shareholders; and (xi)
to pay off all debts that grant an encumbrance on any of the Contributed Assets.
In addition, on the Closing Date, the Buyer has agreed to cause Existing Sub to
make offers of employment to substantially all of the employees of the Business;
however, Existing Sub is not required to continue to employ any such employees
following the Closing Date.
Pursuant to the Sale Agreement the Company, Existing Sub and the Buyer have
agreed (i) to use all reasonable efforts to take all action and to do all things
necessary in order to consummate and make effective the transactions
contemplated by the Sale Agreement and the Ancillary Documents; (ii) to use all
reasonable efforts to cause Existing Sub to take all action necessary to obtain
the funding required under the Sale Agreement; (iii) unless required by law as
advised by counsel to a party to the Sale Agreement, to use all reasonable
efforts to keep confidential the terms of the discussions between the Company
and the Buyer; and (iv) to make all filings and obtain all consents in order to
consummate the transactions contemplated in the Sale Agreement and the Ancillary
Documents.
26
<PAGE>
COVENANT NOT TO COMPETE
For a period of five years from the Closing Date, the Company has agreed
not to (i) engage in any activity involving the manufacture, production,
marketing, advertising, distribution or sale of the products that make up the
specialty baked goods anywhere in the world or (ii) invest in any equity of or
manage, operate or control or become a consultant with respect to any Person
that engages in such activity. The Company may make passive investments in
securities of any such Person if the securities are traded on an exchange or
actively traded in a recognized over-the-counter market and the Company's
investment never exceeds 5%. For a period of two years from the Closing Date,
the Company has also agreed, subject to certain exceptions, not to hire or
solicit to hire any employee of Existing Sub or the Buyer.
CONDITIONS
Under the Sale Agreement, the obligations of the Buyer to effect the
transactions contemplated thereby are subject to the satisfaction (or written
waiver by the Buyer) of the conditions that Existing Sub has obtained the
financing required to consummate the transactions contemplated in the Sale
Agreement and the Buyer has received the funds necessary to pay the Purchase
Price, each on terms satisfactory to the Buyer; the Biscotti Business has
achieved certain projected profits from July 1, 1998, until the end of the month
preceding the Closing Date; and the Buyer has satisfactorily completed its pre-
acquisition review. It is currently anticipated that the terms of the financing
to Existing Sub will require that all stock of Existing Sub (including the stock
in Existing Sub retained by the Company) be pledged as security for such
financing. The obligations of the Buyer to effect the transactions contemplated
by the Sale Agreement are also subject to the satisfaction (or written waiver by
the Buyer) of the following further conditions, among others, (i) that the
representations and warranties made by the Company pursuant to the Sale
Agreement are accurate in all material respects as made on the date of the Sale
Agreement and on the Closing Date; (ii) each of the Company and Existing Sub
have complied in all material respects with all agreements and covenants
contained in the Sale Agreement or in any Ancillary Document; (iii) Existing Sub
has received on the Closing Date from the Company the Contributed Assets and
Existing Sub has only the Assumed Liabilities and no other liabilities of the
Company; (iv) the Company has transferred the Repurchased Shares to Existing
Sub; (v) no preliminary or permanent injunction or other order issued by any
court or by any Authority, which restrains, enjoins, or otherwise prohibits the
transactions contemplated by the Sale Agreement is in effect; (vi) the Buyer has
received on the Closing Date a certificate from executive officers of each of
the Company and Existing Sub relating to the conditions specified in (i) and
(ii) above; (vii) the Buyer has received an opinion from counsel to the Company
and Existing Sub in a form acceptable to the Buyer and its counsel (which will
include counsel's opinion to the Buyer as to the organization, existence and
corporate authority of the Company, the authorization of the Sale, the execution
and binding effect of the Sale Agreement, and the absence of conflicts with
other contracts); (viii) all material approvals and consents by any Authority or
any Person required for the consummation of the transactions contemplated in the
Sale Agreement have been received; (ix) the Buyer has received a guarantee from
Lawrence Field in the amount of $750,000, securing the Company's indemnification
obligations under the Sale Agreement; (x) events have not occurred which have a
material adverse effect or change on the business, assets, liabilities,
operations or financial condition of the Business; (xi) the Assignment and
Assumption Agreement and Employment Agreement have been executed and delivered;
(xii) the Company has executed and delivered a shareholder agreement concerning
shares of common stock of Existing Sub; (xiii) no proceeding has commenced or
been threatened involving a challenge or that may prevent or delay the
transactions contemplated by the Sale Agreement; (xiv) the Buyer has received
from its independent auditors a letter to the effect that the transactions
contemplated in the Sale Agreement will be accounted for as a recapitalization;
(xv) no circumstances exist that would prevent the transactions contemplated in
the Sale Agreement from being accounted for as a recapitalization and treated as
a taxable transaction; and (xvi) all Contributed Assets are located at the
Company's Tulsa facilities, except for those described under the Sale Agreement;
and (xvii) the waiting period applicable to the consummation of the transactions
contemplated under the Sale Agreement.
The obligations of the Company to effect the transactions contemplated
under the Sale Agreement are subject to the satisfaction (or written waiver by
the Company) of the following conditions, among others, (i) that the
27
<PAGE>
representations and warranties made by the Buyer pursuant to the Sale Agreement
are accurate in all material respects as made on the date of the Sale Agreement
and on the Closing Date; (ii) the Buyer has complied in all material respects
with all agreements and covenants contained in the Sale Agreement; (iii) the
Company has received the Repurchase Price from Existing Sub; (iv) the Company
has received the Purchase Price from the Buyer; (v) no preliminary or permanent
injunction or other order issued by any court or by any Authority, which
restrains, enjoins, or otherwise prohibits the transactions contemplated by the
Sale Agreement is in effect; (vi) all material approvals and consents by any
Authority or any Person required for the consummation of the transactions
contemplated in the Sale Agreement have been received; and (vii) the Company has
received an opinion from counsel to the Buyer in a form acceptable to the
Company and its counsel. A waiver by the Company of a material condition would
likely constitute a material change in this proposal which would necessitate a
resolicitation of proxies from the Company's shareholders.
INDEMNIFICATION
The Company has agreed to indemnify and hold harmless Existing Sub, the
Buyer and their respective affiliates from and against any and all losses
incurred by any of them arising out of, relating to or resulting from, among
others, (i) the failure by the Company to pay any of the Retained Liabilities;
(ii) any breach by the Company of any of the representations or warranties made
by the Company in the Sale Agreement, (iii) any failure by the Company to
perform any of its covenants contained in the Sale Agreement; (iv) Taxes imposed
by reason of the transactions contemplated in the Sale Agreement; or (v) any
Loss arising out of or relating to any Benefit Plan maintained by Existing Sub,
the Company or any Subsidiary prior to the Closing Date. The indemnitees of the
Buyer also have a right of set-off for indemnified claims against amounts to be
paid to the Company for post-closing Repurchase Price adjustments, Year-End
Payment amounts and any earn-out payments. In addition, the Buyer will receive
a guarantee from Lawrence Field in the amount of $750,000, securing the
Company's indemnification obligations under the Sale Agreement
The Buyer has agreed to indemnify and hold harmless the Company and its
respective affiliates from and against any and all losses incurred by any of
them arising out of, relating to or resulting from (i) any breach by the Buyer
of any of the representations or warranties made by the Buyer in the Sale
Agreement; (ii) any failure by the Buyer to perform any of its covenants
contained in the Sale Agreement; (iii) the failure by Existing Sub, after the
Closing to pay any of the Assumed Liabilities; or (iv) certain post-closing
employment and tax matters.
Except for losses relating to Taxes, an indemnitee is not entitled to
assert any claim for indemnification under the Sale Agreement until such time as
the aggregate amount of all of such indemnifiable claims exceeds $220,000, in
which event the indemnitee is entitled to seek indemnification for the full
amount of such claims in excess of $220,000.
TERMINATION
The Sale Agreement may be terminated and the transactions contemplated
thereby abandoned at any time prior to the Closing (i) before or after approval
by the Company's shareholders by the mutual consent of the Company and the
Buyer; (ii) by either the Company or the Buyer if the transactions contemplated
by the Sale Agreement have not been consummated by December 31, 1998; the
approval of the Company's shareholders of the Sale is not obtained at the
Meeting; or a federal or state court or other governmental agency has issued an
order, decree or ruling restraining, enjoining or otherwise prohibiting the
transactions contemplated by the Sale Agreement; (iii) by the Buyer if the
representations or warranties of the Company or Existing Sub become inaccurate
or following a breach of any covenant or agreement of the Company or Existing
Sub contained in the Sale Agreement; (iv) by Parent or Existing Sub if the
representations or warranties of the Buyer become inaccurate or following a
breach of any covenant or agreement of the Buyer contained in the Sale
Agreement; (v) by the Buyer if the Company's Board of Directors has withdrawn or
modified, in a manner adverse to the Buyer, its approval or recommendation that
the Company's shareholders approve the Sale or if the Company fails to include
in this Proxy Statement a recommendation for approval of the Sale; (vi) by the
Buyer if at any time the Buyer determines that it is not satisfied with the
results of its pre-acquisition legal, financial and business investigation and
review; and (vii) by the Buyer if Lawrence Field has not entered into a voting
agreement on terms reasonably satisfactory to the Buyer.
28
<PAGE>
EXPENSES
Except as otherwise expressly provided in the Sale Agreement, whether or
not the transactions contemplated by the Sale Agreement are consummated, each of
the parties thereto have agreed to pay all costs and expenses incurred by it on
its behalf in connection with the negotiation, preparation, execution and
performance of the Sale Agreement. If the Sale Agreement is terminated in
accordance with the provisions described above, the Company will pay all of the
expenses of the Buyer, unless such termination is the result of a breach of the
representations and warranties of the Buyer or of the Buyer's failure to perform
its covenants and agreements contained in the Sale Agreement. The Company will
not be obligated to pay the Buyer's expenses in excess of $200,000, excluding
fees of legal counsel and any fees payable to banks. Upon consummation of the
transactions contemplated by the Sale Agreement, Existing Sub will reimburse the
Buyer for all of its expenses and will also pay to the Buyer the sum of
$500,000.
VOTING AGREEMENT
On September 9, 1998, pursuant to the terms of the Sale Agreement, Lawrence
Field entered into a voting agreement with the Buyer pursuant to which Mr. Field
agreed to vote, and granted to the Buyer a proxy to vote, his shares of the
Company's Common Stock in favor of the approval of the Sale Transaction. Mr.
Field's Common Stock, which is covered by the voting agreement, is subject to
the voting restrictions under the control share limitations of the OGCA.
Accordingly, Mr. Field's voting agreement effectively represents approximately
21.6% of Common Stock to be voted in favor of the Sale Transaction. In
addition, pursuant to the voting agreement, Mr. Field agreed that he would not,
among other things, directly or indirectly, sell, transfer or encumber any of
the shares of Common Stock subject to his voting agreement during the term of
the voting agreement, and to vote against any action, that if taken by the
Company, would violate the provisions of the Sale Agreement or would cause any
extraordinary corporate transaction, including a merger, liquidation or sale of
a material amount of the assets of the Company, any of its subsidiaries or
Existing Sub, relating to the Biscotti Business other than as contemplated in
the Sale Agreement.
EMPLOYMENT AGREEMENT
One of the conditions to the obligation of the Buyer to consummate the
transactions contemplated by the Sale Agreement is that Timothy G. Bruer, the
President and Chief Executive Officer of the Company, enter into the Employment
Agreement with Existing Sub. The term of the Employment Agreement would
commence on the Closing Date and would continue thereafter on an at-will basis.
Bruer's compensation is expected to include (i) an annual base salary of
$260,000, (ii) a discretionary performance bonus in the range of 0% to 75% of
his base salary, (iii) a compensatory stock option covering up to 6% of the
outstanding shares of common stock of Existing Sub, 20% of which would be vested
at Closing and the remainder of which would vest on the sixth anniversary
(subject to earlier vesting upon the attainment of certain milestones or a
change in control of Existing Sub), with an exercise price per share equal to
the price per share paid by the Buyer under the Sale Agreement, (iv) a monthly
car allowance of $750, and (v) additional employee benefits such as health and
life insurance. Bruer's employment would be on an at-will basis; however, if he
is terminated at any time without cause, he would be entitled to receive his
base salary and benefits for a period of nine months.
ADDITIONAL AGREEMENTS
Under the Sale Agreement, the parties have agreed to enter into an interim
services agreement, whereby Existing Sub will render certain financial and
accounting services to the Company for a period of time following the Closing.
Under the interim services agreement, Existing Sub may be required by the
Company to provide up to 40 hours of services per month until May 15, 1999.
Also, under the Sale Agreement, the Company has also agreed to enter into a
shareholder agreement concerning the shares of common stock of Existing Sub, in
a form acceptable to the Buyer. Terms of the shareholder agreement have not been
finalized; however, such terms may limit the rights of the Company as a
shareholder of Existing Sub and may limit the transferability of the shares of
Existing Sub. In addition, in accordance with the terms of the Sale Agreement,
other investors that are not yet identified, including other significant
29
<PAGE>
investors, may countersign the Sale Agreement prior to the closing of the Sale
and participate in the Sale together with Swander Pace, Swander Pace affiliates
and Silver Brands. Also, as mentioned above, it is currently anticipated that
the Company will enter into a pledge agreement with Existing Sub's lender
whereby the Company pledges its retained stock in Existing Sub as security for
the financing to be provided to Existing Sub.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS
THAT THE SHAREHOLDERS VOTE TO APPROVE AND ADOPT THIS PROPOSAL
PROPOSAL NO. 2 - AMENDMENT OF THE CERTIFICATE
OF INCORPORATION TO EFFECT A REVERSE STOCK SPLIT
GENERAL
The Board of Directors has adopted, subject to shareholder approval, a
resolution proposing that the Company amend its Certificate of Incorporation to
reduce the outstanding number of shares of Common Stock and effect a reverse
stock split (the "Reverse Stock Split") pursuant to which each ten shares of
Common Stock ("Old Common Stock") will become one share of the Company's then
outstanding common stock ("New Common Stock").
The Certificate of Incorporation presently authorizes 20,000,000 shares
of Common Stock, of which 15,361,553 shares were issued and outstanding on the
Record Date, excluding 26,995 shares held in the Company's treasury. As of
September 30, 1998, the Company was obligated to issue 4,325,000 shares to
former employees, shareholders, and others related to fulfillment of a price
guarantee. In addition, as of the Record Date, approximately 1,086,000 shares
of Common Stock were subject to issuance upon exercise of outstanding warrants
and stock options.
PURPOSES OF THE REVERSE STOCK SPLIT
The closing price per share of the Common Stock as reported on AMEX on
November 24, 1998, the last trading day prior to the date of this Proxy
Statement, was $3/16. The Board of Directors believes that the current low per
share price of the Common Stock has had a negative effect on the price and
marketability of existing shares, the amount and percentage (relative to share
price) of transaction costs paid by individual shareholders and the potential
ability of the Company to raise capital by issuing additional shares. Reasons
for these effects include internal policies of certain institutional investors
which prevent the purchase of low-priced stocks, the fact that many brokerage
houses do not permit low-priced stocks to be used as collateral for margin
accounts or to be purchased on margin and a variety of brokerage house policies
and practices which tend to discourage individual brokers within those firms
from dealing in low-priced stocks.
In addition, since brokers' commissions on the low-priced stocks generally
represent a higher percentage of the stock price than commissions on higher
priced stocks, the current share price of the Common Stock can result in
individual shareholders paying transaction costs which are a higher percentage
of the share price than would be the case if the share price were substantially
higher. The Board of Directors also believes that this factor limits the
willingness of certain institutional investors to purchase the Common Stock.
The Board of Directors believes that the proposed Reverse Stock Split will
enhance the Company's flexibility in the future for financing and capitalization
needs. There can, however, be no assurance that any of the foregoing effects
will occur.
THERE CAN BE NO ASSURANCE THAT THE TOTAL MARKET CAPITALIZATION OF THE
COMMON STOCK AFTER THE PROPOSED REVERSE STOCK SPLIT WILL BE EQUAL TO THE TOTAL
MARKET CAPITALIZATION BEFORE THE PROPOSED REVERSE STOCK SPLIT OR THAT THE MARKET
PRICE FOLLOWING THE REVERSE STOCK SPLIT WILL EITHER EXCEED OR REMAIN IN EXCESS
OF THE CURRENT MARKET PRICE.
30
<PAGE>
EFFECTIVENESS OF THE REVERSE STOCK SPLIT
If the proposal to approve the Reverse Stock Split is authorized by the
shareholders, the Reverse Stock Split would become effective at such time as the
Company files a Certificate of Amendment (the "Certificate of Amendment") of the
Certificate of Incorporation of the Company with the Secretary of State of
Oklahoma (the "Effective Date"). Even if the Reverse Stock Split is approved by
the shareholders, it is within the discretion of the Board of Directors to not
carry out the Reverse Stock Split. Upon the filing of the Certificate of
Amendment, all of the Old Common Stock will be converted into New Common Stock
as set forth in the Certificate of Amendment. The number of shares of New
Common Stock will be rounded up to the nearest whole share as fractional shares
will not be issued. From and after the Effective Date, certificates
representing shares of Old Common Stock shall be deemed to represent only the
right to receive shares of New Common Stock to which an individual shareholder
is entitled.
CERTIFICATES AND FRACTIONAL SHARES
As soon as practicable after the Effective Date, the Company will request
all shareholders to return their stock certificates representing issued shares
of Old Common Stock outstanding on the Effective Date ("Old Certificates") in
exchange for certificates representing the number of whole shares of New Common
Stock into which the shares of Common Stock have been converted ("New
Certificates") as a result of the Reverse Stock Split. Each shareholder will
receive a letter of transmittal from the Company's transfer agent, Continental
Stock Transfer & Trust Company (the "Transfer Agent"), containing instructions
on how to exchange certificates. SHAREHOLDERS SHOULD NOT SUBMIT THEIR OLD
CERTIFICATES TO THE TRANSFER AGENT UNTIL THEY RECEIVE THESE INSTRUCTIONS. In
order to receive New Certificates, shareholders must surrender their Old
Certificates pursuant to the Transfer Agent's instructions, together with the
properly executed and completed letter of transmittal and such evidence of
ownership of such shares as the Company may require.
Beginning with the Effective Date, each Old Certificate until surrendered
and exchanged as described above, will be deemed for all corporate purposes to
evidence ownership of the whole number of shares of the Common Stock into which
the shares evidenced by such Old Certificates have been amended.
No fractional shares of New Common Stock will be issued as a result of the
Reverse Stock Split. In lieu of receiving fractional shares, shareholders who
hold a number of shares not evenly divisible immediately prior to the Reverse
Stock Split will be entitled to receive a whole share of New Common Stock for
any fractional share at no additional cost. The number of shares of New Common
Stock to be issued in connection with rounding up such fractional interests is
not expected by management of the Company to be material.
CERTAIN EFFECTS OF THE REVERSE STOCK SPLIT
The principal effect of the Reserve Stock Split will be to decrease the
number of shares of Common Stock outstanding from 15,361,553 to approximately
1,536,155, before giving effect to the rounding up of fractional shares referred
to above. In addition, the Board of Directors will take appropriate action to
proportionately adjust the number of Common Shares issuable upon exercise of
outstanding warrants, options, other convertible securities and other contingent
share issuances, and to adjust the related exercise price, to reflect the
Reverse Stock Split. As a result, following the Effective Date, the number of
Common Shares issuable upon the exercise of outstanding warrants, options, other
convertible securities and contingent share issuances will be reduced from
20,772,553 to 2,077,255 shares. The authorized number of shares of Common Stock
will remain at 20,000,000 shares.
The shares of New Common Stock will be fully paid and nonassessable. The
relative voting and other rights of holders of the New Common Stock will not be
altered by the Reverse Stock Split. The Company does not anticipate that the
Reverse Stock Split will result in any material reduction in the number of
holders of Common Stock. Following the Reverse Stock Split certain
shareholders' holdings may include an "odd lot" number of shares. In general,
it is
31
<PAGE>
somewhat more difficult to purchase or sell an oddlot number of shares, and
transactions in odd lots are subject to higher commissions and other transaction
costs applicable to so-called round lots.
The Reverse Stock Split will not change the par value of shares of Common
Stock. However, under applicable Oklahoma law, the total capital of the Company
will not be reduced as a result of the Reverse Stock Split, even though the
aggregate par value of all issued and outstanding shares will be reduced to one-
tenth of the aggregate par value prior to the Reverse Stock Split. Accordingly,
the Reverse Stock Split will not change surplus available for dividends.
The Board considered reducing the number of shares of authorized Common
Stock in connection with the Reverse Stock Split but determined that the
availability of additional shares may be beneficial to the Company in the
future. The availability of additional authorized shares will allow the Board
to issue shares for corporate purposes, if appropriate opportunities should
arise, without further action by shareholders or the time delay involved in
obtaining shareholder approval (unless required by law or regulation). Such
purposes could include effecting future Business Combinations, if any, or
meeting requirements for working capital or capital expenditures through the
issuance of shares. To the extent that any additional shares (or securities
convertible into Common Stock) may be issued on other than a pro rata basis to
current shareholders, the present ownership position of current shareholders may
be diluted. The Common Stock has no preemptive rights. In addition, if another
party should seek to acquire or take over control of the Company, and the Board
does not believe such transaction is in the best interest of the Company and its
shareholders, some or all of the authorized shares could be issued to another
party to try to block such transaction.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following description of material federal income tax consequences is
based on the Internal Revenue Code of 1986, as amended (the "Code"), the
applicable Treasury Regulations promulgated thereunder, judicial authority and
current administrative rulings and practices as in effect on the date of this
Proxy Statement. This discussion does not discuss consequences which may apply
to special classes of taxpayers (e.g., nonresident aliens, broker-dealers, or
insurance companies). Shareholders are urged to consult their own tax advisors
to determine the particular tax consequences to them.
The Company has not sought and will not seek a ruling from the Internal
Revenue Service or an opinion of counsel regarding the federal income tax
consequences of the Reverse Stock Split. However, the Company believes that
because the Reverse Stock Split is not part of a plan to periodically increase a
shareholder's proportionate interest in the assets or earnings and profits of
the Company, the Reverse Stock Split will have the following effects:
The amendment of shares of Old Common Stock to become shares of New Common
Stock should not result in recognition of gain or loss (except in the case of
the portion of a whole share of New Common Stock attributable to the rounding up
to the nearest whole number of shares of New Common Stock in lieu of fractional
shares as described above). The holding period for the shares and portions of
shares of New Common Stock will include the shareholder's holding period for its
shares of Old Common Stock, provided that the shares of Old Common Stock were
held as a capital asset. The portion of the shares of New Common Stock
attributable to rounding up for fractional shares will have a holding period
commencing on the Effective Date. The adjusted basis of the shares of New
Common Stock will be the same as the adjusted basis of the shares of Old Common
Stock, increased by the income or gain attributable to the rounding up to a
whole number of shares as described herein. Shares of New Common Stock
attributable to the rounding up to the nearest whole number of shares will be
treated for tax purposes as if the fractional shares constitute a
disproportionate dividend distribution. Such shareholders should generally
recognize ordinary income to the extent of earnings and profits of the Company
allocated to the portion of each share of New Common Stock attributable to the
rounding up process, and the remainder of the gain, if any, shall be treated as
received from the exchange of property.
32
<PAGE>
MISCELLANEOUS
The Board of Directors may abandon the proposed Reverse Stock Split at any
time before or after the Meeting and prior to the filing of the Certificate of
Amendment related thereto if for any reason the Board of Directors deems it
advisable to do so. In addition, the Board of Directors may make any and all
changes to the Certificate of Amendment that it deems necessary to file it with
the Oklahoma Secretary of State and give effect to the Reverse Stock Split.
RECOMMENDATION AND VOTE
Assuming the presence of a quorum, the proposal to amend the Company's
Certificate of Incorporation to effect the Reverse Stock Split requires the
favorable vote of the holders of a majority of the outstanding shares of Common
Stock entitled to vote at the Meeting, in person or by proxy. Proxies will be
voted for or against such approval in accordance with specifications marked
thereon and, if no specification is made, will be voted FOR such approval.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR
THE APPROVAL OF THE PROPOSAL TO AMEND THE COMPANY'S CERTIFICATE
OF INCORPORATION TO EFFECT THE REVERSE STOCK SPLIT
PROPOSAL NO. 3 - APPROVAL OF CONTROL SHARES
GENERAL
Lawrence D. Field, Chairman of the Board of Directors, beneficially owns
4,220,009, or 27.4%, of the issued and outstanding shares of the Company's
Common Stock. See "Principal Shareholders and Security Ownership of
Management." A portion of such shares were acquired in "control share
acquisitions" and are therefore deemed to be "control shares" pursuant to the
Oklahoma Control Shares Act under Sections 1145 to 1155 of the OGCA (the
"Control Shares Act"). Under the Control Shares Act, "control shares" have no
voting rights within certain ranges of voting power. Accordingly, Mr. Field is
deemed to hold voting power with respect to 3,072,310 shares (including
beneficial ownership), or less than one-fifth, of the Company's Common Stock.
When "control shares" are excluded from the total number of shares of Common
Stock entitled to vote on Proposals 1-2 and 4-6 contained herein, Mr. Field
would have effective control of 21.6% of the shares entitled to vote (as
discussed below, Mr. Field is not entitled to vote his shares with respect to
this proposal). The following discussion in this proposal is qualified in its
entirety by reference to the Control Shares Act.
This proposal requests that the shareholders approve the removal of all
restrictions under the Control Shares Act placed on "control shares" held by Mr.
Field, which includes the restoration of all voting power with respect to such
"control shares."
OKLAHOMA CONTROL SHARE PROVISIONS
Under the Control Shares Act, "control shares" are those issued and
outstanding shares that, when added to all of the other shares owned by a given
shareholder, have voting power that falls into one of the following three
ranges: (i) one-fifth or more but less than one-third, (ii) one-third or more
but less than a majority, or (iii) a majority. The range of voting power held
by a given shareholder is calculated from the number of shares he owns both of
record and beneficially. "Beneficial ownership" under the Control Shares Act
includes all shares that the shareholder has the right to acquire within 60
days.
Under the Control Shares Act, the acquisition of any control shares, or the
power to control the voting of any such shares, is a "control share
acquisition." There are twelve exceptions set forth in the Control Shares Act
whereby acquisitions of shares will not be deemed control share acquisitions.
One exception is for shares acquired prior to the
33
<PAGE>
effective date of a company's status as an "issuing public corporation," as
defined in the Control Shares Act. In addition, shares that were control shares
at time of their acquisition, but which have since fallen into a lower range of
voting power due to the issuance of additional shares by the Company, are
automatically restored to full voting power.
Accordingly, those shares that were held by Mr. Field prior to the time the
Company became an issuing public corporation in August of 1994 are not deemed
control shares and Mr. Field has voting power with respect to such shares. In
addition, all shares that were deemed control shares at the time they were
acquired by Mr. Field, but that have since had their respective voting power
diluted by additional issuances of the Company's Common Stock to less than one-
fifth of voting power, are no longer deemed to be control shares. All shares
acquired by Mr. Field that would presently give Mr. Field one-fifth or more of
the voting power of the Company are deemed control shares and Mr. Field has no
voting power over such shares.
NOTICE OF CONTROL SHARE ACQUISITION
Mr. Field has delivered an Acquiring Person Statement to the Company as
required by the Control Shares Act. A copy of the Acquiring Person Statement is
attached to this Proxy Statement as Appendix C.
PURPOSE OF APPROVAL OF CONTROL SHARES
If the shareholders vote to approve this proposal, such approval will lift
the voting restrictions placed on Mr. Field's control shares by the Control
Shares Act effective at midnight following the approval. In addition, such
approval will have the effect of waiving voting restrictions on any future
acquisitions of additional shares by Mr. Field within the entire range of "more
than one-third to less than a majority" of voting power. Such approval would
enable Mr. Field to acquire and have voting rights over additional shares that
make up less than a majority of the voting power of the Company's Common Stock.
However, such approval will not entitle Mr. Field to exercise voting rights over
control shares with respect to any of the proposals discussed in this Proxy
Statement.
If this proposal is not approved by the shareholders, the voting power of
the control shares will return automatically (i) if Mr. Field's voting power is
diluted by the Company's issuance of additional shares so that the control
shares make up less than one-fifth of the voting power, (ii) if the control
shares are transferred to another party in a transaction that does not
constitute a control share acquisition for the other party, or (iii) once three
years elapse following the date of the vote of the shareholders on this
proposal.
SHARES TO BE COUNTED IN DETERMINING QUORUMS AND MAJORITIES
Under the Control Shares Act, only "non-interested shares" may vote on the
issue of control share voting power. Solely with respect to the vote on this
proposal, all "interested shares" otherwise entitled to vote will be excluded
from determination of a quorum, denied the right to vote and omitted from the
calculation of a majority of the voting power. "Interested shares" include all
shares of the Company's Common Stock held by the following shareholders: (i)
Lawrence D. Field, as the owner of the control shares at issue; (ii) all
officers of the Company; and (iii) each employee of the Company who also serves
as a director.
NO APPRAISAL RIGHTS
Under the Control Shares Act, the shareholders of the Company will not have
the right to seek appraisal of their shares of Common Stock with respect to this
proposal.
SUMMARY OF THE CONTROL SHARES ACT NOT DEFINITIVE
Neither the discussion of the Control Shares Act or summaries of its
provisions set forth in this proposal purport to provide a complete statement of
the Control Shares Act or related provisions under Oklahoma law.
34
<PAGE>
RECOMMENDATION AND VOTE
This proposal will be approved if authorized by an affirmative vote of a
majority of the voting power entitled to be cast at the Meeting on this
proposal. The Board of Directors believes that the Control Shares Act was
intended to apply to hostile takeovers of Oklahoma companies, which is not the
situation in the case of Mr. Field's acquisition of shares of the Company's
Common Stock. The Board is not aware of any benefit to the Company or its
shareholders in restricting Mr. Field's voting power with respect to his shares
of the Company's Common Stock. The Board believes that fairness requires that
voting power be restored to such shares. Accordingly, the Board of Directors
strongly urges the shareholders to vote for the approval of this proposal.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS
THAT THE SHAREHOLDERS VOTE TO APPROVE AND ADOPT THIS PROPOSAL
PROPOSAL NO. 4 - ELECTION OF DIRECTORS
Shareholder action will be requested at the Meeting with respect to the
election of each of the members of the Board of Directors. The Amended and
Restated Bylaws (the "Bylaws") of the Company provide that the Board of
Directors shall consist of not less than one nor more than nine directors, as
determined from time to time by resolution of the Board of Directors. The term
of all of the members of the Board of Directors, consisting of Lawrence D.
Field, Gerald E. Milton, James K. Tolbert, Milton D. McKenzie, Sam L. Susser,
James H. Bankard and Timothy G. Bruer, will expire at the Meeting. Although the
number of directors is currently fixed at seven, Mr. Bankard has elected not to
seek re-election as a director. The Board position being vacated by Mr. Bankard
is not being filled at the Meeting. The Bylaws provide that any Board vacancies
may be filled by the affirmative vote of a majority of the remaining directors.
The Board of Directors has not yet identified anyone to fill the vacancy.
Accordingly, the accompanying proxy solicits your vote for only six directors.
The Board of Directors has nominated Lawrence D. Field, Gerald E. Milton,
James K. Tolbert, Milton D. McKenzie, Sam L. Susser and Timothy G. Bruer, for
re-election as directors. The persons named as proxies in the accompanying
proxy, who have been designated by the Board of Directors, intend to vote,
unless otherwise instructed in such proxy, for the election of Messrs. Field,
Milton, Tolbert, McKenzie, Susser and Bruer. Should any nominee named herein
become unable for any reason to stand for election as a director of the Company,
it is intended that the persons named in such proxy will vote for the election
of such other person or persons as the Board of Directors may recommend. The
Company knows of no reason why any of the nominees will be unavailable or unable
to serve. A plurality of the votes cast is required for the election of
directors.
35
<PAGE>
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR"
EACH OF THE FOLLOWING NOMINEES FOR DIRECTORS.
NOMINEES FOR DIRECTORS
TERM EXPIRES AT THE 1999 ANNUAL MEETING OF SHAREHOLDERS
Lawrence D. Field, age 38, the founder of the Company, has been a Director
and Chairman of the Board of Directors of the Company since its inception in
August 1990. He was also Chief Executive Officer of the Company from August
1990 to March 1997 and President of the Company from August 1990 to February
1994. Mr. Field has also served as President of Regent Private Capital Corp, an
investment company, since February 1990. From 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, age 41, joined the Company as a Director, Chief Executive
Officer and President in April 1997. Immediately prior to joining the Company,
Mr. Bruer served as Vice President/General Manager of the Culinary Division of
Nestle USA. He joined Nestle in 1992 as Vice President of Business Development.
From 1985 to 1992, he was a partner with Bain and Company, Inc., a national
consulting firm. Mr. Bruer graduated from Stanford University in 1979 with a
Bachelor of Arts degree in Economics and from the University of Chicago in 1985
with a Master of Business Administration degree.
Gerald E. Milton, age 55, has been a Director of the Company since January
1994, and served as President of the Company from February 1994 until March
1997. He also served as Chief Financial Officer of the Company from June 1993
until February 1995. From May 1989 to June 1993, Mr. Milton worked as an
independent consultant and investor. From August 1987 to October 1989, he served
as President and Chief Executive Officer of Engineered Films, Inc., a
manufacturer of industrial packaging films. From September 1980 to August 1986,
Mr. Milton was Chief Financial Officer of Linear Films, Inc., a manufacturer of
industrial packaging films. He graduated from Oklahoma State University with a
Bachelor of Science degree in Business and a Master of Business Administration.
James K. Tolbert, age 42, joined the Company as a Director in November
1990. Mr. Tolbert has been President of Tolbert Enterprises, Inc. in Tulsa,
Oklahoma, a company which owns and operates several restaurants in Oklahoma and
Texas, since April 1986. Prior to that time, he was a Land Manager of Texas Oil
& Gas Corp., an independent oil and gas company, for seven years. He has a
Bachelor of Business Administration--Management degree from the University of
Oklahoma.
Milton D. McKenzie, age 61, joined the Company as a Director in November
1990. He has been Chairman of the Board of Directors of GPM, Inc. and its
predecessors, the General Partner of CAPMAC, since October 1983. CAPMAC is an
investment company specializing in oil and gas exploration. From February 1970
to October 1983, he was President and/or Chairman of the Board of Directors of
Viking Petroleum, Inc., an oil and gas exploration and production company
located in Tulsa, Oklahoma. He has a Juris Doctor from the University of Denver
Law School and an Engineering degree from Tulsa University.
Sam L. Susser, age 35, joined the Company as a Director in November 1990.
In 1995, Mr. Susser became President and Chief Executive Officer of SSP, a joint
venture of The Circle K Corporation and The Southguard Corporation
("Southguard"), which operates 173 convenience stores. Mr. Susser has been
Chief Executive Officer of Southguard since January 1991, and served as Vice
President, General Manager and Chief Financial Officer of Southguard from its
founding in 1988 until January 1991. Prior to 1988, he was with the investment
banking firm of Salomon Brothers Inc in New York, New York, for three years. Mr.
Susser formed a new company, which he owns,
36
<PAGE>
Susser Holding, LLC which acquired Southguard Corporation, SSP Partners and its
affiliates on January 29, 1998. Mr. Susser graduated from the University of
Texas at Austin in 1985 with a Bachelor of Business Administration in Finance
degree.
One Board position will be vacant following the Meeting.
COMPENSATION OF DIRECTORS
Each Director of the Company is reimbursed for expenses incurred in
attending meetings of the Board of Directors and meetings of committees of the
Board of Directors. The Directors currently do not receive any additional fees
for their services as Directors of the Company. The Company's Bylaws provide
that the Company shall indemnify its Directors and officers to the fullest
extent permitted by Oklahoma law. The Company has also entered into
indemnification agreements with and carries liability insurance on behalf of all
of its Directors.
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
During 1997, the Board of Directors held four meetings. Each of the
incumbent Directors who served as a Director during 1997 attended at least 75%
of the total number of meetings on the Board of Directors and meetings of
committees on which he served during his tenure as a Director. In addition, the
Board of Directors took action six times during 1997 by unanimous written
consent. The Board of Directors had previously established an Executive
Committee, an Audit Committee, a Compensation Committee and a Stock Option
Committee; however, as of February 1996, the Board of Directors determined that
the Executive Committee was no longer necessary and such committee was
dissolved.
The Audit Committee was composed during 1997 of Messrs. Susser, Bankard and
McKenzie. The Audit Committee is comprised entirely of independent Directors
and recommends to the Board of Directors the appointment of the Company's
independent public accountants. The Audit Committee reviews the plan and scope
of the annual audit of the Company's financial statements, as well as the
Company's significant accounting policies and other related matters. The Audit
Committee met once during 1997. All of the members of the Audit Committee were
present at such meeting.
The Compensation Committee was composed during 1997 of Messrs. Susser,
Tolbert and Bankard. The Compensation Committee makes recommendations to the
Board of Directors regarding the compensation of executive officers of the
Company and administers the Company's employee benefit plans other than the
Companies 1994 Stock Option Plan. During 1997, all of the members of the
Compensation Committee were independent Directors. The Compensation Committee
met once during 1997. Two of the three members of the Compensation Committee
were present at such meeting.
The Stock Option Committee was composed during 1997 of Messrs. Susser,
Tolbert and Bankard. The Stock Option Committee administers the Company's 1994
Stock Option Plan and is comprised entirely of independent Directors. The Stock
Option Committee met once during 1997. All of the members of the Stock Option
Committee were present at such meeting.
The Company does not have a standing Nominating Committee. Nominations of
candidates for election as Directors of the Company may be made at a meeting of
shareholders by or at the direction of the Board of Directors or by any
shareholder entitled to vote at such meeting. The Company's Bylaws provide that
the annual meeting of shareholders is to be held each year on the second Friday
in May.
37
<PAGE>
PROPOSAL NO. 5 - RATIFICATION OF APPOINTMENT OF
INDEPENDENT PUBLIC ACCOUNTANTS
Upon the recommendation of the Audit Committee, the Board of Directors has
appointed Arthur Andersen LLP as the independent public accountants of the
Company for the fiscal year ending December 31, 1998. Arthur Andersen LLP has
been the independent public accountants of the Company since 1992. A proposal
will be presented at the Meeting asking the shareholders to ratify the
appointment of Arthur Andersen LLP as the Company's independent public
accountants. If the shareholders do not ratify the appointment of Arthur
Andersen LLP, the Board of Directors will reconsider the appointment.
The affirmative vote of a majority of the shares present in person or by
proxy at the Meeting and entitled to vote is required for the adoption of this
proposal.
A representative of Arthur Andersen LLP will be present at the Meeting.
Such representative will be given the opportunity to make a statement if he
desires to do so and will be available to respond to appropriate questions.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE RATIFICATION
OF ARTHUR ANDERSEN LLP AS INDEPENDENT PUBLIC ACCOUNTANTS FOR 1998.
PROPOSAL NO. 6 - ADJOURNMENT OR POSTPONEMENT OF THE MEETING
In the event the number of shares of Common Stock represented at the
Meeting is insufficient to constitute a quorum or, if a quorum is present, the
Company fails to receive a sufficient number of votes to approve any or all of
the proposals set forth in this Proxy Statement, the Company proposes to adjourn
or postpone the Meeting for a period of not more than 30 days for the purpose of
soliciting additional proxies. Proxies initially cast in favor of any of the
proposals set forth herein will, unless revoked, be voted in favor of the
approval of such item at any Meeting subsequently convened within 30 days of the
initial date of the Meeting.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS
A VOTE FOR THE APPROVAL OF THE ADJOURNMENT OR POSTPONEMENT
OF THE MEETING TO SOLICIT ADDITIONAL PROXIES
SELECTED HISTORICAL AND UNAUDITED PRO FORMA FINANCIAL DATA
The summary below sets forth selected historical financial data and
selected unaudited pro forma financial data. The financial data set forth below
should be read in conjunction with the financial information included elsewhere
in this Proxy Statement and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
SELECTED HISTORICAL FINANCIAL DATA
The selected historical financial data presented below for the years ended
December 31, 1997 through December 31, 1993 are derived from the consolidated
financial statements of the Company, which statements have been audited by
Arthur Andersen LLP, independent public accountants. The selected historical
financial data presented below for the nine month periods ended September 30,
1998 and 1997 are unaudited. The pro forma financial data presented in the table
below are derived from the unaudited pro forma consolidated financial statements
of the Company included elsewhere in the Proxy Statement. No dividends have been
paid for any of the periods presented.
38
<PAGE>
<TABLE>
<CAPTION>
HISTORICAL(A) PRO FORMA(B)
--------------------------------------------------------------------------------- ------------
YEAR
NINE MONTHS ENDED
ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31, DECEMBER 31,
---------------------- ---------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993 1997
---------- ---------- ---------- --------- --------- ---------- ----------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
SUMMARY OF OPERATIONS
DATA:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues.................... $15,608 $ 17,712 $ 23,890 $24,524 $20,940 $15,555 $ 3,023 $15,120
Income (loss) from
continuing operations...... (6,528) (10,997) (11,822) (5,130) (3,278) (1,971) (2,021) (9,475)
PER SHARE DATA:
Earnings per share:
Continuing operations.... (0.47) (1.36) (1.25) (0.80) (0.56) (0.70) (0.64) (1.00)
Net loss................. (0.64) (1.75) (1.95) (1.17) (0.81) (0.78) (0.57) (1.71)
Book value per share........ (1.16) (0.55) (0.77) 0.18 0.89 0.33 (0.53) (1.09)
Weighted average shares
of common stock
outstanding.............. 13,882 8,095 9,475 6,385 5,833 2,944 3,219 9,475
BALANCE SHEET DATA:
Total assets................ 14,320 32,140 20,908 37,776 22,637 20,766 11,659 17,879
Total liabilities other than
long-term debt........... 30,487 23,556 22,880 23,194 9,125 6,437 5,033 22,880
Long-term debt.............. -- 13,049 5,360 13,442 8,294 4,552 8,334 5,360
</TABLE>
______________________
(a) 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. All years have been restated to reflect the discontinued operations
of the Company's snack tray and catalog division.
(b) The pro forma amounts represent the results of the Company's operations as
if the Company's bagel bar business had been sold as of January 1, 1997.
The pro forma income amounts do not reflect any impact from the use of the
ultimate proceeds to be received from the sale of such bagel bar business.
See "Recent Developments." See also "Index to Pro Forma Financial
Statements and Financial Statements" at pages F-2 and F-3.
SELECTED UNAUDITED PRO FORMA FINANCIAL DATA
The selected unaudited pro forma financial data gives effect to the
proposed Sale and the disposition of the Company's bagel bar business, assuming
that such transactions had been effective for all periods presented. The
selected unaudited pro forma financial data do not necessarily indicate the
operating results that would have occurred had such transactions been
consummated on the dates for which such transactions are being given effect, nor
do they necessarily indicate future operating results. The pro forma financial
data presented in the table below are derived from the unaudited pro forma
consolidated financial statements of the Company included elsewhere in the Proxy
Statement. See "Index to Pro Forma Financial Statements and Financial
Statements."
39
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA(b)
--------------------------------------------
NINE MONTHS
ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
----------------------------
1998 1997 1996 1995
-------------- -------- -------- --------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
SUMMARY OF OPERATIONS
DATA(A):
Revenues........................ $ -- $ 373 $ 2,713 $ 7,314
Income (loss) from continuing
operations.................... (1,526) (6,350) (2,596) (1,619)
BALANCE SHEET DATA:
Total assets.................... 7,403 16,687 24,400 25,585
Total liabilities other than
long-term debt............... 14,803 19,543 18,836 8,408
Long-term debt.................. -- -- -- --
</TABLE>
______________________
(a) All years have been restated to reflect the Company's specialty baked
goods, snack tray and catalog operations as discontinued operations. The
pro forma income amounts do not reflect any impact from the use of the net
proceeds from the Sale. No general corporate overhead was allocated to the
discontinued operations.
(b) The pro forma amounts represent the combined impact of the Sale and the
disposition of the Company's bagel bar business which was sold on June 12,
1998. See "Recent Developments." See also "Index to Pro Forma Financial
Statements and Financial Statements" at pages F-4 through F-8.
COMPARATIVE PER SHARE INFORMATION
The following table sets forth certain comparative per share information
for the Company. The "Prior to the Sale" information is historical and pro
forma information, with the pro forma information giving effect to the sale of
the Company's bagel bar business. The "Assuming Sale" information is pro forma
information giving effect to the Sale on a per share basis. No dividends were
paid for the period presented.
<TABLE>
<CAPTION>
Prior to the Sale
------------------------------------------- Assuming Sale*
Historical Pro Forma Per Share
------------------------------------------- --------------
<S> <C> <C> <C>
Book value:
As of December 31, 1997................. (.77) (1.09) (.30)
Income (loss) from continuing operations:
Year ended December 31, 1997............ (1.25) (1.00) (.67)
</TABLE>
__________________________
* Also gives effect to the sale of the bagel bar business, as if such
transaction had occurred on January 1, 1997. See "Index to Pro Forma Financial
Statements and Financial Statements."
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 Historical Financial Data" and the
Company's Consolidated Financial Statements and notes thereto. As discussed in
the accompanying Consolidated Financial Statements, the Company has discontinued
all of its operating businesses, including its specialty baked goods segment,
its snack tray segment and its direct store delivery division. The specialty
baked goods segment is reflected as continuing operations because the Sale is
contingent upon approval
40
<PAGE>
of the Company's shareholders. The following tables present, as a percentage of
net sales, certain selected financial data for the Company for the periods
indicated:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------
1998 1997
--------- --------
<S> <C> <C>
Net Sales 100% 100%
Gross Profit 28 17
Operating Expenses 53 64
Interest and Other 17 15
Loss from Continuing Operations (42) (62)
Loss from Discontinued Operations (16) (18)
Net Loss (58) (80)
</TABLE>
<TABLE>
<CAPTION>
For the Years Ended
December 31,
----------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Net Sales 100% 100% 100%
Gross Profit 18 22 24
General and Administrative 17 18 17
Selling and Marketing 19 17 19
Unusual Charges 15 1 --
Depreciation and Amortization of Goodwill 4 3 3
and Other Intangibles
Interest and Other 14 4 1
Loss from Continuing Operations (50) (21) (16)
Loss from Discontinued Operations (28) (10) (7)
Net Loss (77) (30) (23)
</TABLE>
PERIOD TO PERIOD COMPARISONS
Nine Months Ended September 30, 1998 Compared to the Nine Months Ended
September 30, 1997
Net Sales. Total net sales decreased 12% from $17,712,000 to $15,608,000.
The decrease in the specialty baked goods segment was due to lower sales from
the Company's bagel bar brand due to its sale on June 12, 1998, offset by higher
biscotti brand sales over the same period of 1997. Biscotti sales increased
$3,054,000 from $9,741,000 to $12,795,000 while bagel bar sales decreased
$4,613,000 from $7,283,000 to $2,670,000. Sales from the Maxi-Crisp product
lines also decreased $688,000.
Gross Profit. Gross profit increased from $3,015,000 to $4,299,000, an
increase of 43%. Gross profit as a percentage of net sales increased from 17%
to 28%. This increase was a result of an increase in gross margins from
biscotti brand sales from $2,161,000 to $3,556,000, offset by the decrease in
margin from the sale of the Company's bagel bar brand. As a percentage of
sales, biscotti gross margins increased from 22% to 28%.
41
<PAGE>
General and Administrative. General and administrative expenses decreased
from $6,751,000 to $1,923,000, a decrease of 72% and decreased as a percentage
of net sales from 38% to 12%. The decrease was due to the 1997 expense of
$2,055,000 for an employment agreement buyout of the three former owners of the
Company's Nonni's Biscotti brands discussed above, and a $1,000,000 charge
during the second quarter of 1997 as a reserve provision on a note receivable
from the 1996 sale of the Gift and Gourmet business. In addition, the Company
incurred in 1997 approximately $450,000 in consulting fees in the course of
preparing its strategic operating plan for 1998 and beyond. In addition, general
and administrative expenses decreased $144,000 due to the sale of the bagel bar
business in June of 1998.
Selling and Marketing. Selling and marketing expense decreased from
$3,773,000 to $2,636,000, a decrease of 30% and decreased as a percentage of net
sales from 21% to 17%. This decrease in expense was due to lower demonstration
expenses associated with the bagel bar product brands, as this brand was sold in
June 1998, and lower sales and marketing personnel costs of approximately
$100,000.
Depreciation and Amortization of Intangibles. Amortization of goodwill and
other intangibles decreased 33% to $563,000 when compared to the same nine
months of 1997. The decrease is due to the sale of the bagel bar business in
June, 1998.
Interest and Other. Interest and other expenses increased from $2,643,000
to $2,676,000, an increase of $33,000. Of the 1997 amount, $1,150,000 related
to 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 that the
debentures are held by the debenture holder. In addition, approximately
$260,000 of deferred financing fees associated with the first quarter of 1997
Regulation S financing were expended in the third quarter of 1997 due to the
conversion of the debentures to common stock. These items were offset in 1998
due to increased levels of borrowings.
Loss from Continuing Operations. Losses from continuing operations
decreased from $10,997,000 to $6,528,000, a decrease of $4,469,000. The
decrease in net loss is due to the increase in gross profit from the biscotti
business, the decrease in operating expenses to the sale of the bagel bar
business in June 1998, and the non-recurring expenses related to the employment
agreement termination and Regulation S Debentures recorded in 1997.
Loss from Discontinued Operations. Losses from discontinued operations
decreased from $3,189,000 to $2,378,000, a decrease of $811,000. During the
fourth quarter of 1996, the Company made the decision to sell its distribution
business located in southern California and in the second quarter of 1997, a
decision was made to sell its catalog division located in Palestine, Texas. In
the fourth quarter of 1997, the Company made the decision to divest its snack
tray division. The sale of the catalog division closed in the third quarter of
1997. The sale of the distribution business in southern California closed in
the third quarter of 1998. Therefore, the results from these businesses for
comparable quarters are shown as discontinued operations.
Net Loss. The Company's net loss decreased from $14,186,000 to $8,906,000,
a decrease of $5,280,000 due to the reasons discussed above.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Net Sales. Total sales for 1997 decreased slightly from $24,524,000 to
$23,890,000. However, during this period Nonni's biscotti sales increased 14%
from $12,903,000 to $14,747,000 as the Company's wholesale club sales continue
to enjoy double-digit growth. In addition, the Company introduced new products
into the grocery, vending, and convenience store channels. Bagel bar sales also
increased over the prior year by 25% from $6,793,000 to $8,474,000, a portion of
which was due to the acquisition of certain assets of The Bagel Place, Inc. in
August 1996 and due to the Company expanding its product offering into the
wholesale club channel. Offsetting these increased
42
<PAGE>
sales were sales declines in pound cakes of $1,818,000, a decrease in sales of
crispy marshmallow square treats of $1,779,000 and other decreases of $562,000.
Gross Profit. Gross profit decreased by 19% from $5,438,000 to $4,397,000
and decreased as a percent of net sales from 22% to 18%. This decline was
driven by a decrease in crispy marshmallow square treats of $374,000 caused by
lower sales volumes in 1997, lower gross margin from bagel bar sales of
$233,000, and lower gross margin from pound cakes of $90,000. The Company
believes that changes made in late 1997 and in the first quarter of 1998 have
improved both the biscotti and bagel bar gross margins over the full year 1997
level. These changes include reducing fixed plant overhead, repositioning the
bagel bar program with wholesale clubs, rolling out new products of biscotti in
the grocery, vending, and convenience store channels, and improvements in the
Company's purchasing and logistics to capture savings throughout the supply
chain.
General and Administrative. General and administrative expenses decreased
by $391,000 from $4,333,000 to $3,942,000 and decreased from 18% to 17% of net
sales. This decline was primarily in direct general and administrative expenses
associated with the two manufacturing plants which decreased by $382,000 or 29%
due to plant consolidations in late 1996 that reduced the Company's four
manufacturing plants to two plants.
Selling and Marketing. Selling and marketing expenses increased by 8%
from $4,111,000 to $4,435,000 and increased from 17% to 19% of net sales. This
increase was due to higher demonstration expenses associated with the Company's
bagel bar program with wholesale club customers. Offsetting this increase was
lower selling and marketing expenses associated with biscotti, pound cakes, and
lower corporate selling and marketing expenses.
Unusual Charges. Operating income for 1997 has been reduced for unusual
items of $3,500,000 compared to $344,000 for 1996 and increased as a percentage
of net sales from 1% to 15%. These charges included a $1,000,000 reserve
against a note receivable arising from the 1996 sale of the Company's Gift and
Gourmet business, $2,050,000 related to the settlement of three employment
agreements with the former owners of Nonni's biscotti, and $450,000 related to a
consulting study which took place in 1997 which ultimately resulted in the
Company's decision to divest the mail order catalog business, the snack tray
business, and other smaller non-strategic related business activities.
Depreciation and Amortization of Goodwill and Other Intangibles.
Depreciation and amortization of goodwill and other intangibles increased by
$227,000 to $1,057,000, or 27% and increased from 3% to 4% of net sales.
Depreciation included in cost of goods sold was $638,000 in 1997 and $355,000 in
1996.
Interest and Other. Interest and other expenses increased by $2,334,000
to $3,285,000 and increased as a percent of net sales from 4% to 14%. This
increase was caused by certain factors including a non-cash interest charge in
the first quarter of $1,150,000 from a Regulation S offering.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Net Sales. Total sales for 1996 increased by $3,584,000 to $24,524,000, an
increase of 17%. Sales from businesses acquired accounted for $2,133,000 of the
increase. The Company acquired certain assets of The MarveLoaf Corp. in January
1996 and certain assets of The Bagel Place, Inc. in August 1996. Sales were
higher primarily because the Company's biscotti sales increased 77% over the
1995 level (an increase of $5,595,000) and sales from the 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
$3,372,000 when 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.
Gross Profit. Gross profit increased by 8% from $5,054,000 to $5,438,000
and decreased as a percentage of net sales from 24% to 22% due to a number of
factors, including higher than anticipated manufacturing costs during
43
<PAGE>
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 are included in cost of goods sold.
General and Administrative. General and administrative expenses increased
by $754,000 to $4,333,000 and increased as a percentage of net sales from 17% to
18%. This decrease as a percentage of net sales was a result of the Company
centralizing certain general and administrative functions with the plant
consolidation program discussed above. 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 $227,000 or
6% and decreased slightly as a percentage of net sales from 19% to 17%.
Unusual Charges. As a result of the Company's plant consolidation program
in 1996, the Company incurred $344,000 of costs that management believes are
non-recurring in nature. These expenses were associated with the plant shut-down
and the consolidation program, including severance, rent expense and other costs
associated with closing these facilities. These expenses represent 1% of net
sales in 1996.
Depreciation and Amortization and Goodwill and Other Intangibles.
Depreciation and amortization increased from $633,000 to $829,000, an increase
of 31% while remaining at 3% of net sales. This increase relates primarily to
the acquisitions and related goodwill discussed above. Other depreciation
expense included in cost of goods sold above was $355,000 in 1996 and $252,000
in 1995.
Interest and Other. Interest expense increased from $236,000 to $951,000,
an increase of $715,000. 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 From Discontinued Operations. Operating losses from discontinued
operations increased from 7% to 10% of net sales, an increase of $894,000. 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.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used by operations was $2,550,000 for the nine months ended
September 30, 1998. This compares to $5,357,000 of cash used in operations for
the nine months ended September 30, 1997. Net cash provided by investing
activities was $347,000 compared to $31,000 provided by investing activities for
the comparable period. Net cash provided by financing activities during the
first nine months ended September 30, 1998 totaled $2,147,000 from net
borrowings on long-term debt.
On April 10, 1998, the Company factored certain accounts receivable and
used a portion of those proceeds to reduce the amounts owed under the $7,000,000
revolving line of credit to $6,000,000. In addition, the remaining $6,000,000
on the revolving line of credit was assumed by the Company's Chairman and his
spouse, and in connection with such assumption, the bank released its
collateral. The Company simultaneously agreed to repay the $6,000,000 assumed
by the Company's Chairman and his spouse by delivering a note payable due in
August 1998; however, if excess cash is not available to repay the note, the due
date will be extended. The due date has been extended until
44
<PAGE>
the closing of the Sale. Interest is at local bank prime plus 1 1/2% and is
classified as current in the consolidated financial statements. As of September
30, 1998, the Company owes the Chairman and his spouse $14,340,000.
The Company has a term note with a bank. At September 30, 1998, $7,864,000
was outstanding and interest is at prime. Interest is payable monthly and
principal payments were to begin in August 1998, with a final balloon payment
due in May 1999 based on a five-year amortization. This note is collateralized
by the Company's machinery and equipment and is also guaranteed by the Company's
Chairman, his spouse and another family member of the Chairman. Interest and
principal payments have been suspended until the closing of the Sale.
The continuing losses from prior years and losses for 1998 combined with
start-up costs, acquisitions and consolidations, have required substantial
capital and have left the Company in a highly leveraged financial position as of
September 30, 1998 with most of the Company's debt classified as current. The
Company continues to experience cash flow difficulties in both funding current
working capital requirements and in meeting its commitments for trade payables
which include $4,609,000 of past due amounts as of September 30, 1998.
Management intends to use the proceeds from the Sale to pay bank debt, the
borrowings from the Company's chairman, other notes payable, trade payables and
other obligations of the Company. To the extent proceeds from the Sale are
insufficient to cover all of the Company's obligations, payments for the
borrowings from the Company's chairman will be delayed. Although the Company's
Unaudited Pro Forma Consolidated Balance Sheet dated September 30, 1998, which
gives effect to the Sale, indicates a total asset value for the Company of
approximately $7,400,000, such amount does not account for the proceeds for the
year-end payment or any earn-out payments to be received by the Company
following the Sale. Accordingly, subsequent to the closing of the Sale, and
upon receipt of all of the proceeds relating to the Sale and from all the other
asset divestitures, and after the application of all such proceeds to
outstanding debt, payables and accrued liabilities, the Company estimates that
its cash and notes receivable will total approximately $1,000,000. See "Conduct
of Business Following the Sale; Use of Proceeds."
The Company has also entered into short-term financing transactions with
Accord Capital Corporation ("Accord") and King Financial Corporation ("King")
pledging certain inventories and receivables as collateral. These transactions
are typically for periods of thirty days at high short-term interest rates.
Certain of these transactions are guaranteed by the Company's Chairman. As of
September 30, 1998, the Company owed $1,658,000 to Accord and $665,000 to King.
Prior to the closing of the Sale, it may be necessary for the Company to
utilize other short-term financings, which may or may not be available or
available only at high interest rates, to fund its operations.
Following the closing of the Sale, the Company plans to sell its remaining
operating assets and discontinue its business as a manufacturer and marketer of
branded speciality baked goods and as a retail snack tray operator, leaving the
Company with no further operator business. The management and administrative
staff of the company will be reduced to the minimum required to maintain the
Company's investments and to fulfill its reporting obligations.
In the event the Sale is not consummated, the Company would be forced to
find additional sources of financing in order to satisfy its debt obligations.
There can be no assurance that such additional financing would be available on
commercially reasonable terms and the inability to obtain financing on
commercially reasonable terms would have a material adverse effect on the
Company. In such event, the Company would most likely attempt to find another
buyer for the Biscotti Business. However, there can be no assurance that a sale
to another buyer could be consummated on terms similar to those provided for in
the Sale.
In addition, the failure to collect the $2,500,000 due to the Company from
GSBI for the sale of the Company's bagel bar manufacturing business would
adversely affect the Company's ability to consummate a Business Combination.
Such promissory note is due on November 30, 1998, but its due date may be
extended until March 31, 1999, by the
45
<PAGE>
payment to the Company of $500,000. The Company understands that it will be
necessary for GSBI to obtain financing in order to pay the amount due under such
promissory note. Consequently, there can be no assurance that the Company will
receive timely payment of such amount.
The Company has received notification from AMEX that the Company's Common
Stock is to be removed from listing on AMEX effective as of the close of the
exchange on December 11, 1998. As a result of the delisting of the Common Stock
from AMEX, the liquidity of the Common Stock may be impaired and holders may
encounter greater difficulty in selling shares should they desire to do so and
in obtaining accurate quotations as to the market value of the Common Stock. In
addition, it may prove more difficult for the Company to raise future capital to
fund working capital requirements or possible business acquisitions. It is
anticipated that upon removal of the Common Stock from listing on AMEX, trading
in the Common Stock will likely be conducted in the over-the-counter market in
the so-called "pink sheets" or the NASD's "Electronic Bulletin Board."
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 cost.
YEAR 2000
In the next two years, most companies will face a potentially serious
information systems problem because many software applications and operational
programs written in the past may not properly recognize calendar dates beginning
in the year 2000. This problem could force computers to either shut down or
provide incorrect data or information. The Company has not fully completed its
assessment of its year 2000 issues, but has made advances in the following
described areas. The Company began the process of identifying the changes
required to its computer programs and hardware in 1997. Software upgrades
designed to correct the year 2000 problem have been implemented. The Company is
currently evaluating the effect of the year 2000 problem on its hardware, and
will correct any problems during 1998 and 1999. The Company plans to complete
its assessment during 1998, and thus has not prepared contingency plans at this
point. The Company is also currently evaluating the effect of the year 2000
problem on its manufacturing equipment located within its bakery facilities.
The risk remains that certain bakery equipment may not function or will function
improperly because of electronic circuitry which is affected by the year 2000
problem. The Company does not anticipate the cost of these software and hardware
changes to have a material adverse impact on its business, financial condition,
or results of operation.
RECENT DEVELOPMENTS
In addition to the Biscotti Business, the Company's specialty baked goods
division included a bagel and bagel bar production business located in Santa
Ana, California. The primary products produced at the Santa Ana plant were
bagel bars, which are rectangular-shaped bread products made from bagel dough.
The Santa Ana plant also produced a line of pound cakes. The Company employed
approximately 42 persons at the Santa Ana plant.
During 1997, total revenues relating to the Santa Ana plant were $8,700,000
(37% of the Company's total revenues), but the Company incurred an operating
loss of $1,672,207 from such facility. Based upon the continuing losses from
the Santa Ana plant, as well as the Company's overall goal of divesting all of
its food industry assets, the Board of Directors determined that it was in the
best interests of the Company to sell the assets of the Santa Ana plant.
On June 12, 1998, pursuant to an Asset Sale Agreement dated as of such
date, the Company sold the assets relating to the Santa Ana plant to GSBI
(Gourmet Specialty Bakers, Inc). The total consideration for such sale was
$3,750,000, including $2,500,000, in the form of a promissory note which is due
and payable on November 30, 1998, and $1,250,000 in the form of an earn-out
agreement based on product sales and new distribution achievement in
46
<PAGE>
1998. The promissory note is secured by a lien on the assets sold and may be
extended until March 31, 1999, by the payment to the Company of $500,000. The
Company understands that it will be necessary for GSBI to obtain financing in
order to pay the amount due under such promissory note. Consequently, there can
be no assurance that the Company will receive timely payment of such amount. In
addition, the buyer assumed the liability of accounts payable in the amount of
$257,994, and it assumed contracts relating to the day to day operation of the
business. Pursuant to the earn-out agreement, the buyer will pay the Company
$500,000 if the buyer's sales of such products during 1998 reach $5,100,000 or
$1,000,000 if such sales reach $6,300,000. The additional cash payment rises
proportionately once sales reach $3,900,000. If such 1998 product sales are less
than $3,000,000, the Company will be required to pay $500,000 to the buyer. In
addition, the terms of such sale also provide for the payment by the buyer of
certain royalties of up to $250,000, relating to sales of products included
within the product lines which were sold.
In addition, on September 2, 1998, the Company sold the assets relating to
its food distribution business located in Santa Ana, California to Preferable
Sales & Distribution, LLC for a cash purchase price of $710,000, plus the
assumption by the buyer of liabilities relating to the day to day operations of
the business. All of the proceeds of such sale were used to satisfy existing
obligations of the food distribution business. The total revenues during 1997
relating to the food distribution business were $6,556,000.
DESCRIPTION OF BUSINESS
COMPANY HISTORY
The Company was formed in August of 1990, and in August of 1994 the Company
effected its initial public offering. The Company has made numerous
acquisitions since its inception and during 1997, the Company took steps to make
it a more narrowly focused specialty baked goods producer with an emphasis on
biscotti and bagel bars as follows:
. The Company sold its mail order catalog business, which produced and
sold specialty cakes and pies out of its plant in Palestine, Texas.
. The Company announced its intention to discontinue the operations of
its snack tray business and sold the operations of all but four of
its regional market centers.
. The Company outsourced the production of Mom's Best pound cakes.
. The Company exited the traditional round bagel business, whose market
has become more of a commodity business.
These steps positioned the Company to be a focused branded specialty baked goods
producer, having leading brands in niche product categories in growth markets.
The specialty baked goods business, however, is highly competitive and is
comprised of a few large companies, such as Sara Lee and Campbell Soup, and
numerous small regional companies, many of which have greater resources than the
Company. The Company's principal office is located at 6846 South Canton, Suite
110, Tulsa, Oklahoma 74136, and its telephone number is (918) 496-2400.
CURRENT BUSINESS
The Company is the nation's largest producer of biscotti, an Italian cookie
that is generally eaten with a cup of coffee, cappuccino, milk or espresso.
Biscotti products vary as to flavor, product content and packaging and
specifically due to customer preferences for flavor and package configuration.
The Company currently operates one leased bakery facility located in Tulsa,
Oklahoma (47,000 sq. feet) where all biscotti products are produced.
The Company's products are sold through multiple channels to serve
customers in grocery, club, food service, vending and convenience store
channels. Distribution is by direct store delivery, warehouse to warehouse and,
in some cases, to independent warehouses pending orders from customers.
47
<PAGE>
PROPERTY
The Company leases a 47,000 square foot facility in Tulsa, Oklahoma, where
all biscotti products are produced. This lease expires in 2006. The Sale
Agreement contemplates that either such lease will be assigned to Existing Sub,
or that Existing Sub will sublease the biscotti production facility from the
Company. If a sublease is utilized (rather than the lease being assigned), the
Company, as the primary lessee under the production facility lease, will remain
liable for any obligations under such lease until it expires. 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.
FUTURE BUSINESS STRATEGY
The Board of Directors has elected at this time not to liquidate the
Company and distribute its cash to the shareholders upon consummation of the
Sale Transaction, as the Board believes that the acquisition of a business with
growth potential has the potential to create a greater return for the
shareholders than the distribution of the Company's cash. Following the
consummation of the Sale Transaction, the Company will have no further operating
business, and most of the Company's current management team, including Timothy
G. Bruer, the President and Chief Executive Officer, would leave the Company and
join the entity operating the Biscotti Business. At such time, the Company will
reduce its management and administrative staff to the minimum required to
maintain the Company's investments and to fulfill its reporting obligations.
Lawrence D. Field, the Company's Chairman of the Board of Directors, will remain
with the Company and also serve as its Chief Executive Officer. In addition,
the Company has hired Jason Bryan as Chief Financial Officer of the Company
effective as of November 15, 1998. After the Sale occurs, the Board of
Directors intends to concentrate its efforts on exploring opportunities to
effect an acquisition, whether by merger, exchange or issuance of capital stock,
acquisition of assets or other similar Business Combination, with a business
which the Board believes may have significant growth potential.
The Company has begun investigating opportunities for a Business
Combination. However, such process is still in its initial stages. The Company
anticipates that accelerated efforts towards identifying a Business Combination
will commence following the closing of the Sale. At present, the Company has
not identified a specific opportunity or a specific industry in which it intends
to invest. Since announcing the Sale, the Company has received numerous
inquiries as to its interest in various opportunities. The Company intends to
utilize the talents and contacts of its Board of Directors in identifying and
pursuing opportunities for Business Combinations. In addition, while the
Company does not presently intend to engage an investment banker on an exclusive
basis for the purpose of finding a Business Combination, the Company may utilize
various business brokers on a non-exclusive basis in such process. The Company's
criteria for a Business Combination is still being developed, but it is
anticipated that the Business Combination would involve an industry with
consolidation opportunities, an industry having a market with sufficient size to
realize significant growth, a transaction which would allow the Company to
leverage its cash and a business of sufficient size to create interest among
institutional investors.
FORWARD LOOKING STATEMENTS
Matters discussed throughout this Proxy Statement 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 Proxy
Statement, 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, the successful consummation of the Sale, successful completion of a
Business Combination, general economic trends, continued acceptance of the
Company's products in the marketplace, competitive factors, manufacturing and
raw material costs, the Company's dependence
48
<PAGE>
upon third-party suppliers, and other risks detailed from time to time in the
Company's periodic reports filed with the Commission. The Company undertakes no
obligation to update publicly any forward-looking statements, whether as a
result of new information, future events or otherwise.
PRINCIPAL SHAREHOLDERS AND
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth certain information as of September 30,
1998, regarding the ownership of the Company's Common Stock by (a) all persons
known by the Company to be beneficial owners of more than five percent of such
stock, (b) each director and nominee for director of the Company, (c) each of
the executive officers of the Company named in the Summary Compensation Table
below, and (d) all executive officers and directors of the Company as a group.
Unless otherwise noted, the persons named below have sole voting and investment
power with respect to such shares.
<TABLE>
<CAPTION>
SHARES PERCENT
NAME OF OWNER OR IDENTITY OF GROUP BENEFICIALLY OWNED (1) OF CLASS (1)
- ---------------------------------- ---------------------- ------------
<S> <C> <C>
Lawrence D. Field
6846 South Canton, Suite 110
Tulsa, Oklahoma 74136 4,220,009 (2) 27.4
ML Oklahoma Venture Partners, Limited Partnership
5100 East Skelly Drive, Suite 1060
Tulsa, Oklahoma 74135 792,802 (3) 5.1
Milton D. McKenzie
5727 South Lewis, Suite 125
Tulsa, Oklahoma 74105 863,680 (4) 5.6
Timothy G. Bruer 275,000 (5) 1.8
Gerald E. Milton 95,880 (6) *
James H. Bankard 10,000 (7) *
Sam L. Susser 6,525 *
James K. Tolbert 43,800 *
Richard A. Hall 5,500 *
Robert W. Luttman 4,000 *
Dorvin D. Lively 14,493 (8) *
All executive officers and directors as a group (9 persons) 5,524,394 (9) 34.7
</TABLE>
* Represents less than 1% of the Common Stock outstanding.
(1) Shares of Common Stock which were not outstanding but which could be
acquired by a person upon exercise of an option or warrant within 60 days
of September 30, 1998, are deemed outstanding for the purpose of computing
the number of shares and the percentage of outstanding shares beneficially
owned by such person. However, such shares are not deemed to be
outstanding for the purpose of computing the percentage of outstanding
shares beneficially owned by any other person.
(2) Includes 721,063 shares owned by Regent Private Capital Corp. ("Regent"),
with respect to which Mr. Field has sole voting and investment control as
the controlling shareholder thereof, 42,424 shares purchasable pursuant to
presently exercisable stock purchase warrants held by Mr. Field and Regent,
22,500 shares owned by Legacy Investment Partnership in which Mr. Field
shares voting and investment control over such shares, and 7,875 shares
held by the Silverado Foods, Inc. 401(k) Plan which are allocated to the
account of Mr. Field.
(3) Includes 87,121 shares purchasable pursuant to presently exercisable stock
purchase warrants. MLOK Co., Limited Partnership is the managing general
partner of ML Oklahoma. Merrill Lynch Venture Capital Inc., an indirect
wholly owned subsidiary of Merrill Lynch & Co., Inc. is the sole general
partner of MLOK Co., Limited Partnership. Merrill Lynch & Co., Inc. is a
widely held public company. MLOK Co., Limited Partnership, Merrill Lynch
Venture Capital Inc. and Merrill Lynch & Co., Inc. may be deemed to be the
beneficial owners of these shares. Merrill Lynch & Co., Inc. disclaims
beneficial ownership of these shares.
49
<PAGE>
(4) Includes 191,250 shares owned by CAPMAC, with respect to which Mr. McKenzie
has sole voting and investment control as the general partner, 70,000
shares which may be acquired pursuant to common stock purchase warrants
held by CAPMAC, and 25,000 shares owned by GPM, Inc. with respect to which
Mr. McKenzie has sole voting and ownership control.
(5) Includes 50,000 shares which are restricted and vest over two years.
(6) Includes 6,061 shares purchasable pursuant to presently exercisable stock
purchase warrants.
(7) Includes 10,000 shares purchasable pursuant to presently exercisable stock
options.
(8) Includes 3,393 shares held by the Silverado Foods, Inc., 401(k) Plan which
are allocated to the account of Mr. Lively. Information relating to Mr.
Lively is as of September 25, 1998.
(9) Includes 538,485 shares purchasable pursuant to presently exercisable stock
options and stock purchase warrants and which may be acquired pursuant to
presently convertible debentures.
MARKET PRICE DATA AND DIVIDEND POLICY
The Company's Common Stock is traded on the AMEX under the symbol "SLV."
On November 18, 1998, the Company was notified that its Common Stock is to be
removed from listing on AMEX due to the failure of the Company to satisfy the
continued listing guidelines of AMEX. The Company's Common Stock will cease
trading on AMEX after December 11, 1998, at which time, trading of the Common
Stock will likely be conducted in the over-the-counter market in the so-called
"pink sheets" or the NASD's "Electronic Bulletin Board." The high and low
transaction prices for the calendar quarters indicated, as traded on the AMEX
are set forth below.
<TABLE>
<CAPTION>
STOCK PRICES
-----------------
FISCAL 1996 HIGH LOW
----------- -------- -------
<S> <C> <C>
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
FISCAL 1997
-----------
First Quarter $ 3 $1 7/8
Second Quarter $ 2 3/8 $15/16
Third Quarter $1 11/16 $ 3/4
Fourth Quarter $ 1 3/8 $ 1/2
FISCAL 1998
-----------
First Quarter $ 15/16 $ 1/8
Second Quarter $ 7/8 $ 1/4
Third Quarter $ 5/8 $ 1/4
Fourth Quarter (through November 24, 1998) $ 3/8 $ 1/16
</TABLE>
On July 6, 1998, the last full day of trading prior to the announcement by
the Company of the proposed Sale, the high and low transaction prices as
reported on the AMEX were $5/16 and $5/16, respectively. On April 6, 1998, the
last full day of trading prior to the announcement that the Company intended to
enter into an earlier transaction concerning the sale of the Biscotti Business,
the high and low transaction prices as reported on the AMEX were $3/4 and $5/8,
respectively. As of the Record Date the Company had 15,361,553 shares of Common
Stock outstanding, excluding 26,995 shares held in the Company's treasury, which
were held by approximately 1,500 beneficial owners, represented by 130
shareholders of record.
50
<PAGE>
The Company has never paid cash dividends on its Common Stock. If the Sale
is consummated, the Company intends to retain any earnings for effecting a
Business Combination, if any, 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.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth certain information with respect to the
compensation of the Company's Chief Executive Officer and each of the Company's
other executive officers whose cash compensation, based on salary and bonus,
exceeded $100,000 during 1997, for services in all capacities to the Company and
its subsidiaries during each of the Company's last three fiscal years. No
information is given as to any person for any fiscal year during which such
person was not an executive officer of the Company.
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
-----------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------------------- -------------------------- -------------
OTHER
ANNUAL RESTRICTED SECURITIES LONG-TERM
COMPEN STOCK UNDERLYING INCENTIVE ALL OTHER
NAME AND PRINCIPAL BONUS SATION AWARD(S) OPTIONS/SARS PAYOUTS COMPENSATION
POSITION YEAR SALARY ($) ($) ($) (1) ($) (#) (2) ($) ($)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Lawrence D. Field, 1997 104,487 0 0 0 0 0 11,709(5)
Chairman 1996 106,607 0 0 0 0 0 0
1995 100,000 0 0 0 15,000(3) 0 0
Timothy G. Bruer, 1997 162,180 0 0 62,500 0 0 157,256(6)
President and Chief
Executive Officer
Richard A. Hall, 1997 104,487 0 0 0 0 0 0
Vice President of 1996 114,365 0 0 0 0 0 0
Operations 1995 13,462 0 0 0 0 0 0
Dorvin D. 1997 125,654 0 0 0 0 0 0
Lively, (4) 1996 124,602 0 0 0 0 0 0
Former Vice President, 1995 110,492 0 0 0 0 0 0
Chief Financial Officer
and Secretary
Michael W. 1997 142,962 0 0 0 0 0 0
Knapik, (7) 1996 2,718 0 0 0 0 0 0
Former Vice President of
Sales and Marketing
</TABLE>
(1) Does not include the value of perquisites and other personal benefits
because the aggregate amount of such compensation, if any, does not exceed
the lesser of $50,000 or 10 percent of the total amount of annual salary
and bonus for any individual named.
(2) Consists solely of options to acquire shares of Common Stock.
(3) Such option is subject to vesting upon the achievement of earnings target
for 1997.
(4) Dorvin D. Lively resigned from the Company on September 25, 1998
(5) Consists of payment of automobile lease.
(6) Consists of reimbursement of moving expenses of $94,756 and $62,500 of
stock awards.
(7) Michael W. Knapik resigned from the Company on March 6, 1998.
51
<PAGE>
OPTIONS/SAR GRANTS IN THE LAST FISCAL YEAR
The Company did not grant any options to the named executive officers of
the Company during fiscal 1997. The Company has never granted any stock
appreciation rights.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
The following table sets forth certain information with respect to options
exercised by the named executive officers of the Company during fiscal 1997, and
the number and value of unexercised options held by such executive officers at
the end of the fiscal year. The Company has never granted any stock
appreciation rights.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
SHARES OPTIONS/SARS AT FY-END OPTIONS/SARS AT FY-END
ACQUIRED ON VALUE (#) (2) ($) (1) (3)
EXERCISE REALIZED ----------------------------------- ------------------------------------
NAME (#) ($) (1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------- ------------- ---------- -------------- ------------------ --------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Lawrence D. Field 0 0 0 15,000 0 0
Timothy G. Bruer 0 0 0 0 0 0
Richard A. Hall 0 0 0 0 0 0
Robert W. Luttman 0 0 0 0 0 0
Dorvin D. Lively(4) 0 0 10,000 0 0 0
</TABLE>
(1) Market value of the underlying securities at exercise date or fiscal year-
end, as the case may be, minus the option exercise price.
(2) Does not include option shares pursuant to the Company's 1994 Stock Option
Plan, which failed to vest in 1996.
(3) The closing price of the Common Stock on the AMEX on December 31, 1997, the
last trading day of the fiscal year, was $0.5625.
(4) Dorvin D. Lively resigned from the Company on September 25, 1998.
EMPLOYMENT AGREEMENTS AND CHANGE
IN CONTROL ARRANGEMENTS
The Company has one employment agreement and change in control arrangement
with Timothy G. Bruer, the Company's President and Chief Executive Officer.
This agreement sets his base salary at $250,000, provides for a performance
bonus of up to 75% of his base salary, awards restricted and unrestricted stock
at the commencement of his employment and awards stock options on an annual
basis. In addition, Mr. Bruer is eligible for all Company benefits. Under a
change of control within two years from the commencement of his employment, he
immediately vests in all restricted stock and stock options. In connection with
the Sale, Mr. Bruer will be voluntarily resigning from his position as the
Company's President and Chief Executive Officer and his employment agreement
with the Company will be terminated. Accordingly, Mr. Bruer will not receive
any severance benefits or vest in any restricted stock or stock options under
the change of control provisions contained in the employment agreement.
REPORT OF THE COMPENSATION COMMITTEE OF THE
BOARD OF DIRECTORS ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors administers the
Company's executive compensation program with respect to current salaries.
During 1997, the Committee was comprised of all outside Directors (Messrs.
McKenzie, Bankard and Tolbert). The Stock Option Committee administers the
Company's executive compensation program with respect to all stock options. All
decisions of the Compensation Committee relating to the compensation of the
executive officers of the Company are reviewed by the full Board of Directors.
A 1993 amendment to the Internal Revenue Code of 1986, as amended, provides
that no publicly held company shall be permitted to deduct from its income taxes
compensation exceeding $1 million paid to its chief executive officer or any of
its four other highest paid executive officers unless (a) the compensation is
payable solely
52
<PAGE>
on account of the attainment of performance goals, (b) the performance goals are
determined by a compensation committee of two or more outside directors, (c) the
material terms under which the compensation is paid are disclosed to and
approved by the stockholders, and (d) the compensation committee certifies that
the performance goals were met. Neither the Compensation Committee, the Stock
Option Committee nor the Company expects this amendment to have an impact, or
result in the loss of a deduction, with respect to compensation paid to such
executive officers, including stock options granted to such executive officers.
Overall Executive Compensation. Since inception, the Company has believed
in compensating its executives based on the merits of their performance, with
special weighting placed on long-term incentives based upon increases in the
equity value of the Company. For this reason, executive compensation generally
consists of current salary and stock options. In most cases, there is no
incentive plan which generates current income, either in the form of salary
adjustments or bonus awards.
Salary. The Compensation Committee reviews executive salaries on an as
needed basis, usually not more than once each year. In developing a
recommendation for the Board of Directors concerning the compensation levels for
the executive officers, the Compensation Committee believes there is necessarily
some subjectivity required and therefore does not follow specific objective
performance criteria when recommending salaries. In determining appropriate
salary levels for 1997, the Compensation Committee primarily considered the
individual's past performance, the performance of the Company to date, the
individual's contribution to that performance and the immediate goals of the
Company. The Compensation Committee also considered the executive's level and
scope of responsibility, experience, internal equity of the Company's executive
compensation program and the compensation practices of other high growth,
acquisition companies in related industries for executives of similar
responsibility.
Stock Options. The Company relies somewhat on stock options to compensate
its executive officers and believes that stock options encourage and reward
effective management that results in long-term corporate financial success, as
measured by stock price appreciation. The Stock Option Committee administers
the Company's 1994 Stock Option Plan and the decisions concerning the issuance
of stock options as a part of executive compensation. Options are awarded based
upon the individual's performance and contribution to the overall growth and
financial success of the Company. The Stock Option Committee anticipates that
stock options issued under the Plan will generally vest upon the achievement of
annual earnings targets as adopted by the Board of Directors. No stock options
were granted during 1997. Previously issued options which were subject to
vesting based on annual earnings targets for 1996 did not vest and expired
unexercised because the 1996 targets were not met.
Compensation of Key Executives. Mr. Field, Chairman, received no increase
in his salary during 1997; Mr. Bruer began with the Company in April 1997.
Neither executive received any type of cash bonus. The Compensation Committee
and the Stock Option Committee believe these levels of compensation are at or
below average when compared to executives holding similar responsibilities in
similar companies.
Compensation Committee Stock Option Committee
---------------------- ----------------------
Milton D. McKenzie Milton D. McKenzie
James H. Bankard James H. Bankard
James K. Tolbert James K. Tolbert
This Report on Executive Compensation shall not be deemed incorporated by
reference by any general statement incorporating by reference this Proxy
Statement into any filing under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended, except to the extent that the
Company specifically incorporates this information by reference, and shall not
otherwise be deemed filed under such acts.
53
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1997, the Company's Compensation Committee was composed of Milton D.
McKenzie, James H. Bankard and James K. Tolbert who also served the Company as
independent Directors.
PERFORMANCE GRAPH
The following graph compares the yearly percentage change in the cumulative
total shareholder return on the Company's Common Stock during the period
commencing August 4, 1994 (the date on which the Company's Common Stock began
trading publicly), and ending on December 31, 1997, with the cumulative total
return on the S&P 500 Index and an index of peer companies (weighted by market
capitalization) selected by the Company. Companies in the peer group are as
follows: Bridgford Foods Corp., Brothers Gourmet Coffee, Inc., Celestial
Seasonings, Inc., Hain Food Group, Inc., J&J Snack Foods Corp. and Tasty Baking
Co. The comparison assumes $100 was invested on August 4, 1994, in the
Company's Common Stock and in each of the foregoing indices and assumes
reinvestment of dividends, except with respect to the Company's Common Stock for
which no dividends have been paid.
[PERFORMANCE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
YEARS ENDING
BASE
PERIOD
COMPANY NAME/INDEX 8/4/94 DEC 94 DEC 95 DEC 96 DEC 97
- ---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SILVERADO FOODS, INC. 100 62.50 39.29 39.29 8.03
S&P 500 INDEX 100 101.18 139.20 171.16 226.27
PEER GROUP 100 102.67 86.14 89.25 142.61
</TABLE>
54
<PAGE>
The above performance graph shall not be deemed incorporated by reference
by any general statement incorporating by reference this Proxy Statement into
any filing under the Securities Act of 1933, as amended, or the Securities
Exchange Act of 1934, as amended, except to the extent that the Company
specifically incorporates this information by reference, and shall not otherwise
be deemed filed under such Acts.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's directors and executive officers, and persons who own more than
ten percent of the Common Stock, to report their initial ownership of the Common
Stock and any subsequent changes in that ownership to the Commission and the
AMEX, and to furnish the Company with a copy of each such report. The
Commission's regulations impose specific due dates for such reports, and the
Company is required to disclose in this Proxy Statement any failure to file by
these dates during and with respect to fiscal 1997.
To the Company's knowledge, based solely on review of the copies of such
reports furnished to the Company and written representations that no other
reports were required, during and with respect to fiscal 1997, all Section 16(a)
filing requirements applicable to its officers, directors and more than ten
percent shareholders were complied with, except as follows: (a) Lawrence D.
Field, Chairman of the Board of the Company, filed late four Form 4 reports
covering 23 transactions consisting of purchases of Common Stock in the open
market, and (b) Richard A. Hall, Vice President of Operations of the Company,
filed late one Form 4 report covering one transaction consisting of the purchase
of Common Stock in the open market and (c) Milton D. McKenzie, Director, filed
late one Form 4 report covering one transaction consisting of the issuance of
warrants for the purchase of common stock.
OTHER MATTERS
MATTERS WHICH MAY COME BEFORE THE MEETING
The Board of Directors knows of no matters other than those described in
this Proxy Statement which will be brought before the Meeting for a vote of the
shareholders. If any other matter properly comes before the Meeting for a
shareholder's vote, the persons named in the accompanying proxy will vote
thereon in accordance with their best judgment.
PROPOSALS OF SHAREHOLDERS
The 1999 Annual Meeting of Shareholders of the Company is expected to be
held on or about May 14, 1999, with the mailing of proxy materials for such
meeting to be made on or about April 13, 1999. Proposals of shareholders which
are submitted pursuant to Rule 14a-8 under the Exchange Act to be presented at
the Company's 1999 Annual Meeting of Shareholders must be received at the
principal executive offices of the Company, 6846 South Canton, Suite 110, Tulsa,
Oklahoma 74136, on a reasonable time before April 13, 1999. The Company would
deem notice received on or before December 13, 1998, to be a reasonable time for
such notices to be considered for inclusion in the Company's proxy statement and
accompanying proxy for that meeting.
55
<PAGE>
If a shareholder, who intends to present a proposal at the Company's 1999
Annual Meeting of Shareholders and has not sought inclusion of the proposal in
the Company's proxy materials pursuant to Rule 14a-8, fails to provide the
Company with notice of such proposal by February 26, 1999, then the persons
named in the proxies solicited by the Company's Board of Directors for its 1999
Annual Meeting of Shareholders may exercise discretionary voting power with
respect to such proposal.
By Order of the Board of Directors,
/s/ DIANE T. WOOD
Diane T. Wood
Secretary
November 25, 1998
Tulsa, Oklahoma
56
<PAGE>
INDEX TO PRO FORMA FINANCIAL STATEMENTS
AND FINANCIAL STATEMENTS
SILVERADO FOODS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS PAGE
----
<S> <C>
GIVING EFFECT TO THE SALE OF THE BAGEL BAR BUSINESS
Preliminary Statement F-2
Unaudited Pro Forma Consolidated Statement of Operations
for the year ended December 31, 1997 F-3
Unaudited Pro Forma Consolidated Statement of Operations for the nine months ended
September 30, 1998 F-4
GIVING EFFECT TO THE SALE OF THE BISCOTTI BUSINESS
Preliminary Statement F-5
Unaudited Pro Forma Consolidated Statement of Operations for the years ended
December 31, 1997 F-6
December 31, 1996 F-7
December 31, 1995 F-8
Unaudited Pro Forma Consolidated Statement of Operations for the nine months ended
September 30, 1998 F-9
Unaudited Pro Forma Consolidated Balance Sheet as of September 30, 1998 F-10
AUDITED FINANCIAL STATEMENTS OF SILVERADO FOODS, INC. AND SUBSIDIARIES:
Report of Independent Public Accountants F-11
Consolidated Balance Sheets as of December 31, 1997 and 1996 F-12
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995 F-13
Consolidated Statements of Shareholders' Equity (Deficit)
For the years ended December 31, 1997, 1996 and 1995 F-14
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995 F-15
Notes to Consolidated Financial Statements for the years ended
December 31, 1997, 1996 and 1995 F-16
INTERIM FINANCIAL STATEMENTS OF SILVERADO FOODS, INC. AND SUBSIDIARIES:
Consolidated Balance Sheet as of September 30, 1998 (Unaudited) F-30
Consolidated Statements of Operations for the nine months ended
September 30, 1998 and 1997 (Unaudited) F-31
Consolidated Statements of Shareholders' Equity (Deficit)
For the nine months ended September 30, 1998 (unaudited) F-32
Consolidated Statements of Cash Flows for the nine months ended
September 30, 1998 and 1997 (Unaudited) F-33
Notes to Consolidated Financial Statements for the nine months ended
September 30, 1998 and 1997 (Unaudited) F-34
</TABLE>
F-1
<PAGE>
PRELIMINARY STATEMENT
SILVERADO FOODS, INC.
The Silverado Foods, Inc. Unaudited Pro Forma Consolidated Statements of
Operations for the year ended December 31, 1997 and the nine months ended
September 30, 1998 present the results of operations for such periods as if the
sale of the assets of The Bagel Place, Inc. had taken place on January 1, 1997.
The pro forma adjustments for the year ended December 31, 1997 exclude an
approximate $3.1 million loss incurred in connection with the sale because the
loss is non-recurring and has been reflected in the consolidated financial
statements in the period incurred.
The Silverado Foods, Inc. Unaudited Pro Forma Consolidated Statements of
Operations for the year ended December 31, 1997 and for the nine months ended
September 30, 1998 do not purport to be indicative of the results of operations
which actually would have occurred had the transaction described above been
effected on January 1, 1997, or which may be expected to occur in the future.
The Silverado Foods, Inc. Unaudited Pro Forma Consolidated Statement of
Operations for the year ended December 31, 1997, should be read in conjunction
with the Silverado Foods, Inc. December 31, 1997 consolidated financial
statements included elsewhere in this Proxy Statement.
F-2
<PAGE>
SILVERADO FOODS, INC. AND SUBSIDIARIES
--------------------------------------
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
--------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,1997
----------------------------------------------------------
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
----------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
NET SALES $ 23,890,141 $ (8,769,986) (1) $ 15,120,155
COST OF SALES 19,492,693 (7,915,008) (1) 11,577,685
------------ ------------ ------------
Gross profit 4,397,448 (854,978) 3,542,470
------------ ------------ ------------
OPERATING EXPENSES:
General and administrative 3,942,493 (508,409) (1),(2) 3,434,084
Selling and marketing 4,434,757 (2,245,430) (1) 2,189,327
Unusual charges 3,500,000 - (1) 3,500,000
Depreciation 144,502 (48,478) (1) 96,024
Amortization of goodwill and other intangibles 912,279 (281,347) (1) 630,932
------------ ------------ ------------
12,934,031 (3,083,664) 9,850,367
------------ ------------ ------------
OPERATING LOSS (8,536,583) (2,228,686) (6,307,897)
OTHER INCOME (EXPENSE):
Interest (1,939,298) (1,071) (1) (1,940,369)
Accretion of debenture discount (1,150,000) - (1,150,000)
Other, net (195,965) (119,015) (1) (76,950)
------------ ------------ ------------
(3,285,263) (117,944) (3,167,319)
------------ ------------ ------------
LOSS FROM CONTINUING OPERATIONS (11,821,846) (2,346,630) (9,475,216)
============ ============ ============
BASIC LOSS PER SHARE FROM:
CONTINUING OPERATIONS $ (1.25) $ (0.25) $ (1.00)
DILUTED:
CONTINUING OPERATIONS $ (1.36) $ (0.27) $ (1.09)
</TABLE>
(1) These adjustments relate to Silverado Foods Inc.'s disposition of the assets
of The Bagel Place, Inc. and consists of the elimination of the operations of
The Bagel Place, Inc. for the period presented (loss of $3,100,000 related to
disposal is not reflected).
(2) No general corporate overhead was allocated to the discontinued operations.
F-3
<PAGE>
SILVERADO FOODS, INC. AND SUBSIDIARIES
--------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
--------------------------------------------
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
------------- ------------- -------------
<S> <C> <C> <C>
NET SALES $15,608,412 $(2,683,477) (1) $12,924,935
COST OF SALES 11,309,236 (1,940,929) (1) 9,368,307
----------- ----------- -----------
Gross profit 4,299,176 (742,548) 3,556,628
----------- ----------- -----------
-
OPERATING EXPENSES: -
General and administrative 1,922,527 (218,241) (1),(3) 1,704,286
Selling and marketing 2,636,175 (581,559) (1) 2,054,616
Depreciation 89,896 (23,209) (1) 66,687
Amortization of goodwill and other intangibles 473,185 (108,863) (1) 364,322
Loss on adjustment to carrying value 3,029,599 (3,029,599) (2) -
----------- ----------- ----------
8,151,382 (3,961,471) 4,189,911
----------- ----------- ----------
OPERATING LOSS (3,852,206) (3,218,923) (633,283)
-
OTHER INCOME (EXPENSE): -
Interest (2,594,202) - (2,594,202)
Accretion of debenture discount (66,666) - (66,666)
Other, net (15,263) - (15,263)
----------- ----------- ----------
(2,676,131) - (2,676,131)
----------- ----------- ----------
LOSS FROM CONTINUING OPERATIONS $(6,528,337) $(3,218,923) $(3,309,414)
=========== =========== ===========
BASIC LOSS PER SHARE FROM:
CONTINUING OPERATIONS $ (0.47) $ (0.23) $ (0.24)
DILUTED LOSS PER SHARE FROM
CONTINUING OPERATIONS $ (0.47) $ (0.23) $ (0.24)
</TABLE>
(1) These adjustments relate to Silverado Foods Inc.'s disposition of the assets
of The Bagel Place, Inc. and consist of the elimination of the operations of The
Bagel Place, Inc. for the period presented
(2) This adjustment relates to the loss recorded on the sale of The Bagel
Place, Inc.
(3) No general corporate overhead was allocated to the discontinued operations.
F-4
<PAGE>
PRELIMINARY STATEMENT
SILVERADO FOODS, INC.
The Silverado Foods, Inc. Unaudited Pro Forma Consolidated Statements of
Operations for the years ended December 31, 1997, 1996 and 1995 and for the nine
month period ended September 30, 1998 present the results of operations for such
periods as if the Sale of the Biscotti Business occurred on January 1, 1995.
Management plans to transfer substantially all of the operating assets and
liabilities of Nonni's Biscotti business into an existing subsidiary (Mom's Best
Services, Inc.). Swander Pace, in the Sale transaction, as defined elsewhere in
this Proxy Statement, will then purchase 90% of the common stock of the Existing
Sub, while the Company will retain the remaining 10% of the common stock of
Existing Sub. Management believes the sale of the Biscotti Business will be
accounted for as a recapitalization.
The Unaudited Pro Forma Consolidated Statements of Operations reflect the
following adjustments: (1) elimination of the results of operations attributable
to the Biscotti Business, (2) reduction of interest expense due to outstanding
debt being paid off with proceeds of $15,900,000 from the Sale.
The Silverado Foods, Inc. Pro Forma Consolidated Balance Sheet as of September
30, 1998 reflects the following adjustments: (1) receipt of the $15,900,000
proceeds and application of such proceeds to reduce outstanding short term debt,
accounts payable and accrued liabilities, (2) reflection of the estimated gain
to be recorded on the sale as an addition to stockholders' equity, (3)
reflection of the bonuses of $266,000 payable to certain members of management
upon consummation of the Sale, and (4) transfer of substantially all of the net
operating assets of the Biscotti Business to Existing Sub.
The Silverado Foods, Inc. Unaudited Pro Forma Consolidated Financial Statements
do not purport to be indicative of the results of operations, which actually
would have occurred had the Sale taken place on January 1, 1995, or which may be
expected to occur in the future. The Silverado Foods, Inc. Unaudited Pro Forma
Consolidated Financial Statements should be read in conjunction with the
Silverado Foods, Inc. December 31, 1997 Consolidated Financial Statements
included elsewhere in this Proxy Statement.
F-5
<PAGE>
SILVERADO FOODS, INC. AND SUBSIDIARIES
--------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997
--------------------------------------------------------------
PRO FORMA PRO FORMA
PRO FORMA(1) ADJUSTMENTS ASSUMING SALE
------------ ------------- --------------
<S> <C> <C> <C>
NET SALES $ 15,120,155 $ (14,746,801) (2) $ 373,354
COST OF SALES 11,577,685 (11,120,132) (2) 457,553
------------ ------------- ----------
Gross profit 3,542,470 (3,626,669) (84,199)
------------ ------------- ----------
OPERATING EXPENSES:
General and administrative 3,434,084 (1,772,068) (2),(5) 1,662,016
Selling and marketing 2,189,327 (1,882,762) (2) 306,565
Unusual charges (4) 3,500,000 - 3,500,000
Depreciation 96,024 (91,487) (2) 4,537
Amortization of goodwill and other intangibles 630,932 (224,007) 406,925
------------ ------------- ----------
9,850,367 (3,970,325) 5,880,042
------------ ------------- ----------
OPERATING LOSS (6,307,897) (343,656) (5,964,241)
OTHER INCOME (EXPENSE): (3)
Interest (1,940,369) (1,620,369) (2) (320,000)
Accretion of debenture discount (1,150,000) (1,150,000) (2) -
Other, net (76,950) (10,938) (1) (66,012)
------------ ------------- ----------
(3,167,319) (2,781,307) (386,012)
------------ ------------- ----------
INCOME (LOSS) FROM CONTINUING OPERATIONS (9,475,216) (3,124,963) (6,350,253)
============ ============= ===========
BASIC LOSS PER SHARE FROM:
CONTINUING OPERATIONS $ (1.00) $ (0.33) $ (0.67)
DILUTED:
CONTINUING OPERATIONS $ (1.09) $ (0.36) $ (0.73)
</TABLE>
(1) Pro Forma represents historical Silverado Foods, Inc. less the operations of
The Bagel Place, Inc.
(2) These adjustments relate to Silverado Foods, Inc disposition of the assets
of the Nonni's Biscotti Business and consists of the elimination of operations
for the period of the Biscotti Business ( no gain or loss on sale or earnings on
any ultimate proceeds from such sale are assumed as it will be recorded in the
period the sale occurs
(3) These adjustments reflect reduction of interest expense on all debt
financing due to application of sale proceeds of $15,900,000 to be received at
closing and does not reflect contingent proceeds to be received based upon
achieving certain future earnings levels.
(4) Included in this amount is $2,050,000 of expense related to the termination
of three employment agreements with the original shareholders of Nonni's, Inc.
(5) No general corporate overhead was allocated to the discontinued operations.
F-6
<PAGE>
SILVERADO FOODS, INC. AND SUBSIDIARIES
--------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1996
--------------------------------------------------------
PRO FORMA PRO FORMA
PRO FORMA (1) ADJUSTMENTS ASSUMING SALE
------------- ------------- -------------
<S> <C> <C> <C>
NET SALES $ 15,617,091 $(12,903,483) (2) $ 2,713,608
COST OF SALES 11,359,403 (9,269,719) (2) 2,089,684
------------ ------------ -----------
Gross profit 4,257,688 (3,633,764) 623,924
------------ ------------ -----------
OPERATING EXPENSES:
General and administrative 3,739,799 (1,725,578) (2),(4) 2,014,221
Selling and marketing 2,442,746 (1,711,279) (2) 731,467
Unusual charges 344,000 - (2) 344,000
Depreciation 123,435 (123,435) (2) -
Amortization of goodwill and other intangibles 391,642 (224,000) 167,642
------------ ------------ -----------
7,041,622 (3,784,292) 3,257,330
------------ ------------ -----------
OPERATING LOSS (2,783,934) (150,528) (2,633,406)
OTHER INCOME (EXPENSE): (3)
Interest (941,904) (941,904) (2) -
Other, net 36,682 - 36,682
------------ ------------ -----------
(905,222) (941,904) 36,682
------------ ------------ -----------
LOSS FROM CONTINUING OPERATIONS (3,689,156) (1,092,432) (2,596,724)
============ ============ ===========
BASIC LOSS PER SHARE FROM:
CONTINUING OPERATIONS $ (0.58) $ (0.17) $ (0.41)
DILUTED:
CONTINUING OPERATIONS $ (0.58) $ (0.17) $ (0.41)
</TABLE>
(1) Pro Forma represents historical Silverado Foods, Inc. less the operations of
The Bagel Place, Inc.
(2) These adjustments relate to Silverado Foods, Inc disposition of the assets
of the Nonni's Biscotti Business and consists of the elimination of operations
for the period of the Biscotti Business ( no gain or loss on sale or earnings on
any ultimate proceeds from such sale are assumed as it will be recorded in the
period the sale occurs
(3) These adjustments reflect reduction of interest expense on all debt
financing due to application of sale proceeds of $15,900,000 to be received at
closing and does not reflect contingent proceeds to be received based upon
achieving certain future earnings levels.
(4) No general corporate overhead was allocated to the discontinued operations.
F-7
<PAGE>
SILVERADO FOODS, INC. AND SUBSIDIARIES
--------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1995
-------------------------------------------------------
PRO FORMA PRO FORMA
PRO FORMA(1) ADJUSTMENTS ASSUMING SALE
------------- ------------ -------------
<S> <C> <C> <C>
NET SALES $14,622,622 $(7,308,358) (2) $ 7,314,264
COST OF SALES 11,240,704 (5,013,300) (2) 6,227,404
------------ ----------- -----------
Gross profit 3,381,918 (2,295,058) 1,086,860
------------ ----------- -----------
OPERATING EXPENSES:
General and administrative 2,796,081 (1,522,441) (2),(4) 1,273,640
Selling and marketing 2,584,324 (1,250,024) (2) 1,334,300
Depreciation 115,083 (115,083) (2) -
Amortization of goodwill and other intangibles 281,805 (224,000) (2) 57,805
------------ ----------- -----------
5,777,293 (3,111,548) 2,665,745
------------ ----------- -----------
OPERATING LOSS (2,395,375) (816,490) (1,578,885)
OTHER INCOME (EXPENSE):
Interest (126,013) (126,013) (3) -
Other, net (39,089) 1,152 (2) (40,241)
----------- ----------- ----------
(165,102) (124,861) (40,241)
----------- ----------- ----------
LOSS FROM CONTINUING OPERATIONS (2,560,477) $ (941,351) $(1,619,126)
============ =========== ===========
BASIC LOSS PER SHARE FROM:
CONTINUING OPERATIONS $ (0.44) $ (0.16) $ (0.28)
DILUTED:
CONTINUING OPERATIONS $ (0.44) $ (0.16) $ (0.28)
</TABLE>
(1) Pro Forma represents historical Silverado Foods, Inc. less the operations of
The Bagel Place, Inc.
(2) These adjustments relate to Silverado Foods, Inc disposition of the assets
of the Nonni's Biscotti Business and consists of the elimination of operations
for the period of the Biscotti Business ( no gain or loss on sale or earnings on
any ultimate proceeds from such sale are assumed as it will be recorded in the
period the sale occurs
(3) These adjustments reflect reduction of interest expense on all debt
financing due to application of sale proceeds of $15,900,000 to be received at
closing and does not reflect contingent proceeds to be received based upon
achieving certain future earnings levels.
(4) No general corporate overhead was allocated to the discontinued operations.
F-8
<PAGE>
SILVERADO FOODS, INC. AND SUBSIDIARIES
--------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
PRO FORMA (1) ADJUSTMENTS ASSUMING SALE
------------- -------------- -------------
<S> <C> <C> <C>
NET SALES $12,924,935 $(12,924,935) (2) $ -
COST OF SALES 9,368,307 (9,368,307) (2) -
----------- ------------ -----------
Gross profit 3,556,628 (3,556,628) -
----------- ------------ -----------
OPERATING EXPENSES:
General and administrative 1,704,286 (1,064,175) (2),(4) 640,111
Selling and marketing 2,054,616 (1,940,385) (2) 114,231
Depreciation 66,687 (8,436) (2) 58,251
Amortization of goodwill and other intangibles 364,322 (168,005) (2) 196,317
Loss on adjustment to carrying - - -
value
----------- ------------ -----------
4,189,911 (3,181,001) 1,008,910
----------- ------------ -----------
OPERATING LOSS (633,283) 375,627 (1,008,910)
OTHER INCOME (EXPENSE):
Interest (2,594,202) (2,092,702) (3) (501,500)
Accretion of debenture discount (66,666) (66,666) (2) -
Other, net (15,263) - (15,263)
----------- ------------ -----------
(2,676,131) (2,159,368) (516,763)
----------- ------------ -----------
LOSS FROM CONTINUING OPERATIONS $(3,309,414) $ (1,783,741) $(1,525,673)
=========== ============ ===========
BASIC LOSS PER SHARE FROM:
CONTINUING OPERATIONS $ (0.24) $ (0.13) $ (0.11)
=========== ============ ===========
</TABLE>
(1) Pro Forma represents historical Silverado Foods, Inc. less the operations of
The Bagel Place, Inc.
(2) These adjustments relate to Silverado Foods, Inc disposition of the assets
of the Nonni's Biscotti Business and consists of the elimination of operations
for the period of the Biscotti Business ( no gain or loss on sale or earnings
on any ultimate proceeds from such sale are assumed as it will be recorded in
the period the sale occurs
(3) These adjustments reflect reduction of interest expense on all debt
financing due to application of sale proceeds of $15,900,000 to be received at
closing and does not reflect contingent proceeds to be received based upon
achieving certain future earnings levels.
(4) No general corporate overhead was allocated to the discontinued operations.
F-9
<PAGE>
SILVERADO FOODS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEETS
September 30, 1998
<TABLE>
<CAPTION>
Historical
Consolidated Pro Forma Pro Forma
ASSETS (unaudited) Adjustments(a) Assuming Sale
------ ------------ -------------- -------------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash................................................ $ - $ 1,366,000 (1) $ 1,366,000
Prepaids............................................ 415,665 $ 415,665
------------ -------------- -------------
Total current assets............................ 415,665 1,366,000 1,781,665
------------ -------------- -------------
NET ASSETS HELD FOR SALE............................... 10,408,965 (9,146,904)(1) 1,262,061
NOTES RECEIVABLE....................................... 3,302,332 3,302,332
PROPERTY, PLANT AND EQUIPMENT, net..................... 13,018 - 13,018
GOODWILL AND OTHER INTANGIBLES, net.................... 179,537 - 179,537
INVESTMENT IN SUBSIDIARY............................... 914,690 (4) 914,690
------------ -------------- -------------
Total Assets.................................... $ 14,319,517 $ (6,866,214) $ 7,453,304
============ ============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
- ----------------------------------------------
CURRENT LIABILITIES:
Current maturities of long-term debt................ 21,625,601 $ (15,900,000)(1) $ 5,725,601
Short-term notes payable............................ 475,000 - 475,000
Trade accounts payable.............................. 5,068,728 - 5,068,728
Accrued liabilities................................. 3,317,503 266,000 (3) 3,583,503
------------ -------------- -------------
Total current liabilities....................... 30,486,832 (15,634,000) 14,852,832
------------ -------------- -------------
LONG-TERM DEBT, less current maturities
OTHER
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' DEFICIT
Common stock, $.01 par value, 20,000,000
shares authorized 11,701,757 issued,
11,674,762 outstanding............................ 153,576 - 153,576
Warrants............................................ 51,159 - 51,159
Additional paid-in-capital.......................... 28,873,569 - 28,873,569
Accumulated deficit................................. (45,180,967) 8,767,786 (2),(3) (36,413,181)
------------ -------------- -------------
(16,102,663) 8,767,786 (7,334,876)
Less: Treasury stock................................ (64,652) - (64,652)
Total shareholders' deficit..................... (16,167,315) 8,767,786 (7,399,528)
------------ -------------- -------------
Total liabilities and shareholders' deficit.. $ 14,319,517 $ (6,866,214) $ 7,453,304
============ ============== =============
</TABLE>
(a) These adjustments consist of (1) receipt of the $15,900,000 proceeds and
application of such proceeds to reduce outstanding short term debt, (2)
reflection of the estimated gain to be recorded on the sale as an addition to
stockholders' equity, and (3) reflection of the bonuses of $266,000 to be paid
to a certain members of management upon consummation of the sale, and (4)
transfer of substantially all of the net operating assets of the Nonni's
Biscotti business to the Existing Sub.
F-10
<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, 1997 and
1996, and the related consolidated statements of operations, shareholders'
equity (deficit) and cash flows for the years ended December 31, 1997, 1996 and
1995. 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, 1997 and 1996, and the results of their
operations and their cash flows for the years ended December 31, 1997, 1996 and
1995, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Tulsa, Oklahoma
April 10, 1998, (except with respect to
the matters discussed in Footnotes 14 and 15,
as to which the date is October 27, 1998)
F-11
<PAGE>
SILVERADO FOODS, INC. AND SUBSIDIARIES
--------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
<TABLE>
<CAPTION>
December 31,
-------------------------------------
ASSETS 1997 1996
------ -------------- --------------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 56,359 $ 164,118
Accounts receivable, net 2,689,893 4,605,632
Inventories, net 1,204,321 5,974,719
Prepaid expenses and other 365,069 560,372
------------- ------------
Total current assets 4,315,642 11,304,841
------------- ------------
NET ASSETS HELD FOR SALE 2,835,459 188,324
NOTES RECEIVABLE 1,178,582 1,315,584
PROPERTY, PLANT AND EQUIPMENT, net 7,086,488 11,829,580
GOODWILL AND OTHER INTANGIBLES, net 5,492,027 13,137,613
------------- ------------
Total assets $ 20,908,198 $ 37,775,942
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
CURRENT LIABILITIES:
Current maturities of long-term debt $ 14,257,040 $ 8,637,272
Short-term notes payable 500,000 -
Trade accounts payable 4,516,522 8,338,029
Accrued liabilities 3,291,737 2,324,039
Other liabilities 274,283 306,974
------------- ------------
Total current liabilities 22,839,582 19,606,314
------------- ------------
LONG-TERM DEBT, less current maturities 5,360,086 13,442,197
OTHER 40,967 3,587,632
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY (DEFICIT)
Common stock, $.01 par value, 20,000,000 shares authorized 117,018 72,583
11,701,757 issued, 11,674,762 outstanding
Warrants 46,549 61,563
Additional paid-in-capital 28,843,461 18,843,454
Accumulated deficit (36,274,813) (17,773,149)
------------- ------------
(7,267,785) 1,204,451
Less: Treasury stock (64,652) (64,652)
------------ ------------
Total shareholders' equity (deficit) (7,332,437) 1,139,799
Total liabilities and shareholders' equity (deficit) $ 20,908,198 $ 37,775,942
============ ============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-12
<PAGE>
SILVERADO FOODS, INC. AND SUBSIDIARIES
--------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
NET SALES $ 23,890,141 $ 24,524,007 $ 20,939,961
COST OF SALES 19,492,693 19,085,864 15,885,340
Gross profit 4,397,448 5,438,143 5,054,621
------------- ------------ ------------
OPERATING EXPENSES:
General and administrative 3,942,493 4,332,690 3,579,127
Selling and marketing 4,434,757 4,111,457 3,884,560
Unusual charges 3,500,000 344,000 -
Depreciation 144,502 148,801 134,402
Amortization of goodwill and other intangibles 912,279 680,633 499,068
12,934,031 9,617,581 8,097,157
------------- ------------ ------------
OPERATING LOSS (8,536,583) (4,179,438) (3,042,536)
OTHER INCOME (EXPENSE):
Interest (1,939,298) (957,975) (139,648)
Accretion of debenture discount (1,150,000) - -
Other, net (195,965) 7,376 (96,030)
(3,285,263) (950,599) (235,678)
------------- ------------ ------------
LOSS FROM CONTINUING OPERATIONS (11,821,846) (5,130,037) (3,278,214)
DISCONTINUED OPERATIONS
Operating Loss (3,458,216) (2,328,963) (1,434,797)
Loss on Disposal (3,221,602) - -
LOSS FROM DISCONTINUED OPERATIONS (6,679,818) (2,328,963) (1,434,797)
------------- ------------ ------------
NET LOSS $(18,501,664) $(7,459,000) $(4,713,011)
============= ============ ============
BASIC LOSS PER SHARE FROM:
CONTINUING OPERATIONS $ (1.25) $ (0.80) $ (0.56)
OPERATING LOSS FROM DISCONTINUED OPERATIONS (0.36) (0.37) (0.25)
LOSS ON DISPOSAL (0.34) - -
NET LOSS PER SHARE $ (1.95) $ (1.17) $ (0.81)
============= ============ ============
DILUTED:
CONTINUING OPERATIONS $ (1.36) $ (0.80) $ (0.56)
OPERATING LOSS FROM DISCONTINUED OPERATIONS (0.39) (0.37) (0.25)
LOSS ON DISPOSAL (0.37) - -
------------- ------------ ------------
NET LOSS PER SHARE $ (2.12) $ (1.17) $ (0.81)
============= ============ ============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-13
<PAGE>
SILVERADO FOODS, INC. AND SUBSIDIARIES
--------------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
---------------------------------------------------------
<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK
------------ ---------------
NUMBER NUMBER
OF SHARES AMOUNT OF SHARES AMOUNT WARRANTS
------------ ----------------- --------------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 5,752,680 57,528 (26,995) (64,652) 149,528
Conversion of warrants 162,829 1,628 - - (72,120)
Exercise of common stock 67,500 675 - - -
options
Net loss - - - - -
----------- ---------- ---------- --------- --------
Balance, December 31, 1995 5,983,009 59,831 (26,995) (64,652) 77,408
Accretion of common stock
subject to price guarantee -
Exercise of warrants 35,651 356 - - (15,845)
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 90,000 900 - - -
options
Issuance of common stock 62,571 626 - - -
Net loss - - - - -
----------- ---------- ---------- --------- --------
Balance, December 31, 1996 7,258,243 $ 72,583 (26,995) $(64,652) $ 61,563
Issuance of common stock in
connection with 3,611,293 36,114 - - -
debenture conversion
Exercise of warrants 34,123 341 - - (15,014)
Contribution of capital - - - - -
Accretion of debenture
discount - - - - -
Issuance of common stock 543,731 5,437 - - -
in connection with
settlement of royalty
agreement
Purchase of common stock 16,367 163 - - -
by forgiveness of
indebtedness
Stock Grant 100,000 1,000 - - -
Issuance of common stock 130,000 1,300 - - -
in return for consulting
services
Purchase of common stock 8,000 80 - - -
by management
Issuance of common stock - - - - -
in connection with
settlement of
employment agreement
Net loss - - - - -
----------- ---------- ---------- --------- --------
Balance, December 31, 1997 11,701,757 $117,018 (26,995) $ (64,652) $ 46,549
=========== ========== ========== ========= ========
</TABLE>
<TABLE>
<CAPTION>
ADDITIONAL
PAID-IN ACCUMULATED
CAPITAL DEFICIT TOTAL
------------- -------------- -------------
<S> <C> <C> <C>
Balance, December 31, 1994 15,235,563 (5,601,138) 9,776,829
Conversion of warrants 142,612 - 72,120
Exercise of common stock 81,675 - 82,350
options
Net loss - (4,713,011) (4,713,011)
----------- ------------- ------------
Balance, December 31, 1995 15,459,850 (10,314,149) 5,218,288
Accretion of common stock
subject to price guarantee (131,250) - (131,250)
Exercise of warrants 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 108,900 - 109,800
options
Issuance of common stock 177,701 - 178,327
Net loss - (7,459,000) (7,459,000)
----------- ------------- ------------
Balance, December 31, 1996 $18,843,454 $(17,773,149) $ 1,139,799
Issuance of common stock in
connection with 2,813,886 - 2,850,000
debenture conversion
Exercise of warrants 29,687 - 15,014
Contribution of capital 2,595,601 - 2,595,601
Accretion of debenture
discount 1,150,000 - 1,150,000
Issuance of common stock (5,437) - -
in connection with
settlement of royalty
agreement
Purchase of common stock 2,362,400 - 2,362,563
by forgiveness of
indebtedness
Stock Grant 124,000 - 125,000
Issuance of common stock 79,950 - 81,250
in return for consulting
services
Purchase of common stock 9,920 - 10,000
by management
Issuance of common stock 840,000 - 840,000
in connection with
settlement of
employment agreement
Net loss - (18,501,664) (18,501,664)
----------- ------------- ------------
Balance, December 31, 1997 $28,843,461 $(36,274,813) $ (7,332,437)
============ ============== =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-14
<PAGE>
SILVERADO FOODS, INC. AND SUBSIDIARIES
--------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
---------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(18,501,664) $(7,459,000) $(4,713,011)
------------ ----------- ---------
Adjustments to reconcile net loss to cash used in operating activities--
Depreciation and amortization 2,220,053 2,139,414 1,362,379
Accretion of debenture discount 1,150,000 - -
Provision for note receivable 1,000,000 - -
Employment Agreement Expense 840,000
Loss on sale of assets and assets held for sale 3,473,599 - -
Change in assets and liabilities, net of effect of acquisitions
(Increase) decrease in accounts receivable 1,225,810 (2,431,908) 626,109
(Increase) decrease in inventory 1,535,135 (356,735) (603,780)
(Increase) decrease in prepaid expenses and other 227,701 238,722 (166,901)
Increase in assets held for disposal (731,699) - -
Increase (decrease) in payables and accrued liabilities 1,099,599 3,578,552 1,636,557
(Increase) decrease in intangibles and other 185,616 (458,110) (501,229)
------------ ----------- -----------
Total adjustments 12,225,814 2,709,935 2,353,135
------------ ----------- -----------
Cash used in operating activities (6,275,850) (4,749,065) (2,359,876)
------------ ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (978,406) (3,891,533) (630,852)
Payments for acquisitions - (4,224,376) (2,378,952)
Proceeds from dispositions 1,530,755 - -
Note receivable (200,000) - -
------------ ----------- -----------
Cash provided by (used in) investing activities 352,349 (8,115,909) (3,009,804)
------------ ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from stock issuance 25,013 128,141 154,470
Borrowings from long-term debt 11,545,000 13,743,629 9,308,150
Payments on notes payable and long-term debt (5,754,271) (971,079) (4,522,749)
------------ ----------- -----------
Cash provided by financing activities 5,815,742 12,900,691 4,939,871
------------ ----------- -----------
NET INCREASE (DECREASE) IN CASH (107,759) 35,717 (429,809)
CASH, beginning of period 164,118 128,401 558,210
------------ ----------- -----------
CASH, end of period $ 56,359 $ 164,118 $ 128,401
============ =========== ============
Non-cash Financing Activities:
Issuance of stock for debenture conversion $ 2,850,000 $ - $ -
Addition to paid-in-capital for debenture discount accretion 1,150,000 - -
Debenture conversion to paid in capital 2,595,601 - -
Reclassification of capitalized lease obligation to operating lease (3,768,880) 5,115,153 -
Receipt of note receivable for sale of assets 1,012,383 - -
Stock issued for buyout option of royalty - 2,000,000 -
Purchase of common stock by forgiveness of indebtedness 2,362,563 - -
Issuance of common stock in connection with termination
of employment agreements 840,000 - -
Exercise of warrants for common stock 15,014 15,845 72,120
SUPPLEMENTAL CASH FLOWS INFORMATION:
Cash paid for-
Interest $ 1,289,269 $ 930,230 $ 757,922
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-15
<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 throughout the
United States and parts of Canada.
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.
RECLASSIFICATIONS
- -----------------
Certain reclassifications to the consolidated financial statements for the year
ended December 31, 1996 and 1995 have been made to conform to the presentation
of the December 31, 1997 consolidated financial statements. As discussed in
Note 4, the Company discontinued certain operations in 1997. The 1997 balance
sheet and related disclosures appropriately reflect the net assets of those
operations as "held for sale". The 1996 balance sheet and related disclosures
have not been restated to reflect those net assets as "held for sale".
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,
-------------------------
1997 1996
----------- -----------
<S> <C> <C>
Raw materials $ 908,105 $2,348,945
Finished goods 370,192 3,709,774
---------- ----------
1,278,297 6,058,719
Less - allowance for excess and obsolete inventory (73,976) (84,000)
---------- ----------
$1,204,321 $5,974,719
========== ==========
</TABLE>
F-16
<PAGE>
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."
REVENUE RECOGNITION
- -------------------
Revenues are recognized upon shipment of the product.
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
- --------------
In February 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 fully diluted earnings per share with
diluted earnings per share. Under SFAS No. 128, the loss per share calculations
include the weighted average number of shares outstanding for the years ending
December 31, 1997, 1996, and 1995. As discussed in Note 8, included in basic
loss per share are 1,973,094 contingent shares. The diluted loss per share does
not reflect the contingent shares, stock options, or convertible instruments
because the inclusion of such items would be anti-dilutive. The weighted
average number of shares outstanding for the basic earnings per share were
9,474,644, 6,384,651, and 5,832,896, respectively. The weighted average number
of
F-17
<PAGE>
shares calculated for the diluted earnings per share were 8,724,467, 6,384,651,
and 5,832,896, respectively. Adoption of SFAS No. 128 did not affect the 1996
and 1995 weighted average number of shares outstanding calculations.
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 does not believe that
there are material risks associated with consolidated receivables 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.
FAIR VALUE OF FINANCIAL INSTRUMENTS
- -----------------------------------
The Company values financial instruments as required by Statement of Financial
Accounting Standards No. 107, "Disclosures About Fair Value of Financial
Instruments". The Company estimates the value of its debt based on the
estimated borrowing rates currently available to the Company for debt with
similar terms and remaining maturities. The estimated fair value of the
Company's debt at December 31, 1997 and 1996, was $18.5 million and $20.1
million, respectively, compared with a carrying value of $20.1 million and $22.1
million, respectively.
The carrying value of other financial instruments approximates fair value
because of the short maturity of those instruments.
2. ACQUISITIONS:
During the three year period ended December 31, 1997, the Company's acquisitions
have all been accounted for using the purchase method of accounting. The
significant acquisitions and their terms are summarized below:
F-18
<PAGE>
MARVELOAF
- ---------
In June, 1997, the Company sold the previously acquired assets of the MarveLoaf
Corporation back to the original owner for $50,000 cash and a note receivable
for $1,069,000. No gain or loss was recognized.
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.
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. 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 amended agreement 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 recognizing an additional
$2,000,000 of goodwill. Additionally, the agreement provided for the issuance
of an additional 200,000 shares of common stock if sales of products, which were
subject to the original royalty, exceeded $10,000,000 for any twelve month
period beginning July 1996 through July 1999. This target was met and an
additional 200,000 shares were issued in 1997. The Company guaranteed a market
price of $5.71 per share for both the 700,000 and 200,000 shares under certain
circumstances. Such guarantee is payable in cash or stock, at the option of the
Company. As of December 31, 1997, the Company has the obligation to issue
3,018,539 additional shares under this price guarantee.
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 amended and then terminated in 1997 by the Company
agreeing to pay $1,125,000 and issue 840,000 shares of common stock to the three
selling shareholders. As of December 31, 1997, $204,949 of this amount had been
paid and the Company was obligated to issue the 840,000 shares.
F-19
<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
---- ----
<S> <C> <C>
Fair value of assets acquired $4,783,535 $2,266,174
Cash paid 4,112,415 2,255,975
---------- ----------
Liabilities assumed/issued $ 671,120 $ 10,199
========== ==========
</TABLE>
UNAUDITED PRO FORMA INFORMATION
- -------------------------------
Unaudited pro forma results of operations for the year ended December 31, 1996
and 1995, give effect to acquisitions as if they had occurred on January 1,
1996. 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 January 1 of the respective years, and is not
necessarily indicative of future results.
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Net sales $28,629,000 32,572,000
Gross profit 6,213,000 8,434,000
Loss from continuing operations (6,633,000) (24,809,000)
</TABLE>
3. UNUSUAL CHARGES:
Operating income for 1997 has been reduced for unusual items of $3,500,000.
These charges included a $1,000,000 reserve against a note receivable arising
from the 1996 sale of the Company's Gift and Gourmet business, $2,050,000
related to the settlement of three employment agreements with the former owners
of Nonni's biscotti, and $450,000 related to a consulting study which took place
in 1997 which ultimately resulted in the Company's decision to divest the mail
order catalog business, the snack tray business, and other smaller non-strategic
related business activities.
4. DISCONTINUED OPERATIONS:
In December 1996, the Company discontinued its direct store delivery
distribution business located in Southern California. In the second quarter of
1997, the Company discontinued its mail order catalog business (sold in August
1997), and in the fourth quarter of 1997, the Company discontinued its snack
tray business. The net assets of these businesses not yet sold are reflected in
the accompanying balance sheet at the lower of their cost or their estimated
fair market value. The consolidated statement of operations for 1997, 1996, and
1995 have been presented to reflect the results of continuing operations.
Included in the loss from discontinued operations is $647,000 of interest
expense for each of the years ended 1997, 1996 and 1995. Additionally, interest
expense of $324,000 for January 1998 through the expected disposal date was
included in the loss on disposal. The allocation of interest expense was based
on estimated proceeds
F-20
<PAGE>
from the disposals because such proceeds were less than the original debt
incurred from the acquisitions and to finance the operations of the discontinued
operations. Due to the Company's net operating loss carryforward position, no
income tax benefit was recognized from this transaction. The Company expects to
complete these disposals by the end of 1998. Operating results for these
businesses for the three year period ending December 31, 1997, 1996 and 1995 are
as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------------- ------------- -------------
<S> <C> <C> <C>
Net sales $ 27,679,800 $ 28,939,992 $ 20,071,032
Cost of sales (15,337,274) (17,277,713) (11,758,653)
Selling, general and administrative and other (19,022,344) (13,991,242) (9,747,176)
------------ ------------ ------------
Loss from discontinued operations $ (6,679,818) $ (2,328,963) $ (1,434,797)
============ ============ ============
<CAPTION>
Net assets held for sale
include the following: December 31, 1997
-----------------
<S> <C>
Accounts receivable $ 1,233,950
Inventory 2,356,906
Other current assets 21,773
Property, plant and equipment 1,191,924
Goodwill and other intangibles 3,967,615
Notes payable (511,424)
Accounts payable (2,407,186)
Accrued liabilities (1,811,352)
Other liabilities (388,389)
Non-current liabilities (818,358)
------------
Net assets held for sale $ 2,835,459
============
</TABLE>
5. DETAILS TO CONSOLIDATED BALANCE SHEETS:
<TABLE>
<CAPTION>
December 31,
Depreciation ----------------------------
Property, Plant and Equipment Period 1997 1996
- ----------------------------- ------------ ------------ ------------
<S> <C> <C> <C>
Land and improvements $ -- $ 25,000
Building and improvements 5 to 40 years 2,424,739 6,316,320
Machinery and equipment 5 to 20 years 5,272,956 5,729,586
Office equipment 3 to 10 years 620,569 1,029,944
------------ ------------
8,318,264 13,100,850
Less - accumulated depreciation 1,231,776 1,271,270
------------ ------------
$ 7,086,488 $ 11,829,580
============ ============
</TABLE>
F-21
<PAGE>
<TABLE>
<CAPTION>
Amortization
Intangibles Period December 31,
- ----------- ------------- --------------------------
1997 1996
---- ----
<S> <C> <C> <C>
Goodwill 15 years $5,913,801 $14,225,517
Recipes 7 years 50,000 70,000
Deferred loan costs 3 years 215,084 148,792
Trademarks 7 years 120,541 160,876
Customer data base 7 years 25,000 127,834
Other 3 years 621,733 561,790
---------- -----------
6,946,159 15,294,809
Less - accumulated amortization 1,454,132 2,157,196
---------- -----------
$5,492,027 $13,137,613
========== ===========
</TABLE>
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Allowances for accounts receivable:
- -----------------------------------
Balance, beginning of year $ (676,495) $ (55,502) $ (168,820)
Provision for losses on receivables (126,000) (660,191) (97,094)
Receivables written-off, net of recoveries 483,887 39,198 210,412
----------- ----------- -----------
Balance, end of year $ (318,608) $ (676,495) $ (55,502)
=========== =========== ===========
Allowances for inventories:
- ---------------------------
Balance, beginning of year $ (84,000) $ (29,073) $ (11,000)
Provision (397,699) (202,573) (244,781)
Inventories written-off 407,723 147,646 226,708
----------- ----------- -----------
Balance, end of year $ (73,976) $ (84,000) $ (29,073)
=========== =========== ===========
Accumulated amortization of goodwill and other intangibles:
- -----------------------------------------------------------
Balance, beginning of year $(2,157,195) $(1,477,781) $ (607,113)
Provision (748,429) (1,058,200) (870,668)
Retirements and other 1,451,492 378,786 -
----------- ----------- -----------
Balance, end of year $(1,454,132) $(2,157,195) $(1,477,781)
=========== =========== ===========
</TABLE>
6. LONG-TERM DEBT:
The Company's revolving credit facility provides 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, 1997). On April 10, 1998, the Company entered into
a factoring transaction using trade accounts receivable receiving approximately
$1,869,000 in proceeds. Of this amount, $750,000 was used to reduce the
revolving line of credit to $6,000,000. At the same time, the bank and the
Company's Chairman and his spouse entered into a note agreement whereby the
remaining $6,000,000 owed to the bank will be transferred from the Company to
the Chairman and his spouse and the bank released its lien on accounts
receivables and inventories. The Company also signed a note agreement with the
Chairman and his spouse in the amount of $6,000,000. This note will become due
on
F-22
<PAGE>
August 31, 1998 and interest is at local bank prime plus 1 1/2%. In the event
that funds are not available as of August 31, 1998, the Chairman has agreed to
extend the note until the funds become available.
In addition, the Company has a two-year $6,000,000 term loan with another bank.
Interest is at prime and is payable monthly. Principal payments of $123,000
begin in May 1998 with a balloon payment due in April 1999. This term loan is
collateralized by the Company's machinery and equipment.
Borrowings are guaranteed as to repayment of principal and interest by the
Company's Chairman and his spouse and borrowings under the term loan are
guaranteed by the Company's Chairman, his spouse, and another family member.
Long-term debt consists of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
8% notes payable to the Company's Chairman, due in
June 1998. $ 6,275,335 5,927,197
9% convertible debenture payable to the Company's Chairman
converted in 1997. - 3,000,000
Revolving credit agreement, interest
at prime, payable monthly, principal due in June 1998. 7,000,000 7,000,000
Term loan, interest at prime, payable in equal
monthly installments beginning May 1998, through April 1999. 6,000,000 5,000,000
9% note, paid in January 1997. - 200,000
9% three year convertible subordinated debentures,
due 1999, interest payable quarterly. 300,000 550,000
Other notes payable. 41,791 402,272
----------- -----------
Total long-term debt 19,617,126 22,079,469
Less - current maturities 14,257,040 8,637,272
----------- -----------
$ 5,360,086 $13,442,197
=========== ===========
</TABLE>
The annual maturities of long-term debt are: 1998 - $14,257,040; 1999 -
$5,360,086; 2000 - $-0-; 2001 - $-0- and 2002 - $-0-.
F-23
<PAGE>
7. INCOME TAXES:
The Company paid no income taxes and recorded no income tax expense or benefit
from its inception through December 31, 1997. 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,
---------------------------
1997 1996
---- ----
<S> <C> <C>
Deferred tax liabilities:
Fixed asset basis differences $ (13,600) $ (176,863)
Intangible asset basis differences (79,828) (18,986)
----------- -----------
Total deferred tax liabilities (93,428) (195,849)
----------- -----------
Deferred tax assets:
Net operating loss carryforwards 8,500,000 5,142,266
Reserves not currently deductible 645,659 429,310
Intangible asset basis differences 414,406 307,305
Other 8,045 8,040
----------- -----------
Total deferred tax assets 9,568,110 5,886,921
----------- -----------
Valuation allowance for deferred tax assets (9,474,682) (5,691,072)
----------- -----------
93,428 195,849
----------- -----------
Net deferred tax assets $ - $ -
=========== ===========
</TABLE>
Due to the 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, 1997, the Company had net operating loss (NOL) carry forwards
for federal income tax purposes of approximately $25,000,000 potentially
available to offset future federal taxable income. The utilization for federal
income tax purposes of this 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 begin to expire in 1999.
F-24
<PAGE>
8. SHAREHOLDERS' EQUITY (DEFICIT):
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. From time to time the Company has issued additional warrants. Total
warrants outstanding were 584,590 and 423,713 at December 31, 1997 and 1996,
respectively, and range in exercise price from $0.44 to $11.55 per warrant,
expiring in 1998 through 2002.
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 a total of 500,000
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 outstanding under the Plan as of December 31, 1997 and
1996 were 10,000 and 40,000, respectively with 30,000 options expiring in 1997.
Of this amount, 10,000 shares are fully vested at December 31, 1997. These
shares have an exercise price of $7.00 and expire in 2000. Additionally, the
Board of Directors granted 10,000 options to a Director in 1997, all of which
are fully vested at December 31, 1997. These options have an exercise price of
$3.50 and expire in 2002.
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.
CONTINGENT COMMON STOCK
- -----------------------
As of December 31, 1997, the Company was obligated to issue 6,392,964 shares to
former employees, shareholders, and others related to fulfillment of a price
guarantee, conversion of debt instruments and other transactions. In addition,
the Company may be required to issue additional stock under the remaining price
guarantee provisions (see Note 2).
PREFERRED STOCK
- ---------------
At December 31, 1997, 1996 and 1995, the Company had 1,000,000 authorized shares
of preferred stock, $0.01 par value, but no shares are issued and outstanding.
F-25
<PAGE>
9. RELATED PARTY TRANSACTIONS:
Significant related party transactions of the Company for the three years ended
December 31, 1997 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,
1997, the Company has notes payable to a director for $250,000 and notes payable
to the Company's Chairman for $6,275,335 and accrued interest payable of
$1,066,000. See also Notes 6 and 14 for further discussion regarding amounts
owed to the Company's Chairman.
Also from time to time, the Company's Chairman has guaranteed obligations of the
Company. Currently, the Company's Chairman 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 $13,000,000, which bears interest at the prime rate published
in The Wall Street Journal (see Note 14).
10. COMMITMENTS AND CONTINGENCIES:
During 1997, management determined it would not exercise a bargain purchase
option to purchase the Tulsa plant facility. Consequently, the lease no longer
met the qualifications of a capital lease. The net amount capitalized and
remaining lease payable were removed from their respective accounts. No
material gain or loss on the transaction was recognized. The remaining lease
payments on the plant are reflected as operating lease payments and along with
other operating leases are included in the following table:
<TABLE>
<CAPTION>
Leases Operating
- ------ ---------
<S> <C>
1998 $ 728,337
1999 726,727
2000 623,384
2001 492,675
2002 400,000
Thereafter 1,166,667
----------
Total 4,137,790
</TABLE>
The Company's rental expense for operating leases was $820,000, $1,201,000, and
$729,000, for 1997, 1996, and 1995, respectively.
F-26
<PAGE>
In August 1997, the Company sold its mail-order catalog business located in
Palestine, Texas. The results from this business are shown as discontinued in
the consolidated income statement. The Company has an earn-out based on 1998
sales which could pay the Company an additional $100,000.
11. SIGNIFICANT CUSTOMERS:
During 1997, the Company had sales to two customers, Price Costco and Sam's,
representing 27% and 47%, respectively, of net sales. During 1996, the Company
had sales to two customers, Price Costco and Sam's, representing 39% and 31%,
respectively. During 1995, sales to one customer, Price Costco, was
approximately 20% 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. During
1997, the Company foreclosed on this note and has repossessed the remaining
assets from the buyer. In connection with this, the Company has written down
these assets to their estimated realizable value of $114,000.
In June 1997, the Company sold the assets of the Marveloaf Corporation for a
note receivable of $1,069,000.
13. QUARTERLY RESULTS (UNAUDITED):
The quarterly unaudited results for the Company for the year ended December 31,
1997 are as follows:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
------------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Revenues $ 5,715,000 $ 5,709,000 $ 6,288,000 $ 6,178,000 $ 23,890,000
Gross profit 948,000 1,117,000 951,000 1,382,000 4,398,000
General & administrative 978,000 1,090,000 1,183,000 691,000 3,942,000
Unusual charges - 1,000,000 2,500,000 - 3,500,000
Selling & marketing 1,271,000 1,221,000 1,281,000 662,000 4,435,000
Depreciation &
amortization 237,000 234,000 374,000 213,000 1,058,000
----------- ----------- ----------- ----------- ------------
Operating loss (1,538,000) (2,428,000) (4,387,000) (184,000) (8,537,000)
Loss from discontinued
operations 528,000 1,738,000 922,000 3,492,000 6,680,000
Interest & other 1,537,000 417,000 689,000 632,000 3,285,000
----------- ----------- ----------- ----------- ------------
Net loss (3,603,000) (4,583,000) (5,998,000) (4,318,000) (18,502,000)
=========== =========== =========== =========== ============
</TABLE>
F-27
<PAGE>
14. FINANCIAL CONDITION AND MANAGEMENTS PLANS:
The accompanying financial statements have been prepared on a going concern
basis, which assumes the realization of assets and the satisfaction of
liabilities in the normal course of business. As shown in the consolidated
financial statements, during the years ended December 31, 1997, 1996 and
1995, the Company incurred net losses of approximately $18,500,000, $7,500,000
and $4,200,000, respectively, and has a deficit in retained earnings of
approximately $36,300,000 and a deficit in stockholders' equity of approximately
$7,300,000 at December 31, 1997. These conditions have combined to create a
working capital deficit of approximately $18,500,000 at December 31, 1997.
The Company's management is actively pursuing several alternatives to resolve
the Company's liquidity and capital needs. As discussed further in Note 15, on
April 10, 1998 the Company transferred the remaining $6,000,000 owed on the
revolving line of credit ($7,000,000 at December 31, 1997) to the Company's
Chairman and his spouse. Additionally, all collateral under the line of credit,
including inventory and accounts receivable, was released by the bank. The
amount transferred to the Chairman is due in December 1998; however, if excess
cash is not available to repay the note, the due date will be extended. Further
as discussed in Note 15, management has announced plans to sell certain assets,
including those related to the Nonni's biscotti business. Management believes
that these actions, combined with improved operations, will provide sufficient
liquidity to meet their obligations through December 31, 1998 and to continue as
a going concern.
15. SUBSEQUENT EVENT:
On August 18, 1998, the Company announced that it had reached a new definitive
agreement to sell 90% of the Company's Nonni's(R) Biscotti business. This
agreement includes all of Nonni's assets, including the brand, the equipment
owned at the Tulsa, Oklahoma production facilities, the distribution rights, and
other brands used for the biscotti products. The estimated maximum proceeds for
the sale are $28,000,000, which includes up to $11,000,000 in an earn-out
agreement based on future earnings. The closing of the transaction is subject
to final due diligence by the acquirer and shareholders and regulatory approval.
Management intends to use the proceeds from the sale to pay bank debt, the
borrowings from the Company's Chairman, other notes payable, and other
obligations of the Company.
In addition, the Company has decided to sell the remaining operations of the
Specialty Baked Goods segment. The Company sold the assets of the bagel bar and
pound cakes, effective June 12, 1998. The Company recorded a loss on the sale of
these assets of approximately $3,100,000.
Management is also evaluating other alternatives, which include, but are not
limited to, acquisitions or mergers.
On April 10, 1998, the Company entered into a factoring transaction using trade
accounts receivable receiving approximately $1,869,000 in proceeds. Of this
amount, $750,000
F-28
<PAGE>
was used to reduce the revolving line of credit to $6,000,000. At the same time,
the bank and the Company's Chairman and his spouse entered into a note agreement
whereby the remaining $6,000,000 owed to the bank will be transferred from the
Company to the Chairman and his spouse and the bank released its lien on
accounts receivables and inventories. The Company also signed a note agreement
with the Chairman and his spouse in the amount of $6,000,000. This notes due
date was extended and will become due on December 31, 1998 and interest is at
local bank prime plus 1 1/2%. In addition, the Company's term note with another
bank has $6,700,000 outstanding as of August 31, 1998. Principal and interest
payments have been suspended until October 31, 1998. In addition, the Company
has entered into certain short-term borrowings at high interest rates against
outstanding purchase orders of approximately $892,000 and had additional
borrowings from its Chairman of approximately $400,000.
F-29
<PAGE>
SILVERADO FOODS, INC. AND SUBSIDIARIES
--------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
<TABLE>
<CAPTION>
SEPTEMBER 30,
ASSETS 1998
------ ----
(UNAUDITED)
-----------
<S> <C>
CURRENT ASSETS:
Cash $ -
Accounts receivable, net -
Inventories, net -
Prepaid expenses and other 415,665
------------
Total current assets 415,665
------------
NET ASSETS HELD FOR SALE (Notes 2 and 3) 10,408,965
NOTES RECEIVABLE (Note 5) 3,302,332
PROPERTY, PLANT AND EQUIPMENT, net 13,018
GOODWILL AND OTHER INTANGIBLES, net 179,537
------------
Total assets $ 14,319,517
============
LIABILITIES AND SHAREHOLDERS' DEFICIT
-------------------------------------
CURRENT LIABILITIES:
Current maturities of long-term debt $ 21,625,601
Short-term notes payable 475,000
Trade accounts payable 5,068,728
Accrued liabilities 3,317,503
------------
Other liabilities -
Total current liabilities 30,486,832
------------
LONG-TERM DEBT, less current maturities -
OTHER -
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' DEFICIT
Common stock, $.01 par value, 20,000,000 shares authorized 153,576
14,607,125 issued and 14,580,130 outstanding
Warrants 51,159
Additional paid-in-capital 28,873,569
Accumulated deficit (45,180,967)
------------
(16,102,663)
Less: Treasury stock (64,652)
------------
Total shareholders' deficit (16,167,315)
------------
Total liabilities and shareholders' deficit $ 14,319,517
============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-30
<PAGE>
SILVERADO FOODS, INC. AND SUBSIDIARIES
--------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------
1998 1997
---- ----
<S> <C> <C>
NET SALES $ 15,608,412 $ 17,712,389
COST OF SALES 11,309,236 14,697,214
------------ -------------
Gross profit 4,299,176 3,015,175
------------ -------------
OPERATING EXPENSES:
General and administrative 1,922,527 6,750,946
Selling and marketing 2,636,175 3,773,393
Depreciation 89,896 107,339
Amortization of goodwill and other intangibles 473,185 737,374
Loss on adjustment to carrying value 3,029,599 -
------------ -------------
8,151,382 11,369,052
------------ -------------
OPERATING LOSS (3,852,206) (8,353,877)
OTHER INCOME (EXPENSE):
Interest (2,594,202) (1,472,049)
Accretion of debenture discount (66,666) (1,150,000)
Other, net (15,263) (20,751)
------------ -------------
(2,676,131) (2,642,800)
------------ -------------
LOSS FROM CONTINUING OPERATIONS (6,528,337) (10,996,677)
DISCONTINUED OPERATIONS
Operating Loss - (1,738,837)
Loss on Disposal (2,377,817) (1,450,289)
------------ -------------
LOSS FROM DISCONTINUED OPERATIONS (2,377,817) (3,189,126)
------------ -------------
------------ -------------
NET LOSS $ (8,906,154) $ (14,185,803)
============ =============
BASIC LOSS PER SHARE FROM:
CONTINUING OPERATIONS $ (0.47) $ (1.36)
DISCONTINUED OPERATIONS - (0.21)
LOSS ON DISPOSAL (0.17) (0.18)
------------ -------------
NET LOSS PER SHARE $ (0.64) $ (1.75)
============ =============
DILUTED LOSS PER SHARE FROM:
CONTINUING OPERATIONS $ (0.47) $ (1.36)
OPERATING LOSS FROM DISCONTINUED OPERATIONS - (0.21)
LOSS ON DISPOSAL (0.17) (0.18)
------------ -------------
NET LOSS PER SHARE $ (0.64) $ (1.75)
============ =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-31
<PAGE>
SILVERADO FOODS, INC. AND SUBSIDIARIES
--------------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
------------------------------------------------
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK
--------------------------- ------------------------
NUMBER NUMBER
OF SHARES AMOUNT OF SHARES AMOUNT WARRANTS
--------- ------ --------- ------ --------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1997 11,701,757 $ 117,018 (26,995) $ (64,652) 46,549
Accretion of Debenture Discount - - - - -
Exchange of Note Receivable for - - - - -
reduction of stock guarantee
Issuance of common stock 1,025,142 10,251 - - -
in connection with debenture
conversion
Issuance of warrants - - - - 4,610
Issuance of common stock in
in connection with settlement
of employment agreement 840,000 8,400 - - -
Contribution of capital 1,790,694 17,907 - - -
Net loss - - - - -
--------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 1998 15,357,593 $ 153,576 (26,995) $ (64,652) $ 51,159
==========================================================================
</TABLE>
<TABLE>
<CAPTION>
ADDITIONAL
PAID-IN ACCUMULATED
CAPITAL DEFICIT TOTAL
------- ------- -----
<S> <C> <C> <C>
BALANCE, DECEMBER 31, 1997 $ 28,843,461 (36,274,813) $ (7,332,437)
Accretion of Debenture Discount 66,666 - 66,666
Exchange of Note Receivable for (200,000) - (200,000)
reduction of stock guarantee
Issuance of common stock 189,749 - 200,000
in connection with debenture -
conversion -
Issuance of warrants - - 4,610
Issuance of common stock in -
in connection with settlement -
of employment agreement (8,400) - -
Contribution of capital (17,907) - -
Net loss - (8,906,154) (8,906,154)
-------------------------------------------------
BALANCE, SEPTEMBER 30, 1998 $ 28,873,569 $ (45,180,967) $ (16,167,315)
=================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-32
<PAGE>
SILVERADO FOODS, INC. AND SUBSIDIARIES
--------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (8,906,154) $ (14,185,803)
------------ -------------
Adjustments to reconcile net loss to cash used in operating activities--
Depreciation and amortization 973,846 1,670,672
Accretion of debenture discount 66,666 1,150,000
Increase in allowance for doubtful accounts - 1,000,000
Loss on sale of assets 2,377,817 1,378,357
Loss on adjustment to carrying value 3,029,599 -
Change in assets and liabilities, net of effect of acquisitions
Decrease in accounts receivable (473,605) 645,674
Decrease in inventory (715,599) 1,299,015
(Increase) Decrease in prepaid expenses and other (218,570) (59,306)
Increase in assets held for disposal (1,856,572) (538,140)
Increase in payables and accrued liabilities 2,701,829 2,275,984
Decrease in intangibles and other 470,492 6,469
------------ -------------
Total adjustments 6,355,903 8,828,725
------------ -------------
Cash provided by (used in) operating activities (2,550,251) (5,357,078)
------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets 1,052,153 1,009,239
Increase in notes receivable - (200,000)
Capital expenditures (705,380) (778,553)
------------ -------------
Cash provided by (used in) investing activities 346,773 30,686
------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings from long-term debt 9,208,476 10,873,473
Payments on notes payable and long-term debt (7,065,967) (5,638,679)
Issuance of stock 4,610 10,000
------------ -------------
Cash provided by (used in) financing activities 2,147,119 5,244,794
------------ -------------
NET DECREASE IN CASH (56,359) (81,598)
CASH, beginning of period 56,359 164,118
------------ -------------
CASH, end of period $ (0) $ 82,520
=========== =============
Non-cash Financing Activities:
Issuance of stock for debenture conversion $ 200,000 $ 1,622,250
Addition to paid-in-capital for debenture discount accretion 66,666 1,150,000
Receipt of note receivable for sale of assets 2,458,750 1,012,383
Contribution of capital - 2,595,601
Exchange of note receivable for reduction of stock guarantee 200,000 -
Purchase of common stock by forgiveness of indebtedness - 2,362,564
Issuance of common stock in connection with termination of - 840,000
employment agreements
Issuance of additional shares for buyout option of royalty - 2,000
SUPPLEMENTAL CASH FLOWS INFORMATION:
Cash paid for-
Interest $ 863,760 $ 820,464
Taxes $ - $ -
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-33
<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,
1997. The foregoing financial statements include only normal recurring accruals
and all adjustments which the Company considers necessary for a fair
presentation.
2. DISCONTINUED OPERATIONS:
During the second quarter of 1998, the Company entered into a plan of disposal
for its specialty baked goods division. The sale of the specialty baked goods
division is subject to obtaining shareholder approval. Accordingly, until such
approval is obtained, the specialty baked goods division is shown as continuing
operations. In addition, the assets of the specialty baked goods division have
been classified as assets held for sale. This disposition is in addition to the
snack tray business, the catalog food division, and the direct store delivery
business, which were discontinued in late 1996 and 1997. The results of the
snack tray division and the catalog division are included in the discontinued
operations section of the income statement, and their assets have been
classified as assets held for sale. Operating expenses include selling, general
and administrative, and interest expense related to these operations. The snack
tray segment does not reflect a loss for the three months ended September 30,
1998 as their operating losses were accrued as part of the loss on disposal
recorded in prior quarters. The following tables summarize the operations and
the components of net assets for the periods indicated below:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
Sales: 1998 1997
---- ----
<S> <C> <C>
Catalog $ --- $ 180,359
Division
Snack Tray 12,708,525 22,592,978
---------------------------------
12,708,525 22,773,337
---------------------------------
Cost of Sales:
Catalog $ ---- $ 212,125
Division
Snack Tray 6,518,491 12,809,275
---------------------------------
6,518,491 13,021,400
---------------------------------
Operating Expenses:
Catalog $ ---- $ 1,695,793
Division
Snack Tray 8,567,851 11,245,270
---------------------------------
8,567,851 12,941,063
---------------------------------
</TABLE>
F-34
<PAGE>
<TABLE>
Loss from Discontinued Operations:
<S> <C> <C>
Catalog Division $ ---- $ (1,727,559)
Snack Tray (2,377,817) (1,461,567)
---------------------------------
Total
(2,377,817) (3,189,126)
=================================
</TABLE>
Net assets held for sale at September 30, 1998 include the following:
<TABLE>
<CAPTION>
SPECIALTY
SNACK TRAY BAKED GOODS TOTAL
---------- ----------- -----
<S> <C> <C> <C>
Accounts Receivable $ 755,855 $ 3,163,498 $ 3,919,353
Inventory 1,380,573 1,644,887 3,025,460
Other Assets 112,481 ----- 112,481
PP&E 192,370 4,163,820 4,356,190
Goodwill 2,344,678 2,273,899 4,618,577
Accounts Payable (2,016,249) (2,010,555) (4,026,804)
Accrued Liabilities (1,348,010) (88,645) (1,436,655)
Other Non-Current Liabilities (159,637) ----- (159,637)
----------- ----------- -----------
Net assets held $ 1,262,061 $ 9,146,904 $10,408,965
for sale =========== =========== ===========
</TABLE>
3. DETAILS TO CONSOLIDATED BALANCE SHEETS:
The inventories related to the Company's discontinued operations are detailed in
Note 2 as a component of net assets held for sale. 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>
DECEMBER 31,
1997
----
<S> <C>
Raw Materials $ 908,105
Finished Goods 370,192
-----------
1,278,297
Less: Allowance for excess and
obsolete inventory (73,976)
-----------
$ 1,204,321
===========
</TABLE>
F-35
<PAGE>
APPENDIX A
AGREEMENT OF STOCK PURCHASE AND SALE
BY AND AMONG
SILVERADO FOODS, INC.
MOM'S BEST SERVICES, INC.
AND
THE PARTIES LISTED ON EXHIBIT A ATTACHED HERETO
DATED AS OF AUGUST 14, 1998
<PAGE>
TABLE OF CONTENTS
PAGE
ARTICLE 1 DEFINITIONS.......................................... 1
1.1 Certain Definitions.................................... 1
1.2 Exhibits, Etc. ........................................ 8
1.3 Plurals, Etc. ......................................... 8
ARTICLE 2 PURCHASE AND SALE OF STOCK AND CONTRIBUTION OF
ASSETS............................................... 8
2.1 Repurchase, Purchase and Sale ......................... 8
2.2 Contribution of Assets to Existing Sub ................ 9
2.3 Excluded Assets........................................ 10
2.4 Assumption of Liabilities.............................. 10
2.5 Assignment of Contracts, Rights and Obligations and
Assumption of Related Liabilities...................... 12
ARTICLE 3 CONSIDERATION........................................ 13
3.1 Consideration and Purchase Price....................... 13
3.2 Repurchase Price Adjustment............................ 13
3.3 Preparation of Closing Balance Sheet................... 13
3.4 Post-Closing Repurchase Price Adjustment............... 14
3.5 Earn-Out Payments...................................... 14
ARTICLE 4 CLOSING.............................................. 17
4.1 Time and Place......................................... 17
4.2 Deliveries............................................. 17
4.3 Notices of Transfer.................................... 18
ARTICLE 5 REPRESENTATIONS AND WARRANTIES OF PARENT............. 19
5.1 Organization and Standing of Parent and Existing Sub... 19
5.2 Authorization of Agreement and Ancillary Documents..... 19
5.3 Shares of Existing Sub................................. 20
5.4 Capitalization......................................... 20
5.5 SEC Reports............................................ 21
5.6 Financial Statements................................... 21
5.7 Insurance.............................................. 22
-i-
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
PAGE
5.8 Absence of Certain Changes or Events................... 22
5.9 Title to Properties; Absence of Liens and Encumbrances. 23
5.10 Condition of Buildings, Structures, Equipment, Etc..... 24
5.11 Agreements, Plans, Arrangements, Etc................... 24
5.12 Legal Proceedings...................................... 26
5.13 Notice of Proceeding, Violation, Etc................... 26
5.14 Intellectual Property.................................. 27
5.15 Permits, Licenses, Etc................................. 28
5.16 Compliance with Laws................................... 28
5.17 Existing Sub and the Business.......................... 28
5.18 Employment Matters..................................... 29
5.19 Tax Matters............................................ 29
5.20 Employee Benefit Plans................................. 32
5.21 Accounts Receivable.................................... 35
5.22 Environmental Matters.................................. 36
5.23 Inventory.............................................. 37
5.24 Books and Records...................................... 37
5.25 Transactions with Affiliates........................... 37
5.26 Brokers................................................ 37
5.27 Major Customers........................................ 37
5.28 Trade Deals and Promotions............................. 38
5.29 Disclosure............................................. 38
5.30 Securities Law Matters................................. 38
ARTICLE 6 REPRESENTATIONS AND WARRANTIES OF BUYERS............. 38
6.1 Organization and Standing.............................. 38
6.2 Authorization of Agreement and Ancillary Documents..... 38
6.3 Governmental Consents.................................. 38
6.4 No Conflict............................................ 39
6.5 Acquisition of Shares for Investment................... 39
6.6 Brokers................................................ 39
-ii-
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
PAGE
ARTICLE 7 PRE-CLOSING COVENANTS................................ 39
7.1 Reasonable Efforts; Cooperation by Parties............. 39
7.2 Conduct of Business.................................... 40
7.3 Required Notices....................................... 42
7.4 Access and Confidentiality............................. 42
7.5 No Shop................................................ 43
7.6 Funding................................................ 44
7.7 Approval............................................... 44
7.8 Free of Encumbrance.................................... 44
7.9 Employees.............................................. 45
7.10 Approvals and Consents................................. 45
7.11 Location of Contributed Assets......................... 45
ARTICLE 8 POST-CLOSING AGREEMENTS.............................. 45
8.1 Further Assurances..................................... 45
8.2 Rights of Enforcement and Settlement................... 45
8.3 Mail, Payments......................................... 46
8.4 Certain Tax Matters.................................... 46
8.5 Covenant Not to Compete................................ 47
ARTICLE 9 CONDITIONS TO BUYERS' OBLIGATIONS.................... 48
9.1 Representations and Warranties True.................... 48
9.2 Performance of Agreements.............................. 48
9.3 Consummation of Contribution........................... 48
9.4 Consummation of Repurchase............................. 48
9.5 No Injunction, Etc..................................... 48
9.6 Executive Officer's Certificates....................... 48
9.7 Approvals and Consents................................. 48
9.8 Assignment and Assumption.............................. 49
9.9 Opinion................................................ 49
9.10 Employment Agreement................................... 49
9.11 Shareholder Agreement.................................. 49
-iii-
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
PAGE
9.12 Guarantee.............................................. 49
9.13 Warrant................................................ 49
9.14 Financing.............................................. 49
9.15 Operation in Accordance with Budget.................... 49
9.16 No Encumbrance on Assets............................... 49
9.17 No Material Adverse Effect............................. 50
9.18 No Proceedings......................................... 50
9.19 Satisfactory Completion of Pre-Acquisition Review...... 50
9.20 Accountant's Letter.................................... 50
9.21 Recapitalization Accounting and Tax Treatment.......... 50
9.22 Location of Contributed Assets......................... 50
ARTICLE 10 CONDITIONS TO PARENT'S OBLIGATIONS................... 50
10.1 Representations and Warranties True.................... 50
10.2 Performance of Agreements.............................. 51
10.3 Deliveries............................................. 51
10.4 No Injunction, Etc..................................... 51
10.5 Parent's Shareholders Approvals and Consents........... 51
10.6 Repurchases............................................ 51
10.7 Opinion................................................ 51
ARTICLE 11 TERMINATION PRIOR TO CLOSING......................... 51
11.1 Termination by Mutual Consent.......................... 51
11.2 Termination by Either Parent or Buyers................. 51
11.3 Other Termination Rights............................... 52
11.4 Effect on Obligations.................................. 53
ARTICLE 12 INDEMNIFICATION...................................... 53
12.1 Survival of Representations, Warranties and Covenants.. 53
12.2 Indemnification by Parent.............................. 54
12.3 Indemnification by Buyers.............................. 55
12.4 Right of Set-Off....................................... 55
12.5 Procedure for Indemnification.......................... 56
-iv-
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
PAGE
12.6 Payment............................................... 56
12.7 Limitation on Right of Indemnification ............... 57
12.8 Other Indemnification Provisions....................... 57
ARTICLE 13 MISCELLANEOUS........................................ 57
13.1 Interpretive Provisions................................ 57
13.2 Entire Agreement....................................... 57
13.3 Successors and Assigns; Benefits....................... 57
13.4 Headings............................................... 58
13.5 Modification and Waiver................................ 58
13.6 Expenses............................................... 58
13.7 Notices................................................ 58
13.8 Specific Performance................................... 60
13.9 Governing Law.......................................... 60
13.10 Public Announcements................................... 60
13.11 Counterparts........................................... 61
-v-
<PAGE>
AGREEMENT OF STOCK PURCHASE AND SALE
THIS AGREEMENT OF STOCK PURCHASE AND SALE (this "AGREEMENT"), made and
entered into as of this 14th day of August, 1998, by and among SILVERADO
FOODS, INC., an Oklahoma corporation ("PARENT"), MOM'S BEST SERVICES, INC., a
Florida corporation and a wholly owned subsidiary of Parent ("EXISTING SUB"),
and the entities set forth on Exhibit A attached hereto, as such Exhibit A may
be amended from time to time prior to the Closing by Swander Pace Capital Fund,
L.P. ( "BUYERS"). Terms defined herein are used in the attached Schedules and
Exhibits as so defined unless otherwise defined therein.
WHEREAS, the parties hereto desire and intend to effect a recapitalization
of Existing Sub on terms and subject to conditions set forth herein.
WHEREAS, after the date hereof, immediately upon the satisfaction or waiver
of certain conditions set forth herein, and immediately prior to the
consummation of the Repurchase (as hereafter defined), Parent shall have
contributed the assets and properties Related to the Business (as hereafter
defined) to Existing Sub, such Contributed Assets (as hereafter defined)
constituting substantially all of Parent's assets, and, in exchange, Existing
Sub shall have issued shares of its capital stock to Parent and shall have
assumed certain specified liabilities, as set forth herein (the "CONTRIBUTION").
WHEREAS, immediately after the Contribution and immediately prior to the
Closing (as hereafter defined), Existing Sub shall repurchase certain shares of
Existing Sub owned by Parent as set forth herein (the "REPURCHASE") and
immediately thereafter, Buyers shall purchase from Parent 90% of the shares of
Existing Sub then outstanding.
WHEREAS, Parent, Existing Sub and Buyers desire to enter into this
Agreement pursuant to which Parent will sell to Buyers, and Buyers will purchase
from Parent, in the amounts set forth opposite the names of each Buyers on
Exhibit A, certain shares of the capital stock of Existing Sub on the terms and
conditions set forth herein, and in connection therewith, to enter into the
Ancillary Documents (as hereafter defined).
NOW, THEREFORE, in consideration of the premises herein contained and for
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, and intending to be legally bound hereby, each of the
parties hereto agrees as follows:
ARTICLE 1
DEFINITIONS
1.1 CERTAIN DEFINITIONS. For all purposes of this Agreement, the
following terms have the respective meanings set forth below:
1
<PAGE>
"ACQUISITION PROPOSAL": any offer, proposal or inquiry (other than an offer
or proposal by Parent) contemplating or otherwise relating to any Acquisition
Transaction.
"ACQUISITION TRANSACTION": any transaction or series of transactions
involving: (a) any merger, consolidation, share exchange, business combination,
issuance of securities, acquisition of securities, tender offer, exchange offer
or similar transaction (i) in which Parent or Existing Sub is a constituent
corporation, (ii) in which a Person directly or indirectly acquires Parent or
Existing Sub or more than 50% of Parent's business or more than 50% or control
of the Business, or directly or indirectly acquires beneficial or record
ownership of securities representing more than 50% of the outstanding securities
of Parent or Existing Sub, or (iii) in which Parent or Existing Sub issues
securities representing more than 50% of the outstanding securities of any class
of voting securities of Parent or Existing Sub; (b) any sale, lease, exchange,
transfer, license acquisition or disposition of more than 50% of the assets of
Parent or Existing Sub, or more than 50% of the Contributed Assets; or (iv) any
liquidation or dissolution of Parent or Existing Sub.
"ADDITIONAL EARN-OUT DATE": as set forth in Section 3.5(a).
"ADDITIONAL EARN-OUT PAYMENT": as set forth in Section 3.5(b).
"ADDITIONAL EARN-OUT PERIOD": as set forth in Section 3.5(a).
"AFFILIATES": with respect to any specified Person, any other Person
directly or indirectly controlling or controlled by or under direct or indirect
common control with such specified Person. For the purposes of this definition,
"control", when used with respect to any specified Person, means the power to
direct or cause the direction of the management and policies of such Person,
directly or indirectly, whether through ownership of voting securities, by
contract, credit arrangement or otherwise; and the terms "controlling" and
"controlled" have meanings correlative to the foregoing. For the avoidance of
doubt, Existing Sub shall not be deemed an Affiliate of any Buyers unless and
until the transactions contemplated hereby are consummated.
"AGREEMENT": as set forth in the Recitals.
"ANCILLARY DOCUMENTS": collectively, the Assignment and Assumption
Agreement, the Interim Services Agreement, the Employment Agreement, the
Shareholder Agreement, the Voting Agreement and all other contracts, agreements,
instruments, deeds, certificates, affidavits and documents being delivered
pursuant to or in connection with this Agreement or with any such other
agreement by any party hereto at or prior to the Closing.
"ARBITRATING ACCOUNTANTS": as set forth in Section 3.3(b).
"ASSIGNED CONTRACTS": as set forth in Section 2.2(e).
"ASSIGNMENT AND ASSUMPTION AGREEMENT": as set forth in Section 4.2(c).
"ASSUMED LIABILITIES": as set forth in Section 2.4(a).
2
<PAGE>
"AUTHORITY": any national, federal, state, provincial or local
governmental, quasi-governmental, administrative, judicial or regulatory agency
or body, commission or authority, within or without the United States of
America.
"BENEFIT PLAN": as set forth in Section 5.20(a).
"BOOKS AND RECORDS": as set forth in Section 2.2(f).
"BUDGET": as set forth in Section 9.15 and attached as Exhibit 9.15.
"BUSINESS": the business of the Nonni's division of Parent.
"BUSINESS DAY": a day other than Saturday, Sunday and national holidays in
the United States.
"BUYERS": as set forth in the Recitals.
"BUYER INDEMNITEES": as set forth in Section 12.02.
"CLOSING": as set forth in Section 4.1.
"CLOSING DATE": as set forth in Section 4.1.
"CODE": the Internal Revenue Code of 1986, as amended and any regulations
promulgated or proposed thereunder.
"COMMITMENTS": as set forth in Section 5.11.
"COMMON STOCK": as set forth in Section 5.4.
"COMPANY BENEFIT PLAN": as set forth in Section 5.20.
"COMPETITIVE ACTIVITY": as set forth in Section 8.5.
"COMPETITIVE PRODUCTS": as set forth in Section 8.5.
"CONSENTS": as set forth in Section 9.7.
"CONTRIBUTION": as set forth in the Recitals.
"CONTRIBUTED ASSETS": as set forth in Section 2.2.
"DEBT FINANCING": as set forth in Section 2.1.
"DEPARTMENT": as set forth in Section 5.20.
"EBITDA": as set forth in Section 3.5(a).
3
<PAGE>
"EMPLOYEE": each current, former or retired employee, officer, consultant,
independent contractor, agent or director of the Business.
"EMPLOYEE AGREEMENT": as set forth in Section 5.20(a).
"ENCUMBRANCES": all claims, restrictions, mortgages, pledges,
hypothecations, security interests or assignments, deposit arrangements,
encumbrances, charges, liens (statutory or other), or preferences, priority or
other security agreements or preferential arrangements of any kind, nature or
character whatsoever (including, without limitation, all conditional sale or
other title retention agreements and all capital leases having substantially the
same economic effect as any of the foregoing), all rights of first refusal,
rights to call, preemptive rights or similar rights, or all options, warrant or
similar commitments, or all other similar rights or interests of others therein.
"ENVIRONMENTAL PERMITS": as set forth in Section 5.22(b).
"ERISA": the Employee Retirement Income Security Act of 1974, as amended
and any regulations promulgated or proposed thereunder.
"ERISA AFFILIATE": as set forth in Section 5.20(a).
"EXCHANGE ACT": as set forth in Section 5.5(a).
"EXCLUDED ASSETS": as set forth in Section 2.3.
"EXPENSES": as set forth in Section 13.6.
"EXISTING SUB": as set forth in the Recitals.
"FIELD WARRANT": as set forth in Section 9.13.
"FINAL SPECIFIED NET ASSETS": as set forth in Section 3.4.
"FINANCIAL STATEMENTS": as set forth in Section 5.6.
"GAAP": as of the date of any determination. the generally accepted
accounting principles as used by the Financial Accounting Standards Board and/or
the American Institute of Certified Public Accountants.
"HOLDBACK AMOUNT": as set forth in Section 3.5(d).
"INDEMNITEE": any Person that may be entitled to seek indemnification under
this Agreement.
"INDEMNITOR": any Person that may be required to provide indemnification
under this Agreement.
"INSURANCE POLICIES": as set forth in Section 5.7.
4
<PAGE>
"INTELLECTUAL PROPERTY RIGHTS": means, with respect to the Business, any:
(a) patent, patent application, trademark (whether registered or unregistered),
trademark application, trade name, brand name, fictitious business name, service
mark (whether registered or unregistered), service mark application, copyright
(whether registered or unregistered), copyright application, label, trade dress,
formula, recipe, mixing instruction, product specification, trade secret, know-
how, computer software, computer program, invention, design, proprietary
product, technology, proprietary right or other intellectual property right or
intangible asset Related to the Business; or (b) right to use or exploit any of
the foregoing.
"INTERIM FINANCIAL STATEMENTS": as set forth in Section 5.6(b).
"INTERIM SERVICES AGREEMENT": the Interim Services Agreement, to be entered
into by and between Parent, Existing Sub, acting for itself and Buyers, in a
form mutually agreeable to the parties thereto, pursuant to which Existing Sub
shall render certain services to Parent after the Closing.
"INITIAL EARN-OUT DATE": as set forth in Section 3.5(a).
"INITIAL EARN-OUT PAYMENT": as set forth in Section 3.5(b).
"INITIAL EARN-OUT PERIOD": as set forth in Section 3.5(a).
"INVENTORY": as set forth in Section 5.23.
"IRS": the Internal Revenue Service or any successor agency thereto.
"LAWS": as set forth in Section 5.2(c).
"LEASED REAL PROPERTY": as set forth in Section 5.9(b).
"LIBOR": means the overnight London Interbank Offered Rate quoted by
Telerate, as of 11:00 a.m. British Standard Time, or as otherwise mutually
agreed.
"LICENSE AGREEMENTS": as set forth in Section 5.11(xv).
"LOSS OR LOSSES": each and all of the following items: claims, losses,
liabilities, obligations, payments, damages (actual, consequential (to the
extent of any dimunition in the value of the Business) or punitive), charges,
judgments, fines, penalties, amounts paid in settlement, costs and expenses, Tax
(without duplication of amounts otherwise indemnified for or paid by Existing
Sub hereunder), fee or expense of any nature (including, without limitation,
interest which may be imposed in connection therewith, costs and expenses of
investigation, actions, suits, proceedings, demands, assessments and fees,
expenses and disbursements of counsel, consultants and other experts).
"1998 MONTHLY PERIODS": as set forth in Section 5.6(b).
"MULTI-EMPLOYER PLAN": as set forth in Section 5.20.
5
<PAGE>
"NET WORKING CAPITAL": means, with respect to the Business, an amount equal
to the Working Capital Assets minus the Working Capital Liabilities.
"NEW EQUIPMENT": means the auto loaders and the cutters contemplated by the
Budget to be purchased at a cost of $262,000.
"NONCOMPETITIVE PERIOD": as set forth in Section 8.5.
"PARENT": as set forth in the Recitals.
"PARENT INDEMNITEES": as set forth in Section 12.3.
"PARENT PROXY STATEMENT": as set forth in Section 5.5(a).
"PARENT SHAREHOLDERS' MEETING": as set forth in Section 7.7.
"PBGC": as set forth in Section 5.20(a).
"PENSION PLAN": as set forth in Section 5.20(a).
"PERMITS": as set forth in Section 2.2(g).
"PERMITTED ENCUMBRANCES": as set forth in Section 5.9(b).
"PERSON": an individual, Partnership (general or limited), corporation,
joint venture, business trust, cooperative, association or other form of
business organization (whether or not regarded as a legal entity under
applicable law), trust estate, agency or any other entity.
"PERSONALTY LEASES": as set forth in Section 2.2(c).
"PLANT-LEVEL EBITDA": as set forth in Section 3.5(a).
"PRO-FORMA FINANCIAL STATEMENTS": as set forth in Section 5.6(b).
"PURCHASE PRICE": as set forth in Section 2.1(b).
"REAL PROPERTY LEASES": as set forth in Section 5.9(b).
"RELATED TO THE BUSINESS": (i) entirely or primarily related to, or (ii)
used or held for use in connection with, the Business.
"REPURCHASE": as set forth in the Recitals.
"REPURCHASED SHARES": as set forth in Section 2.1(a).
"REPURCHASE PRICE": as set forth in Section 2.1(a).
"RETAINED LIABILITIES": as set forth in Section 2.4(b).
6
<PAGE>
"SEC": as set forth in Section 5.5(a).
"SEC REPORTS": as set forth in Section 5.5(b).
"SHAREHOLDER AGREEMENT": as set forth in Section 9.11.
"SPECIFIED NET ASSETS": as set forth in Section 3.2.
"SUBSIDIARY": with respect to any Person, any corporation, partnership,
joint venture, or other legal entity of which such Person (either above or
through or together with any other Subsidiary) owns, directly or indirectly,
more than 50% of the stock or other equity interests the holders of which are
generally entitled to vote for the election of the board of directors or other
governing body of such corporation or other legal entity.
"SUPERIOR OFFER": an unsolicited, bona fide written offer made by a third
party to purchase more than 50% of the outstanding shares of the common stock of
Parent or Existing Sub or more than 50% of the Contributed Assets on terms that
Parent's Board of Directors determines, in its reasonable judgment, based upon
the written advice of its financial advisor, to be more favorable from a
financial point of view to Parent's shareholders than the terms of the
transactions contemplated by this Agreement.
"TARGET SPECIFIED NET ASSETS": as set forth in Section 3.2.
"TAX" all net income, capital gains, gross income, gross receipts, sales,
use, transfer, ad valorem, franchise, net worth, profits, license, capital,
withholding, payroll, employment, excise, goods and services, severance, stamp,
occupation, premium, property, windfall profits, customs, duties or other taxes,
fees or assessments, or other governmental charges of any kind whatsoever,
together with any interest, fines, and any penalties, additions to tax or
additional amounts incurred or accrued under applicable law or assessed, charged
or imposed by any Authority, provided that any interest, penalties, additions to
tax or additional amounts that relate to Taxes for any taxable period (including
any portion of any taxable period ending on or before the Closing Date) shall be
deemed to be Taxes for such period, regardless of when such items are incurred,
accrued, assessed or imposed.
"TAX AFFILIATE": any entity that is a member of a group of entities that
includes the Existing Sub and that files Tax Returns on a consolidated,
combined, unitary or similar basis, if the Existing Sub may be held liable for
the Taxes of such entity or such group under applicable law.
"TAX RETURN": any report, return, statement, estimate, declaration, claim
for refund, notice, form or other information to be supplied to an Authority in
connection with Taxes, including any schedule or attachment thereto and any
amendment thereof.
"TOTAL CONSIDERATION": as set forth in Section 8.4(b).
"TRANSFER TAXES": as set forth in Section 5.19(g).
"WELFARE PLAN": as set forth in Section 5.20(a).
7
<PAGE>
"WORKING CAPITAL ASSETS": prepaid expenses, accounts receivable and
Inventory Related to the Business, as set forth in Section 2.2(i).
"WORKING CAPITAL LIABILITIES": accounts payables and accrued expenses
(including accrued wages, benefits and vacations, and accrued trade payables)
Related to the Business arising in the ordinary course of business in accordance
with past practice
1.2 EXHIBITS, ETC. References made to an "Exhibit" or a "Schedule,"
unless otherwise specified, refer to one of the Exhibits or Schedules attached
to this Agreement, and references made to an "Article" or a "Section," unless
otherwise specified, refer to one of the Articles or Sections of this Agreement.
1.3 PLURALS, ETC. As used herein, the plural form of any noun shall
include the singular and the singular shall include the plural, unless the
context requires otherwise. Each of the masculine, neuter and feminine forms of
any pronoun shall include all such forms unless the context requires otherwise.
ARTICLE 2
PURCHASE AND SALE OF STOCK AND CONTRIBUTION OF ASSETS
2.1 REPURCHASE, PURCHASE AND SALE.
(a) Immediately following the contribution of assets set forth in
Section 2.2 below, Parent shall (1) in cooperation with Buyers, cause Existing
Sub to borrow an amount of money to be determined prior to Closing, under terms
reasonably satisfactory to Buyers, which amount shall be adequate to pay the
Repurchase Price and Buyers' Expenses (together, the "DEBT FINANCING") and (2)
cause Existing Sub to use the proceeds of the Debt Financing (net of any of
Buyers' Expenses, including any Expenses related to the Financing) to repurchase
from Parent 450,000 shares of Common Stock of Existing Sub, par value $1.00 per
share (the "REPURCHASED SHARES") at an aggregate price (the "REPURCHASE PRICE")
equal to one-third (1/3) of the difference of (i) $24 million, and (ii) ten
percent (10%) of the result of (A) subtracting the amount of the Debt Financing
and the purchase price of the Field Warrant from, and (B) adding the amount of
Buyers' Expenses, including any Expenses related to the Financing to, $24
million. In other words, the Repurchase Price shall be equal to:
1/3 x [$24 million - (10%)($24 million - Debt Financing - Field Warrant +
Buyers' Expenses)].
(b) Upon the terms and subject to the conditions set forth herein, at
the Closing and immediately after consummation of the Repurchase, Parent shall
transfer, assign and deliver to Buyers, and Buyers shall purchase from Parent,
in the amounts set forth opposite each Buyer's name on Exhibit A, an aggregate
of 900,000 shares of Common Stock of Existing Sub, par value $1.00 per share
(the "SHARES"), representing 90% of all issued and outstanding shares of the
Common Stock of Existing Sub, on a fully diluted basis, for an aggregate price
equal to two-thirds (2/3) of the difference of (i) $24 million, and (ii) ten
percent (10%) of the result of (A) subtracting the amount of the Debt Financing
and the purchase price of the Field Warrant from, and (B) adding the amount
8
<PAGE>
of Buyers' Expenses, including any Expenses related to the Financing to, $24
million (the "PURCHASE PRICE"). In other words, the Purchase Price shall be
equal to:
2/3 x [$24 million - (10%)($24 million - Debt Financing - Field Warrant +
Buyers' Expenses)].
Each Buyers shall pay the percentage of the Purchase Price set forth opposite
such Buyer's name on Exhibit A.
2.2 CONTRIBUTION OF ASSETS TO EXISTING SUB. Upon the terms and immediately
following the satisfaction or waiver of the conditions set forth in this
Agreement (except for the conditions set forth in Sections 9.3 and 9.4) and
immediately prior to the Repurchase, Parent shall transfer, assign, deliver and
convey to Existing Sub, and Existing Sub shall acquire, accept and receive from
Parent, all direct or indirect right, title and interest of Parent in and to all
of the assets, properties, privileges and rights Related to the Business,
including, without limitation, all assets, properties, privileges and rights
described in clauses (a) through (j) below, whether now owned or hereafter
acquired prior to the Closing (the "CONTRIBUTED ASSETS"), but excluding the
Excluded Assets (as defined in Section 2.3 below). In exchange for the
contribution of the Contributed Assets, Existing Sub shall issue 1,449,900
shares of its Common Stock to Parent and such shares shall be delivered to
Parent on the date of the Contribution and, to the extent required, Existing Sub
shall amend its Certificate of Incorporation to allow for such issuance.
Without limiting the generality of the foregoing, the Contributed Assets shall
include all of Parent's rights, title and interest to and in:
(a) MACHINERY, EQUIPMENT, ETC. Any and all machinery, equipment,
furniture, tools, spare parts, maintenance equipment and supplies, other
supplies, materials, computer hardware and peripherals, construction-in-process,
communications equipment, transportation assets and other personal property
(other than personal property leased pursuant to the Personalty Leases)
(collectively, "EQUIPMENT") that are Related to the Business, and any fixtures,
leasehold or other improvements, including security deposits on any of the
foregoing. The Equipment shall include all personal property on the Leased Real
Property, including, without limitation, property listed in Schedule 2.2(a).
(b) REAL PROPERTY LEASES. Any and all Real Property Leases Related to
the Business, including, without limitation, the leases listed in Schedule
5.9(b).
(c) PERSONALTY LEASES. Any and all leases or other rights to use or
possess personalty Related to the Business, including the leases and rights that
are listed in Schedule 2.2(c), including, without limitation, leases of
machinery, equipment, furniture, tools, spare parts, supplies, materials,
software media, computer hardware, communications equipment and other personal
property (collectively, the "PERSONALTY LEASES").
(d) INTELLECTUAL PROPERTY RIGHTS. Any and all Intellectual Property
Rights, including, without limitation, the rights listed in Schedule 2.2(d).
(e) ASSIGNED CONTRACTS. All (i) the Commitments that are listed in
Schedule 5.11 and the contracts, agreements, plans, policies and arrangements
which would have been required to be listed in Schedule 5.11 except that they
provide for payments in an amount less than, the
9
<PAGE>
applicable amount set forth in Section 5.11 or they are otherwise excludable
from Schedule 5.11 in accordance with Section 5.11, and (ii) rights under
express or implied warranties or other claims against third parties Related to
the Business, and, in each case, any claim or right or any benefit thereunder or
resulting therefrom (the agreements described in (i) and (ii) above are referred
to herein as the "ASSIGNED CONTRACTS").
(f) BOOKS AND RECORDS. Originals or certified copies of all books and
records (excluding any Tax books and records) that are entirely or in
substantial part Related to the Business or related to Existing Sub, wherever
located, including, without limitation, stockholder, board and committee
minutes, technical and procedural manuals, customer and supplier lists,
financial records, maintenance records, personnel records, consulting and
marketing studies, market information, marketing and sales plans, accounting
records, inventory records, sales and sales promotional data, advertising
materials, cost and pricing information, product development information, title
reports and policies, environmental and engineering studies, technical data,
specifications, work standards and manufacturing, assembling and process
information, designs, processes, operating manuals, operating data and plans,
engineering drawings, working drawings, schematics, blueprints, flowsheets and
models, waste disposal, records, correspondence and files (collectively, the
"BOOKS AND RECORDS").
(g) PERMITS. All rights and incidents of interest in and to all
licenses, franchises, grants, easements, exceptions, certificates, consents,
permits, approvals, orders and other authorizations of any Authority
(collectively, the "PERMITS") that are Related to the Business, including,
without limitation, those are listed in Schedule 5.15.
(h) RIGHTS, CLAIMS, CREDITS, ETC. All known and unknown, liquidated
or unliquidated, contingent or fixed, rights, claims, credits, rights of setoff
against third parties, choses in action, causes of action or rights to commence
any causes of action which Existing Sub has at the Closing or may acquire after
the Closing relating to or arising out of the Contributed Assets or Related to
the Business.
(i) WORKING CAPITAL ASSETS. All Working Capital Assets, including (i)
any prepaid items that are Related to the Business; (ii) all accounts, notes and
other receivables Related to the Business; and (iii) all Inventory (as defined
in Section 5.24) Related to the Business.
(j) GOODWILL. All goodwill associated with the Business.
2.3 EXCLUDED ASSETS. Notwithstanding the foregoing, the Contributed
Assets shall not include (i) any deferred income taxes, intercompany receivables
between the Business and Parent or cash or cash equivalents, (ii) any
consideration received by, and the rights of, Parent under orpursuant to this
Agreement and the Ancillary Documents or (iii) such assets located in Parent's
Tulsa corporate offices specifically listed in Schedule 2.3 (the "EXCLUDED
ASSETS").
2.4 ASSUMPTION OF LIABILITIES.
(a) Subject to the provisions of Section 2.5 hereof, as of the
Closing, Existing Sub shall assume and thereafter pay, perform or discharge the
following obligations and liabilities of Parent, as they relate to the Business,
but only those and no others (the "ASSUMED LIABILITIES"):
10
<PAGE>
(i) the Working Capital Liabilities;
(ii) Parent's obligations arising or to be performed after the
Closing under (x) the Assigned Contracts (other than monetary obligations
relating to time periods prior to the Closing, except to the extent they are
Working Capital Liabilities, and other than indemnification obligations of
Parent arising prior to the Closing) to the extent (and from and after the date
as of which) they are assigned to Existing Sub; and (y) the then outstanding
purchase order contracts and sale order contracts entered into in the ordinary
course of business to the extent (and from and after the date as of which) they
are assigned to Existing Sub and not listed in Schedule 5.11;
(iii) Parent's obligations arising or to be performed after
the Closing under the Personalty Leases listed in Schedule 2.2(c) (other than
monetary obligations relating to time periods prior to the Closing except to the
extent they are Working Capital Liabilities, and other than indemnification
obligations of Parent arising prior to the Closing);
(iv) Parent's obligations arising or to be performed after the
Closing under the Real Property Leases listed in Schedule 5.9(b) (other than
monetary obligations relating to time periods prior to the Closing, except to
the extent they are Working Capital Liabilities, and other than indemnification
obligations of Parent arising prior to the Closing);
(v) Parent's obligations arising or to be performed after the
Closing under the Permits listed in Schedule 5.15 to the extent such Permits are
assigned to Existing Sub; and
(vi) Parent's obligations arising or to be performed after the
Closing under the Intellectual Property Rights listed in Schedule 2.2(d), to the
extent (and from and after the date as of which) such rights are assigned to
Existing Sub.
(b) Except as expressly provided in Section 2.4(a), as of the Closing
Date, Existing Sub does not assume, agree to pay, perform, discharge or
indemnify Parent or any of Parent's Affiliates against, or otherwise have any
responsibility for, any or all liabilities or obligations of Parent or the
Business of any kind, character or nature whatsoever, whether known or unknown,
accrued, absolute, contingent, determined, determinable or otherwise, and
whether arising or to be performed prior to, on or after the Closing, whether or
not scheduled pursuant to this Agreement including, without limitation, any
indebtedness for borrowed money, capital lease obligations, intercompany
payables between the Business and Parent, any workers compensation claims,
product liability claims, Tax liabilities (including current or deferred income
tax liabilities), environmental liabilities, liabilities arising out of any
royalty or employment termination agreement (including, without limitation (x)
the Royalty Termination Agreement, dated November 8, 1996, by and among Parent,
Nonni's Inc., Steve Sirianni ("SIRIANNI"), Tim Soldati ("SOLDATI") and Rich
Martin ("MARTIN"), (y) the Employment Termination Agreements, dated April 1,
1998, by and between Parent and each of Sirianni and Soldati, and (z) the
Employment Termination Agreement, dated March 29, 1998 by and between Parent and
Martin), liabilities arising out of any employee benefit plan or agreement,
except to the extent otherwise expressly assumed under this Agreement, any other
claim against the Business arising from facts or events occurring prior to
Closing (such liabilities and obligations being collectively referred to herein
as the "RETAINED LIABILITIES"). Retained Liabilities shall also mean and include
all obligations of Parent or Existing Sub to pay, and
11
<PAGE>
all claims related to, severance or similar payments (notwithstanding anything
contained in this Agreement to the contrary), and all claims, actions,
litigations and proceedings relating to any of the Retained Liabilities and all
costs and expenses in connection therewith.
(c) The assumption by Existing Sub of the Assumed Liabilities as of
the Closing shall not enlarge any rights of any Person under any contracts or
arrangements with Parent.
(d) Nothing contained herein shall prevent Existing Sub from
contesting any of the Assumed Liabilities with any third party obligee or
beneficiary.
2.5 ASSIGNMENT OF CONTRACTS, RIGHTS AND OBLIGATIONS AND ASSUMPTION OF
RELATED LIABILITIES. Notwithstanding anything in this Agreement to the
contrary, this Agreement shall not constitute an agreement to assign any of the
Personalty Leases, Assigned Contracts or Permits as and to the extent that an
attempted assignment thereof, without the consent of a third party thereto,
would constitute a breach or default thereof, would cause or permit the
acceleration or termination thereof or would in any way adversely affect the
rights of Parent or Existing Sub thereunder, but rather shall constitute an
equitable assignment by Parent to Existing Sub of such of Parent's right, title
and interest in and to the Personalty Lease, Assigned Contract or Permit as may
be legally assigned. If such third party consent has not been obtained prior to
the Closing, Parent shall, until such consent is obtained, at its expense, agree
with Buyers to any reasonable arrangement designed to provide Existing Sub the
benefits under any such Personalty Lease, Assigned Contract or Permit,
including, without limitation (a) compliance by Parent on Existing Sub's behalf
with any such Personalty Lease, Assigned Contract or Permit and (b) enforcement
for the benefit of Existing Sub of any and all retained rights of Existing Sub
against a third party thereto arising out of the breach or cancellation by such
third party or otherwise. Upon receipt of any such third party consent, the
assignment to Existing Sub of such Personalty Lease, Assigned Contract or Permit
as provided in Section 2.2 hereof, and the assumption by xisting Sub of certain
related liabilities as provided in Section 2.4 hereof shall, without any further
action on the part of Parent or Existing Sub, become effective.
12
<PAGE>
ARTICLE 3
CONSIDERATION
3.1 CONSIDERATION AND PURCHASE PRICE. The aggregate purchase price for
the Shares to be purchased by Buyers from Parent pursuant to the terms hereof
shall be the Purchase Price, as defined in Section 2.1(b). The Purchase Price
shall be paid to Parent at the Closing by wire transfer or delivery of other
immediately available funds to an account or accounts designated by Parent not
less than three (3) business days prior to the Closing Date.
3.2 REPURCHASE PRICE ADJUSTMENT. In accordance with Section 3.4, the
Repurchase Price shall be adjusted based on the calculation of Specified Net
Assets (as defined below) (x) upward by ninety percent (90%) of the amount in
dollars by which the sum of (1) the book value of Net Working Capital at
Closing, and (2) the book value of the New Equipment at Closing (the "SPECIFIED
NET ASSETS") is more than the sum of (a) $2,196,475, plus (b) the greater of the
final amount actually expended on the New Equipment and $262,000 (the "TARGET
SPECIFIED NET ASSETS") and (y) downward by ninety percent (90%) of the amount in
dollars by which the Target Specified Net Assets is more than the Specified Net
Assets. The Specified Net Assets at Closing shall be preliminarily estimated in
good faith by Parent, which determination shall be reasonably satisfactory to
Buyers, not less than five (5) days prior to the Closing Date. Existing Sub
shall pay to Parent the Repurchase Price, as adjusted pursuant to this Section
3.2, immediately after consummation of the Contribution and immediately prior to
the Closing, upon delivery of the Repurchased Shares by Parent to Existing Sub.
3.3 PREPARATION OF CLOSING BALANCE SHEET.
(a) Within 30 days after the Closing Date, Existing Sub shall deliver
to Parent a calculation of Specified Net Assets as of the close of business on
the Closing Date prepared by Existing Sub in accordance with GAAP, on a basis
consistent with the accounting principles utilized in the preparation of year-
end financial statements. Existing Sub shall provide Parent with reasonable
access to its workpapers in connection with such calculation and shall make
itself available at reasonable times upon request of Parent to discuss with
Parent such calculation.
(b) If Parent objects to Existing Sub's calculation of Specified Net
Assets, Parent shall deliver to Existing Sub and Buyers, within 30 days after
receipt of Existing Sub's calculation (the "OBJECTION PERIOD"), a written
statement describing its objections thereto. In the event that Parent fails to
deliver such written statement prior to the expiration of the Objection Period,
Existing Sub's calculation shall be final, conclusive and binding upon the
parties hereto. In the event that Parent delivers such written statement prior
to the expiration of the Objection Period, Parent and Existing Sub will use all
reasonable efforts to resolve any dispute. If Parent's calculation of Specified
Net Assets differs by no more than $5,000 from Existing Sub's calculation, then
no adjustment shall be made and Parent's calculation shall be the final
resolution of the Specified Net Assets. If a final resolution is not obtained
within 30 days after Parent has delivered such written notice, either Existing
Sub or Parent may submit any remaining disputes for resolution to an accounting
firm mutually agreeable to Existing Sub and Parent (such accounting firm shall
be referred to herein as the "ARBITRATING ACCOUNTANTS") which firm shall resolve
such dispute within 30 days following its selection based solely upon
presentations by the parties, which presentations
13
<PAGE>
shall include each party's estimate of the Specified Net Assets and shall not
include any independent review. In resolving any dispute, the Arbitrating
Accountants shall examine only those issues in dispute and shall not assign a
value greater than the highest value claimed by a party or lower than the lowest
value claimed by a party. The Arbitrating Accountants' determination shall be
final, conclusive and binding upon the parties hereto. The calculation of
Specified Net Assets as finally revised based on the mutual agreement of
Existing Sub and Parent or by the Arbitrating Accountants shall be final,
conclusive and binding upon the parties hereto.
(c) Existing Sub and Parent shall cooperate with the Arbitrating
Accountants in all respects, including providing the Arbitrating Accountants
with all work papers and back-up materials used in preparation and review of
their calculations of Specified Net Assets.
(d) The fees, expenses and costs of the Arbitrating Accountants shall
be borne by the party (Existing Sub or Parent) whose estimation of the Specified
Net Assets, taking into account any changes made prior to submission to the
Arbitrating Accountants, is farthest from the sum of the Specified Net Assets as
finally determined by the Arbitrating Accountants.
3.4 POST-CLOSING REPURCHASE PRICE ADJUSTMENT. In the event that the
Specified Net Assets as finally determined ("FINAL SPECIFIED NET ASSETS") is
less than the Specified Net Assets originally calculated by Parent ("PRELIMINARY
SPECIFIED NET ASSETS"), then the Repurchase Price will be adjusted downward by
an amount equal to ninety percent (90%) of the amount of such difference, to
reflect the decrease in Final Specified Net Assets from Preliminary Specified
Net Assets, and Parent shall pay Existing Sub such amount as set forth in the
last sentence of this Section 3.4. Conversely, in the event that the Final
Specified Net Assets is more than the Preliminary Specified Net Assets, then the
Repurchase Price will be adjusted upward, by an amount equal to ninety percent
(90%) of such difference, to reflect the increase, if any, in Final Specified
Net Assets from Preliminary Specified Net Assets, and Existing Sub shall pay to
Parent such amount as set forth in the last sentence of this Section 3.4. The
post-closing adjustment to the Repurchase Price, if any, plus interest payment
thereon, calculated at a rate of one-month LIBOR (in effect as of the Closing
Date) plus three percent (3%), shall be paid by Parent to Existing Sub or by
Existing Sub to Parent, as the case may be, in immediately available funds
within ten (10) days of the earlier of (a) delivery of the final, conclusive and
binding calculation of Specified Net Assets by the Arbitrating Accountants, (b)
the mutual resolution of any dispute between Existing Sub and Parent, or (c) the
expiration of the Objection Period in the event no objection has been made.
3.5 EARN-OUT PAYMENTS.
(a) For purposes of this Agreement, the following terms shall have the
meaning set forth below:
"ADDITIONAL EARN-OUT PERIOD": the twelve month period ending on the
Additional Earn-Out Date.
"ADDITIONAL EARN-OUT DATE": September 30, 1999.
"INITIAL EARN-OUT PERIOD": the twelve month period ending on the
Initial Earn-Out Date.
14
<PAGE>
"INITIAL EARN-OUT DATE": March 31, 1999.
"EBITDA": Plant-Level EBITDA plus "indirect sales and marketing
expense" and "indirect general and administrative expense."
"PLANT-LEVEL EBITDA": As calculated by Existing Sub, earnings from the
operation of the Business, before interest, income taxes, depreciation,
amortization, "indirect sales and marketing expense," "indirect general and
administrative expense," payments made by Parent to Existing Sub pursuant to the
Interim Services Agreement and any nonrecurring gains, losses, or expenses.
The calculations of Plant-Level EBITDA and EBITDA shall be consistent
with Parent's accounting for "indirect sales and marketing expense" and
"indirect general and administrative expense," and consistent with GAAP, except
as otherwise provided herein. To the extent that the Business uses outside
co-packers during the Initial Earn-Out Period or Additional Earn-Out Period,
such resulting expenditures shall be included in the calculation of Plant-Level
EBITDA and EBITDA. To the extent any acquisitions are made during the Initial
Earn-Out Period or Additional Earn-Out Period, Existing Sub shall make a good
faith computation of Plant-Level EBITDA and EBITDA on a segregated basis. In
addition to the foregoing, the calculation of Plant-Level EBITDA and EBITDA
shall be subject to the following:
(i) The "earnings from the operation of the Business" shall
include without limitation:
(1) all revenues and expenses from the sale of biscotti,
products similar to biscotti, products related to biscotti, and other specialty
cookie products;
(2) all revenues from the existing brands of the Business
and all successor and related brands;
(3) all revenues of the Existing Sub until such time as
Existing Sub acquires another business entity; and
(4) all revenues from all products produced by Existing Sub,
including all revenues from new products developed by Existing Sub following the
Closing, but excluding revenues from products relating to product lines acquired
from third parties.
(ii) The only acquisitions by Existing Sub which will require
computation on a segregated basis are those involving the acquisition of another
business entity. Acquisitions of additional plant and equipment by Existing Sub
shall not require computation on a segregated basis.
(iii) For purposes of this Section 3.5, the Business shall
include the operation by Existing Sub of the Business following the Closing, and
shall include any business or businesses conducted by Existing Sub, or any
subsidiary or other affiliates of Existing Sub, which represent a succession to
and a continuation of the Business, as the same may be expanded from time to
time.
15
<PAGE>
(b) Subject to paragraph (c) of this Section, Existing Sub shall pay
to Parent an amount in cash ("INITIAL EARN-OUT PAYMENT") equal to $3.0 million
if EBITDA for the Initial Earn-Out Period exceeds $3.6 million. Subject to
paragraph (c) of this Section, Existing Sub shall pay to Parent an amount in
cash ("ADDITIONAL EARN-OUT PAYMENT") equal to the product of (i) a fraction, the
numerator of which is equal to (A) Plant-Level EBITDA for the Additional Earn-
Out Period, minus (B) $8,600,000 (which numerator, if such difference equals a
negative number, shall equal zero, and if such difference is greater than
$1,000,000, shall equal $1,000,000), and the denominator of which is equal to
$1,000,000 and (ii) $5,000,000.
(c) Subject to paragraph (d) below, any Initial Earn-Out Payment or
Additional Earn-Out Payment pursuant to this Section shall be delivered from
Existing Sub to Parent as soon as reasonably practicable following the
availability of unaudited financial statements relating to the relevant Initial
Earn-Out Period or Additional Earn-Out Period, but in no event later than 60
days after the relevant Initial Earn-Out Date or Additional Earn-Out Date (or,
to the extent that the Initial Earn-Out or Additional Earn-Out has not been
finally determined as set forth in Section 3.5(g), within 5 days after such
determination).
(d) Notwithstanding the foregoing, if an Initial Earn-Out Payment or
Additional Earn-Out Payment is payable under this Section and there exists any
outstanding claim for indemnification asserted by any Buyer Indemnitee pursuant
to Article XII hereof, the portion of the Initial Earn-Out Payment or Additional
Earn-Out Payment equal to the amount of such outstanding claim for
indemnification asserted by any Buyer Indemnitee (the "HOLDBACK AMOUNT"), to be
paid by Buyers to Parent shall be delayed until the final resolution of such
claim. The excess, if any, of the Initial Earn-Out Payment or Additional Earn-
Out Payment payable to Parent over the Holdback Amount shall be paid in
accordance with paragraph (c) above. If any Buyer Indemnitee is subsequently
entitled to be indemnified pursuant to Article XII hereof, then a portion of the
Holdback Amount equal to the amounts owed to Buyer Indemnitee shall be paid to
Buyer Indemnitee.
(e) During the Initial Earn-Out Period and the Additional Earn-Out
Period and until all Initial Earn-Out Payments and Additional Earn-Out Payments
have been duly paid, (i) Parent shall have reasonable access to the financial
books and records of Existing Sub, and (ii) Existing Sub shall provide to Parent
monthly statements of the results of operations of Existing Sub and monthly
calculations of Plant-Level EBITDA and EBITDA, which information shall be
provided in the ordinary course no later than the 30th day of the following
month.
(f) Buyers shall not, and shall cause Existing Sub to not, take any
action reasonably calculated to diminish the levels of Plant-Level EBITDA and
EBITDA, provided that in no event shall this provision restrict Buyers' ability
to conduct the Business after the Closing in the ordinary course.
(g) Within 45 days after each of the Initial Earn-Out Date and the
Additional Earn-Out Date, Existing Sub shall deliver to Parent a calculation of
the Initial Earn-Out Payment and Additional Earn-Out Payment, respectively.
Existing Sub shall provide Parent with reasonable access to its workpapers in
connection with such calculation and shall make itself available at reasonable
times upon request of Parent to discuss with Parent such calculation. If Parent
objects to Existing
16
<PAGE>
Sub's calculation of the Initial Earn-Out Payment or Additional Earn-Out
Payment, Parent shall deliver to Existing Sub and Buyers, within 10 days after
receipt of Existing Sub's calculation, a written statement describing its
objections thereto. In the event that Parent fails to deliver such written
statement within the period set forth above, Existing Sub's calculation shall be
final, conclusive and binding upon the parties. In the event that Parent
delivers such written statement within the period set forth above, Parent and
Existing Sub will use reasonable efforts to resolve any dispute. If a final
resolution is not obtained within 30 days after Parent has delivered such
written notice, either Existing Sub or Parent may submit any remaining disputes
for resolution to the Arbitrating Accountants, which firm shall resolve such
dispute within 30 days based solely upon presentations by the parties, which
presentations shall include each party's calculation of the Initial Earn-Out
Payment or Additional Earn-Out Payment and shall not include any independent
review. In resolving any dispute, the Arbitrating Accountants shall examine only
those issues in dispute and shall not assign a value greater than the highest
value claimed by a party or lower than the lowest value claimed by a party. The
calculation of the Initial Earn-Out Payment or Additional Earn-Out Payment as
finally revised based on the mutual agreement of Existing Sub and Parent or by
the Arbitrating Accountants shall be final, conclusive and binding upon the
parties hereto. Existing Sub and Parent shall cooperate with the Arbitrating
Accountants in all reasonable respects, including providing the Arbitrating
Accountants with all work papers and backup materials used in preparation and
review of their calculations of the Initial Earn-Out Payment or Additional Earn-
Out Payment. The fees, expenses and costs of the Arbitrating Accountants shall
be borne by the party (Existing Sub or Parent) whose estimation of the Initial
Earn-Out or Additional Earn-Out, taking into account any changes made prior to
submission to the Arbitrating Accountants, is farthest from the sum of the
Initial Earn-Out or Additional Earn-Out as finally determined by the Arbitrating
Accountants.
ARTICLE 4
CLOSING
4.1 TIME AND PLACE. The closing of the transactions contemplated hereunder
(the "CLOSING") shall take place at the offices of Cooley Godward LLP, Five Palo
Alto Square, 3000 El Camino Real, Palo Alto, California, at 10 A.M., California
time, within five (5) Business Days after satisfaction or waiver of all of the
conditions to each party's obligations under Articles IX and X, or at such other
place, time and date as the parties hereto may agree or such date as Buyers
shall determine to be reasonable in order for Buyers to obtain the financing for
completion of the transactions contemplated herein (the "CLOSING DATE").
4.2 DELIVERIES. At the Closing:
(a) Parent will deliver to each Buyers a stock certificate,
representing all of the Shares set forth opposite such Buyer's name on Exhibit
A, endorsed in blank or accompanied by duty executed assignment documents;
(b) Parent shall deliver to Existing Sub all Books and Records, and
Consents required by Section 9.7 and shall deliver to Buyers the certificates
and documents required in Article IX and such other documents, instruments and
writings as may be reasonably requested by Buyers prior to the Closing; and
17
<PAGE>
(c) Parent shall deliver, or cause to be delivered, to Buyers such
deeds, bills of sale, endorsements, assignments, licenses and other instruments,
certificate and documents executed and reasonably satisfactory in form and
substance to Buyers and its counsel as shall be reasonably necessary to vest in
Existing Sub as of the Closing Date good and valid title to the Contributed
Assets free and clear of any Encumbrances (including, without limitation, an
Assignment and Assumption Agreement in a form to be agreed between the parties.
(d) Parent and Buyers shall cause Existing Sub to pay, and Existing
Sub shall pay, the Repurchase Price in accordance with Section 2.1(a).
(e) Buyers shall pay the Purchase Price in accordance with Section 3.1
and deliver to Parent (i) the certificates and documents required in Article X,
and (ii) such other documents, instruments and writings as may be reasonably
requested by Parent prior to the Closing.
(f) Parent will deliver to Existing Sub stock certificates
representing all of the Repurchased Shares, endorsed in blank or accompanied by
duly executed assignment documents.
4.3 NOTICES OF TRANSFER. As requested by Existing Sub from time to time
after the Closing, Parent shall prepare and mail notices to the other party
under each of the Personalty Leases, Real Property Leases and the Assigned
Contracts transferred, assigned, delivered and conveyed to Existing Sub pursuant
to this Agreement advising such other party that such Personalty Leases, and
Assigned Contracts have been contributed to Existing Sub and directing such
other party to send to Existing Sub all future payments, notices and
correspondences relating to the foregoing. As requested by Existing Sub from
time to time after the Closing, Parent shall prepare and mail notices to
relevant Authorities relating to the contribution to Existing Sub of all rights
and incidents of interest in and to all Permits that are Related to the
Business, advising such Authorities that such rights and interests in and to the
Permits have been contributed to Existing Sub and directing such Authorities to
send to Existing Sub all future payments, notices and correspondences relating
to the Permits.
18
<PAGE>
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF PARENT
Parent represents and warrants to Buyers as follows (such representations
and warranties, unless otherwise specified, are deemed to be made as of the date
hereof and as of the Closing Date):
5.1 ORGANIZATION AND STANDING OF PARENT AND EXISTING SUB. Each of Parent
and Existing Sub is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation and has all
requisite corporate power and authority to carry on its business as now
conducted and as proposed to be conducted. Except as set forth on Schedule 5.1,
Parent and Existing Sub are each duly qualified to do business as a foreign
corporation and are each in good standing under the laws of each state or other
jurisdiction in which either the ownership or use of their respective properties
owned or used by it, or the nature of their respective activities conducted by
it or proposed to be conducted by it, requires such qualification. Existing Sub
has no subsidiaries, and Existing Sub has never owned, beneficially or
otherwise, any shares or other securities of, or any direct or indirect interest
of any nature in, any entity.
5.2 AUTHORIZATION OF AGREEMENT AND ANCILLARY DOCUMENTS.
(a) Each of Parent and Existing Sub has all requisite corporate power
and authority to execute, deliver and perform this Agreement and each Ancillary
Document to which it is a party and to consummate the transactions contemplated
hereby and thereby.
(b) Except for the lack of approval, as of the date of this Agreement,
by Parent's shareholders, each of Parent and Existing Sub has taken all action
required by Law and necessary corporate action (including, without limitation,
obtaining the approval of its Board of Directors and any consent of its
stockholders required by Law or by its certificate of incorporation or by-laws)
to authorize the execution, delivery and performance of this Agreement and each
Ancillary Document to which it is a party and the consummation of the
transactions contemplated hereby and thereby. This Agreement and the Ancillary
Documents to which Parent or Existing Sub is a party have been duly and validly
authorized, executed and delivered by Parent or Existing Sub, as applicable, and
this Agreement and the Ancillary Documents constitute the legal, valid and
binding obligations of Parent or Existing Sub, as applicable.
(c) Except as set forth on Schedule 5.2(c) and subject to the
satisfaction of the conditions to this Agreement the execution and delivery of
this Agreement by each of Parent and Existing Sub and the Ancillary Documents to
which either of them is a party and the consummation of the transactions
contemplated hereby and thereby will not (with or without the giving of notice
or the lapse of time or both) (i) conflict with any provision of the certificate
of incorporation or by-laws of Parent or Existing Sub, (ii) have any effect on
any of the Permits or the ability of Existing Sub to use such Permits, (iii)
conflict with, or result in any violation of, or default or loss of a benefit
under, or cause or permit the termination of, or cause or permit the
acceleration under, the terms of any Personalty Lease, Assigned Contract or
domestic (federal, state or local) or foreign law, judgment, order, decree,
statute, code, law, ordinance, rule or regulation (collectively, "LAWS")
applicable to any of the Contributed Assets or Existing Sub or any of Existing
Sub's respective assets and properties, (iv) result in the creation or
imposition of any Encumbrance upon any of the
19
<PAGE>
Contributed Assets or any portion thereof or (v) result in the creation of any
Lien upon the Shares. Except as set forth in Schedule 5.2(c), no consent,
approval, order or authorization of, or registration, declaration or filing
with, any Authority and no consent, approval or authorization of any Person is
required to be made or obtained by Parent or Existing Sub in connection with the
execution and delivery of this Agreement or any Ancillary Document or the
consummation of the transactions contemplated hereby or thereby, including,
without limitation the Contribution and the sale of Shares to Buyers.
5.3 SHARES OF EXISTING SUB. Parent holds of record and owns beneficially,
as of the date hereof, 100 shares of Common Stock, and after the Contribution,
it will own 1,450,000 shares of Common Stock of Existing Sub, free and clear of
any Liens, options, warrants, purchase rights contracts, commitments, equities,
claims and demands. Parent is not a party to, nor has it taken any steps to
become a party to, any option, warrant, purchase right or other contract (other
than this Agreement) or commitment that could require it to sell, transfer or
otherwise dispose of any of the shares of capital stock of Existing Sub or any
interest therein or right thereto. There are no voting trusts, stockholder
agreements, proxies or other agreements or understandings in effect with respect
to the voting or transfer of any of the Shares.
5.4 CAPITALIZATION. As of the date hereof, the authorized capital stock
of Existing Sub consists solely of 1,000 shares of Common Stock, par value $
1.00 per share (the "COMMON STOCK"), of which 100 shares are issued and
outstanding and all of such outstanding shares are owned beneficially and of
record by Parent. Immediately following the Contribution, the authorized capital
stock of Existing Sub will consist solely of 1,450,000 shares of Common Stock,
all of which will be issued and outstanding and all of such outstanding shares
will be owned beneficially and of record by Parent. Immediately following the
purchase of the Shares, the authorized capital stock of Existing Sub shall
consist solely of 1,450,000 shares of Common Stock, 1,000,000 of which shall be
issued and outstanding, 100,000 of which will be owned beneficially and of
record by Parent and 900,000 of which will be owned beneficially and of record
by Buyers. All of the issued and outstanding shares of Common Stock have been
duly authorized, are validly issued, fully paid and nonassessable. The shares of
Common Stock of Existing Sub to be issued in connection with the Contribution
will, when issued, be duly authorized, validly issued, fully paid and
nonassessable. At the Closing, Parent shall have and Buyers shall acquire, good
and valid title to the Shares free and clear of any Encumbrances. Other than
pursuant to transactions contemplated hereunder, there are no outstanding or
authorized options, warrants, purchase rights, subscription rights, conversion
rights, exchange rights or other contracts or commitments that could require
Existing Sub to issue, sell or otherwise cause to become outstanding any of its
capital stock or any securities exercisable for, exchangeable for or convertible
into such capital stock. There are no outstanding or authorized share
appreciation, phantom share, profit participation or similar rights with respect
to the capital stock of Existing Sub.
20
<PAGE>
5.5 SEC REPORTS.
(a) The proxy statement of Parent to be filed with the Securities and
Exchange Commission (the "SEC") in connection with the transactions contemplated
under this Agreement (the "PARENT PROXY STATEMENT") and any amendments or
supplements thereto will, when filed, comply as to form in all material respects
with the applicable requirements of the Securities Exchange Act of 1934 (the
"EXCHANGE ACT"). At the time the Parent Proxy Statement or any amendment or
supplement thereto is first mailed to stockholders of Parent and at the time
such stockholders vote on the approval and adoption of this Agreement, the
Parent Proxy Statement, as supplemented or amended, if applicable, will not
contain any untrue statement of a material fact or omit to state any material
fact necessary in order to make the statements contained therein, in the light
of the circumstances under which they were made, not misleading. The foregoing
representations and warranties will not apply to statements or omissions
included in the Parent Proxy Statement or any amendment or supplement thereto
based upon information furnished to the Parent by Buyers for use therein.
(b) Parent has filed all proxy statements, reports and other documents
required to be filed by it under the Exchange Act since December 31, 1997; and
Parent has furnished the Purchaser copies of its Annual Report on Form 10-K for
the fiscal years ended December 31, 1997, and all proxy statements and reports
under the Exchange Act filed by Parent after such date, each as filed with the
SEC (collectively, the "SEC REPORTS"). Each SEC Report was in compliance with
the requirements of its respective report form and did not on the date of filing
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading.
5.6 FINANCIAL STATEMENTS.
(a) The financial statements (including any related schedules and/or
notes) included in the SEC Reports have been prepared in accordance with GAAP
consistently applied (except as indicated in the notes thereto) throughout the
periods involved and fairly present the consolidated financial condition,
results of operations, changes in stockholders' equity and cash flows of Parent
and its Subsidiaries as of the dates thereof and for the periods ended on such
dates (except for lack of footnotes and in each case subject, as to interim
statements, to changes resulting from year-end adjustments, which in the
aggregate will not be material in amount or effect).
(b) Attached hereto as Schedule 5.6(a) are the following financial
statements of the Business (the "PRO-FORMA FINANCIAL STATEMENTS"): (i) the
audited balance sheet of the Business as of December 31, 1997 and the unaudited
balance sheets of the Business as of each month end from January 31, 1998 to May
31, 1998 (the "1998 MONTHLY PERIODS") and (ii) audited statements of income and
cash flows for the fiscal year ended December 31, 1997 (the "1997 INCOME
STATEMENT") and unaudited statements of income and cash flows for each of the
1998 Monthly Periods. From the date of this Agreement to the Closing Date,
Parent shall provide to Buyers monthly unaudited balance sheets and statements
of income and cash flows for each of Parent and the Business in the form of
Exhibit 5.6(b) attached hereto (the "INTERIM FINANCIAL STATEMENTS") as promptly
as practicable (and in any event within 20 days) after the end of each month
and, in the case
21
<PAGE>
of the Interim Financial Statements for the month ending prior to the Closing,
prior to the Closing Date only if the Closing occurs on or following the 20th
day of the month. The Pro-Forma Financial Statements (including the notes
thereto) and the Interim Financial Statements present (or will present) fairly
the financial condition of Parent and the Business as of such dates and the
results of operations of Parent and the Business for such periods, are correct
and complete, and are consistent with the books and records of Parent and the
Business and have been prepared in accordance with GAAP, applied on a consistent
basis (except for the absence of footnotes and in each case subject, as to
interim statements, to changes resulting from year-end adjustments, which in the
aggregate will not be material in amount or effect).
5.7 INSURANCE. Schedule 5.7 sets forth a list, as of the date hereof, of
all material casualty, general liability and other insurance maintained by
Parent and, as of the Closing, Existing Sub, for the benefit of the Business
(the "INSURANCE POLICIES") and a list and brief description of all claims made
by Parent since January 1, 1994 against any of its insurance policies. Each of
the insurance Policies is in full force and effect and no written notice has
been received by Parent nor, as of the Closing, Existing Sub from any insurance
carrier purporting to cancel coverage under any of the Insurance Policies which
are currently in effect. Except as set forth in Schedule 5.7, to Parent's
knowledge, there are no pending material claims against the Insurance Policies
by Parent with respect to the Business as to which the insurers have denied
liability. Parent has made timely premium payments with respect to all of the
Insurance Policies.
5.8 ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as set forth in Schedule
5.8, since December 31, 1997, neither Parent nor Existing Sub has directly or
indirectly:
(a) made any change in its accounting methods or practices (including
estimation methodologies) or any revaluation of any asset or property;
(b) operated the Business in a manner other than in the ordinary
course of business, consistent with past practice and business policies;
(c) sustained any damage, destruction, or casualty loss whether or not
covered by insurance, to any of the assets of the Business in excess of $20,000
individually, and no more than $50,000 in the aggregate;
(d) incurred any material obligation or liability (fixed or
contingent) in respect of or affecting the Business (in the case of Parent) or
any of the Contributed Assets except (i) trade obligations incurred in the
operation of the Business in the ordinary course, consistent with past practice,
(ii) obligations and liabilities under any Commitment set forth in Schedule 5.11
or under any contracts, agreements, plans, policies or arrangements which would
have been required to have been listed in Schedule 5.11 except that they provide
for payments in an amount less than the applicable amount set forth in Section
5.11 or they are otherwise excludable from Schedule 5.11 in accordance with
Section 5.11, and (iii) obligations and liabilities under this Agreement, and
(vi) obligations and liabilities which, in accordance with GAAP consistently
applied, would not be required to be recorded on a consolidated balance sheet of
Parent or a balance sheet of Existing Sub.;
(e) made any amendment to its or Existing Sub's certificate of
incorporation or by-laws;
22
<PAGE>
(f) sold, assigned, transferred or granted any license or sublicense
of any rights, title or interest under or with respect to any Intellectual
Property Rights, in the case of Parent, Related to the Business;
(g) sold, leased, transferred, or assigned any assets, tangible or
intangible, in the case of Parent, Related to the Business other than for fair
consideration. in the ordinary course of business, but in no event any non-
inventory assets, tangible or intangible, in the case of Parent, Related to the
Business for any amount in excess of $10,000;
(h) effected any increase, direct or indirect, in the compensation
paid or payable to any salaried employee, agent or independent contractor (of
the Business in the case of Parent), other than in the ordinary course of
business and, in any event, not to exceed 5%; or engaged any new employee
involving annual compensation in excess of $50,000 or made any general "across-
the board" increase in wage rates for any category of hourly employees;
(i) made any material increase in or commitment to materially increase
any employee benefits or adopted or made any commitments to adopt any additional
employee benefit plan;
(j) made or entered into any contracts or commitments to make any
capital expenditures in excess of $25,000 in the aggregate;
(k) mortgaged, pledged or subjected to any Encumbrance any of the
assets;
(l) amended or terminated any of its Assigned Contracts, Real Property
Leases, or Personalty Leases;
(m) waived or released any other right of material value; or
(n) agreed, whether in writing or otherwise, to take any action
described in this Section 5.8.
Except as set forth in Schedule 5.8, since December 31, 1997, (a) Parent
has not significantly changed any of its business policies with respect to the
Business and (b) without limiting any of the foregoing, there has not been any
material adverse effect or change on the business, assets, liabilities,
operations, results of operations or financial condition of the Business.
5.9 TITLE TO PROPERTIES; ABSENCE OF LIENS AND ENCUMBRANCES.
(a) Parent has, prior to the date of consummation of the Contribution,
and as of the date of consummation of the Contribution, Existing Sub, shall have
good and valid title to all of the Contributed Assets (tangible and intangible,
other than real properties), free and clear of all imperfections of title and
all Encumbrances, except (i) as set forth in Schedule 5.9(a) and (ii) for such
imperfections of title and Encumbrances, if any, as do not individually
interfere with or affect the present or contemplated use or value of the asset
or property to which it attaches. The Contributed Assets constitute all of the
assets, tangible and intangible, of any nature whatsoever, used in operating the
Business in the manner presently operated by Parent or Existing Sub.
23
<PAGE>
(b) Neither Parent nor, as of the Closing, Existing Sub owns any real
property. Schedule 5.9(b) lists all real property Related to the Business leased
by Parent or, as of the Closing, Existing Sub (the "LEASED REAL PROPERTY" and
the leases to such real property, the "REAL PROPERTY LEASES"). Parent has and,
as of the Closing, Existing Sub, will have good, valid and binding leasehold
title to its leased real properties Related to the Business, free and clear of
all imperfections of leasehold title and all Encumbrances, other than as set
forth in Schedule 5.9(b) and such imperfections of leasehold title and
Encumbrances, if any, as do not individually materially interfere with or affect
the current use or the value of the property to which it attaches or otherwise
have a material adverse effect on the conduct of the Business (imperfections of
title and Encumbrances specifically described in this sentence and in clauses
(i) and (ii) of subparagraph (a) above shall be included in the term "PERMITTED
ENCUMBRANCE"). There are no existing defaults, and no events or circumstances
have occurred which, with or without notice or lapse of time or both, would
constitute defaults, under any of the Real Property Leases. None of the real
property Related to the Business leased by Parent or, as of the Closing,
Existing Sub, is subject to any leases or rights of occupancy by any third
party. Except as set forth on Schedule 5.9(b), there are no options, rights of
first refusal, rights of first offer or other similar rights in favor of any
Person other than Parent, prior to the date of consummation of the Contribution,
with respect to the real property used in connection with the Business.
5.10 CONDITION OF BUILDINGS, STRUCTURES, EQUIPMENT, ETC. Except as set
forth on Schedule 5.10, the Equipment, buildings, facilities, utilities,
leasehold and other improvements, fixtures, structures, any related capitalized
items and other tangible property included in the Contributed Assets, (i) are in
good operating condition and repair (normal wear and tear excepted), free (in
the case of buildings or structures located on the Real Properties) of any
structural or engineering defects, (ii) are subject to continued repair and
replacement in accordance with past practice and all applicable laws and
regulations; and (iii) are suitable and sufficient for the conduct of the
Business as conducted on the date hereof..
5.11 AGREEMENTS, PLANS, ARRANGEMENTS, ETC. Except as set forth in Schedule
5.11, neither Parent nor Existing Sub (either currently or as of the Closing
Date) is a party to any contract, agreement, plan, policy or arrangement, in the
case of Parent, Related to the Business that is of a type described below:
(i) any lease agreement (whether as lessor or lessee) relating to
personal property, including the Personalty Leases other than those lease
agreements (1) listed in Schedule 2.2(c) or (2) which are cancelable on not more
than thirty days' notice and do not in any case provide for a rental of more
than $500 per month;
(ii) any agreements with officers, directors, stockholders,
consultants, or contractors, or any other agreement with employees, except for
agreements with employees who are not officers or directors where the aggregate
amount of such agreements is not in excess of $10,000;
(iii) any sales order or other agreement for the sale of goods,
materials, supplies, machinery, capital assets or services in excess of $50,000
in any one case, other than sales of inventory in the ordinary course of
business not in excess of $10,000 in any one case;
24
<PAGE>
(iv) any purchase order or; other agreement for the purchase of
goods, materials and supplies having a value in excess of $10,000, other than in
the ordinary course of business, consistent with past practice;
(v) any agreement not terminable at will by Parent or, as of the
Closing, Existing Sub and granting to any Person a right at such Person's option
to purchase or acquire any asset or property Related to the Business (or any
interest therein) except for agreement relating to payments, in the aggregate,
not in excess of $10,000;
(vi) any agreement granting any Person an Encumbrance on any
Contributed Asset or any asset of Existing Sub;
(vii) any agreement for the construction or modification of any
building or structure or for the incurrence of any other capital expenditure
with an outstanding balance in excess of $10,000;
(viii) any agreement which restricts any party thereto from (A)
entering into or competing in any line of business, (B) acquiring any product or
other asset or any services from any other Person, selling any product or other
asset to or performing any services for any other Person or transacting business
or dealing in any other manner with any other Person, or (C) developing or
distributing any technology, or which contains restrictions on its ability to
conduct business activities or contains restrictions on the soliciting or hiring
of employees;
(ix) any confidentiality agreement pertaining to the Business with
any other Person, other than Buyers or their respective affiliates; and
(x) collective bargaining or other agreements with any labor union;
(xi) any agreement pursuant to which a joint venture or partnership
has been formed or will be formed or is governed;
(xii) any agreement relating to the acquisition or disposition by
Existing Sub of any business or the capital stock of any other Person;
(xiii) any agreement under which Parent agrees to indemnify any Person
or to share Tax liability of any Person;
(xiv) any other contract of a type not described above materially
affecting the Business or any of the Contributed Assets or the Assumed
Liabilities or involving an obligation on the part of Parent in excess of
$25,000; and
(xv) any license agreement, assignment, contract or other
arrangement or understanding (whether as licensor or licensee, assignor or
assignee) relating to the acquisition, transfer, use, development, sharing or
license of any of the Intellectual Property Rights or which is used, or
necessary for use of any of the Contributed Assets or performance by Existing
Sub of any the services specified or otherwise required or necessary for the
operation of the Business or the performance by Parent or Existing Sub under the
Interim Services Agreement (collectively, the
25
<PAGE>
"LICENSE AGREEMENTS"), or any agreement understanding, right or arrangement
under which any Person has, would or could acquire any ownership, marketing, use
or other rights or interest in, or could restrict the use of, the Intellectual
Property Rights or any Intellectual Property Rights created, developed or used
by Parent or Existing Sub in connection with its performance under the Interim
Services Agreement.
Correct and complete copies of all agreements, plans, policies and
arrangements (or, where they are oral, true and complete written summaries
thereof) required to be listed on Schedule 5.11, including, without limitation,
any amendment, modification, waiver, supplement, purchase order, letter or
agreement or understanding related to any agreement, plan, policy or arrangement
required to be specified above which changes the rights or obligations of Parent
or, as of the Closing, Existing Sub, or any other party thereto (collectively,
together with the Real Property Leases, referred to herein as the
"COMMITMENTS"), have been provided to Buyers or their respective representatives
before the date hereof Except as otherwise set forth in Schedule 5.11, (i) each
Commitment is valid, in full force and effect and enforceable in accordance with
its terms, (ii) there has not occurred any default or breach by Parent or, as of
the Closing, Existing Sub, or any event which, with the lapse of time, the
giving of notice or the election of any Person, or any combination thereof, will
become a default (including, without limitation, any violation of the usage
terms, royalty provisions or other terms of any Licensing Agreement), nor, to
Parent's knowledge after due inquiry, has there occurred any default by others
or any event which, with the lapse of time, the giving of notice or the election
of Parent or, as of the Closing, Existing Sub, will become a default under any
of the Commitments, and (iii) each Commitment to be assigned to Existing Sub
hereunder is assignable to Existing Sub without the consent of any party thereto
or any necessary consents have been obtained.
5.12 LEGAL PROCEEDINGS. Except as set forth on Schedule 5.12, there is no
claim, prosecution, suit, action, inquiry, arbitration or proceeding pending or,
to the best of Parent's knowledge, after due inquiry, threatened against or
affecting any of the Contributed Assets, Existing Sub or Related to the
Business, involving amounts in the aggregate not greater than $50,000, or which
questions or challenges the validity of this Agreement or any Ancillary Document
or any action to be taken by Parent, Existing Sub or Buyers pursuant to this
Agreement or in connection with the transactions contemplated hereby; nor is
there any judgment, decree, injunction, rule or order of any Authority or
arbitrator outstanding against or affecting the Business or any property or
asset held or maintained by Parent or, as of the Closing Date, Existing Sub and
otherwise Related to the Business.
5.13 NOTICE OF PROCEEDING, VIOLATION, ETC. Except as set forth in Schedule
5.13, no written notice or oral or written communication from any Authority of
any violation of any Law applicable to any Property or asset held or maintained
by Parent and Related to the Business or by Existing Sub has been filed or
communicated to Parent or Existing Sub. Parent has delivered to Buyers correct
and complete copies of all such notices or communications filed or received
prior to the date of this Agreement, and Parent will, prior to Closing, deliver
correct and complete copies of any such notices or communications filed or
received subsequent to the date of this Agreement.
26
<PAGE>
5.14 INTELLECTUAL PROPERTY.
(a) Schedule 2.2(d) sets forth, with respect to each trademark
included in the Intellectual Property Rights, (i) an identification of such
Intellectual Property Right, and (ii) the names of the jurisdictions covered by
the applicable registration or application. Schedule 5.11 identifies each
Intellectual Property Right licensed to or by Parent by or to any Person, and
identifies the License Agreement under which such Intellectual Property Right is
being licensed to or by Parent. Parent has and, as of the Closing Date,
Existing Sub will have, (1) good and valid title to all of the Intellectual
Property Rights identified in Schedule 2.2(d), free and clear of all
Encumbrances, (2) the right to use, transfer, license or encumber such
Intellectual Property Rights and (3) a valid right to use all Intellectual
Property Rights identified in Schedule 5.11. Neither Parent nor, as of the
Closing, Existing Sub, is obligated to make any payment to any Person for the
use of any Intellectual Property Right, nor is Parent or, as of the Closing,
Existing Sub subject to any restriction related thereto, except pursuant to the
License Agreements specified in Schedule 5.11.
(b) Parent has used reasonable efforts to employ measures and
precautions necessary to protect and maintain the confidentiality and secrecy of
all Intellectual Property Rights (except Intellectual Property Rights whose
value would be unimpaired by public disclosure). Parent has not (other than to
employees of Parent, or consultants or independent contractors pursuant to
confidentiality agreements, or pursuant to License Agreements identified in
Schedule 5.11) disclosed or delivered to any Person, or permitted the disclosure
or delivery to any Person of, (i) the source code, or any portion or aspect of
the source code, of any Intellectual Property Right, or (ii) the object code, or
any portion or aspect of the object code, of any Intellectual Property Right.
(c) All trademarks and other rights included in Intellectual Property
Rights and held by Parent or, as of the Closing, Existing Sub are valid and
subsisting. There are no patents, registered copyrights, service marks or
copyrights which are held by Parent or Existing Sub and which are Related to the
Business. None of the Intellectual Property Rights currently infringes or
conflicts with any Intellectual Property Right owned or used by any other
Person. Neither Parent nor Existing Sub is infringing, misappropriating or
making any unlawful use of, and neither Parent nor Existing Sub has at any time
infringed, misappropriated or made any unlawful use of, any Intellectual
Property Right owned or used by any other Person, nor is Parent aware of any
grounds for any bona fide claim thereof. Neither Parent nor Existing Sub has
received any notice or other communication (in writing or otherwise) of any
actual, alleged, possible or potential infringement, misappropriation or
unlawful use of any Intellectual Property Right owned or used by any other
Person. To the best knowledge of Parent, no other Person is infringing,
misappropriating or making any unlawful use of, and no Intellectual Property
Right owned or used by any other Person infringes or conflicts with, any
Intellectual Property Right. Neither Parent nor Existing Sub has entered into
any agreement to indemnify any other Person against any charge of infringement
of any Intellectual Property Right, other than indemnification provisions
contained in License Agreements as designated in Schedule 5.11.
(d) The Intellectual Property Rights contributed by Parent to Existing
Sub pursuant to Section 2.2(d) and identified in Schedule 2.2(d) constitute all
the Intellectual Property Rights used by Parent and Existing Sub to conduct the
Business in the manner in which the Business is being conducted. Parent has not
and, as of the Closing Date, Existing Sub, will have not licensed
27
<PAGE>
any of the Intellectual Property Rights to any Person on an exclusive basis or
pursuant to any agreement or arrangement which restricts the ability of Existing
Sub or any other Person to use or license any Intellectual Property Right.
5.15 PERMITS, LICENSES, ETC. Parent and, as of the Closing Date, Existing
Sub, possesses all Permits required by any Law or Authority for the conduct of
the Business as conducted as of the date hereof, all of such Permits are in full
force and effect; and Parent has, and as of the Closing Date, Existing Sub, will
have materially complied with at all times and is in compliance in all material
respects with all Permits. Schedule 5.15 sets forth a complete and accurate
list of all such Permits. Except as otherwise indicated on Schedule 5.15, all
of the Permits to be assigned to Existing Sub hereunder shall be assigned as of
the Closing Date to Existing Sub and neither such assignment nor any of the
transactions contemplated under this Agreement requires the consent of any
Authority or any other Person. No suspension, termination, modification or
cancellation of any Permit is pending, or to the best of Parent's knowledge,
after due inquiry, threatened, and Parent has no reason to believe, after due
inquiry, that any Authority or any other Person intends to cancel, suspend,
modify or terminate any of such Permits or that valid grounds for any
cancellation, suspension, modification or termination currently exist and no
proceeding is pending, or to the best of Parent's knowledge, after due inquiry,
threatened with respect to any alleged failure to hold all Permits required to
conduct the Business. No event has occurred or circumstance exists that may
(with or without notice or lapse of time) constitute or result directly or
indirectly in a violation of or a failure to comply with any term or requirement
of any Permit listed or required to be listed in Part 5.15 of the Disclosure
Schedule, or result directly or indirectly in the revocation, withdrawal,
suspension, cancellation or termination of, or any modification to, any such
Permit. Neither Parent nor Existing Sub has received, at any time since January
1, 1997, any notice or other communication (whether oral or written) from any
Authority or any other person or entity regarding any actual, alleged, possible,
or potential violation of or failure to comply with any term or requirement of
any Permit.
5.16 COMPLIANCE WITH LAWS. The Business has been at all times and is being
conducted in compliance with all Laws in all material respects. No
investigation is pending or, to the best of Parent's knowledge, after due
inquiry, threatened by any Authority with respect to any violation of any Law by
Parent or Existing Sub in connection with the Business. No "bulk sales" law is
applicable to the transactions contemplated hereby.
5.17 EXISTING SUB AND THE BUSINESS.
(a) Prior to the Contribution, Existing Sub owned no assets, had no
Subsidiaries and had no liabilities of any kind, character or nature whatsoever,
whether known or unknown, accrued, absolute, contingent determined, determinable
or otherwise and did not engage in any conduct of any business since July 1,
1993. As of the Closing Date, Existing Sub will own only the Contributed Assets
and other than the Assumed Liabilities and the liability pursuant to the Debt
Financing (including liability for Buyer's Expenses), Existing Sub will have no
other liabilities of any kind, character or nature whatsoever, whether known or
unknown, accrued, absolute, contingent, determined, determinable or otherwise.
28
<PAGE>
(b) Except as disclosed on Schedule 5.17, (i) the Contributed Assets
include all assets and properties which are Related to the Business, and (ii)
the Contributed Assets will, as of the Closing Date, include all of the assets
and properties required to conduct the Business as it is presently being
conducted.
5.18 EMPLOYMENT MATTERS.
(a) Parent and each of its Subsidiaries, including, without
limitation, Existing Sub, (i) are in compliance in all material respects with
all applicable federal, state and local laws, rules and regulations (domestic
and foreign) respecting employment, employment practices, labor, terms and
conditions of employment and wages and hours, in each case, with respect to
Employees; (ii) have withheld all amounts required by law or by agreement to be
withheld from the wages, salaries and other payments to Employees; (iii) are not
liable for any arrears of wages or any taxes or any penalty for failure to
comply with any of the foregoing; and (iv) are not liable for any payment to any
trust or other fund or to any governmental or administrative authority, with
respect to unemployment compensation benefits, social security or other benefits
for Employees.
(b) No work stoppage or labor strike against Parent or any of its
Subsidiaries, including, without limitation, Existing Sub, by Employees is
pending or threatened or, except as set forth in Schedule 5.18, has been
threatened since January 1, 1990. Except as set forth in Schedule 5.18, neither
Parent nor any of its Subsidiaries, including, without limitation, Existing Sub,
(i) is involved in or threatened with any labor dispute, grievance, or
litigation relating to labor matters involving any Employees, including, without
limitation, violation of any federal, state or local labor, safety or employment
laws (domestic or foreign), charges of unfair labor practices or discrimination
complaints; (ii) has engaged in any unfair labor practices within the meaning of
the National Labor Relations Act or the Railway Labor Act; or (iii) is
presently, nor has been in the past a party to, or bound by, any collective
bargaining agreement or union contract with respect to Employees and no such
agreement or contract is currently being negotiated by Existing Sub, Parent or
any of their Affiliates. No Employees are currently represented by any labor
union for purposes of collective bargaining and no activities the purpose of
which is to achieve such representation of all or some of such Employees are
threatened or ongoing.
5.19 TAX MATTERS.
(a) Except as set forth on Schedule 5.19:
(i) each of Existing Sub, each of its Subsidiaries and any Tax
Affiliate, has timely filed, in accordance with all applicable laws, all Tax
Returns required to be filed by it and paid all Taxes due by it, whether or not
such Taxes are or are required to be shown on any Tax Return;
(ii) there is no action, suit, proceeding, investigation, audit,
claim or assessment pending or, to the knowledge of Existing Sub, any of its
Subsidiaries or Parent, proposed or threatened with respect to Taxes of Existing
Sub, any of its Subsidiaries or any Tax Affiliate;
29
<PAGE>
(iii) all amounts required to be collected or withheld by
Existing Sub or any of its Subsidiaries with respect to Taxes have been duly
collected or withheld and all such amounts that are required to be remitted to
any Authority have been duly remitted;
(iv) no extension of time within which to file any Tax Return
that relates to Existing Sub, any of its Subsidiaries or any Tax Affiliate has
been requested, which Tax Return has not since been filed;
(v) there are no waivers or extensions of any applicable
statute of limitations for the assessment or collection of Taxes with respect to
any Tax Return of Existing Sub, any of its Subsidiaries or any Tax Affiliate,
which waiver or extension remains in effect;
(vi) there are no tax rulings, requests for rulings, or closing
or other similar agreements known to Parent to which Existing Sub, any of its
Subsidiaries or any Tax Affiliate is a party or is subject which could affect
Existing Sub's liability for Taxes for any period after the Closing Date;
(vii) there are no outstanding subpoenas or requests for
information by any Authority with respect to any Taxes of Existing Sub, any of
its Subsidiaries or any Tax Affiliate;
(viii) to Parent's knowledge after due inquiry, there are no
material proposed reassessments by any Taxing authority of any property owned or
leased by Existing Sub;
(ix) Existing Sub does not nor could it reasonably be expected
to have, any liability in respect of Taxes, under an indemnification agreement
or on a transferee liability theory, of any person or entity (other than
Parent), which indemnification agreement or application of a transferee
liability theory relates to an acquisition, disposition or similar transaction
occurring on or prior to the Closing Date;
(x) no taxing authority in a jurisdiction where Existing Sub,
any of its Subsidiaries or any Tax Affiliate does not file Tax Returns has made
a claim or assertion that Existing Sub, any of its Subsidiaries or any Tax
Affiliate is subject to Tax in such jurisdiction;
(xi) all Tax Returns of Existing Sub and each Tax Affiliate with
respect to taxable periods through the year ended December 31, 1993 have been
examined and closed or are Tax Returns with respect to which the applicable
statue of limitations has expired (taking into account any waivers or extensions
thereof);
(xii) neither Existing Sub nor any Tax Affiliate has filed a
consent under Section 341(f) of the Code or any comparable provision of state,
local or foreign law;
(xiii) Existing Sub has not agreed nor is it required to include
in income any adjustment pursuant to Section 481(a) of the Code (or similar
provisions of state, local or foreign law) by reason of a change in accounting
method or otherwise, and, to the knowledge of Parent or Existing Sub, the IRS
(or other Authority) has not proposed, and is not considering, any such change
in accounting method;
30
<PAGE>
(xiv) Existing Sub has not disposed of property in a transaction
being accounted for under the installment method pursuant to Section 453 of the
Code;
(xv) no excess loss account (as described in Treasury
Regulation Section 1.1502-19) exists with respect to any of the Subsidiaries;
(xvi) Neither Existing Sub nor any of its Subsidiaries has any
deferred gain arising from an intercompany transaction (as described in Treasury
Regulation Section 1.1502-13);
(xvii) Existing Sub is not a party to any agreement that could
result in the payment of a non-deductible "excess parachute payment" within the
meaning of Section 280G of the Code;
(xviii) complete copies of (A) federal income Tax Returns,
including amended Tax Returns, for Existing Sub, each of its Subsidiaries and
each Tax Affiliate and (B) state and local income Tax and other Tax Returns,
including amended Tax Returns, of Existing Sub, each of its Subsidiaries and
each Tax Affiliate, that have been filed with respect to taxable periods
beginning on or after January 1, 1993 through the date hereof, have been
delivered or made available to the Buyers; and
(xix) None of the Contributed Assets is tax-exempt use property
under Section 168(h) of the Code. None of the Contributed Assets is property
that Existing Sub is required to treat as being owned by any other person
pursuant to the safe harbor lease provisions of former Section 168(f)(8) of the
Code.
(b) All Tax Returns filed by Existing Sub, each of its Subsidiaries
and each Tax Affiliate are true and correct in all material respects.
(c) Each of Existing Sub and each Tax Affiliate has provided to the
Buyers copies of all revenue agent's reports and other written assertions by
Authorities of deficiencies or other liabilities for Taxes of Existing Sub or
such Tax Affiliate with respect to past periods for which the limitations period
has not run and each of such items has been set forth on Schedule 5.19.
(d) Any adjustment of Taxes of Existing Sub, any' of its Subsidiaries
or any Tax Affiliate made by the IRS in any examination which is required to be
reported to the appropriate state, local or foreign taxing authorities has been
so reported, and any additional Taxes due with respect thereto have been paid
except for amounts that Existing Sub, any of its Subsidiaries or any Tax
Affiliate is contesting in good faith, as set forth on Schedule 5.19.
(e) There are no Liens on any of the Contributed Assets that arose in
connection with any failure (or alleged failure) to pay any Tax (except for
Liens for Taxes not yet assessed, due or payable).
(f) No withholding is required in connection with any of the
transactions contemplated hereunder pursuant to Section 1445 of the Code either
because (i) Parent is a U.S. Person as defined in Section 7701(a)(30) of the
Code or (ii) Existing Sub is not a United States Real Property Holding
Corporation as defined in Section 897 of the Code.
31
<PAGE>
(g) There are no documentary, sales, use, stamp, excise, transfer or
other taxes (collectively, "TRANSFER TAXES") payable in connection with the
transfer of the Contributed Assets, the assumption of the Assumed Liabilities,
the Repurchase and the sale of the Shares, which Transfer Taxes become payable
in connection with the transactions consummated pursuant to this Agreement and
the Ancillary Documents.
5.20 EMPLOYEE BENEFIT PLANS.
(a) For purposes of this Agreement, the following terms shall have the
meanings set forth below:
"BENEFIT PLAN" means each plan, program, policy, payroll practice,
contract, agreement or other arrangement providing for compensation, severance,
termination pay, performance awards, stock or stock-related awards, fringe
benefits or other employee benefits of any kind, whether formal or informal,
funded or unfunded, written or oral and whether or not legally binding,
including, without limitation, each "employee benefit plan," within the meaning
of Section 3(3) of ERISA and each "multi-employer plan" within the meaning of
Sections 3(37) or 4001(a)(3) of ERISA.
"COMPANY BENEFIT PLAN" means each Benefit Plan (other than an Employee
Agreement) which is now or previously has been sponsored, maintained,
contributed to, or required to be contributed to, or with respect to which any
withdrawal liability (within the meaning of Section 4201 of ERISA) has been
incurred, by Existing Sub, Parent, any Subsidiary or any ERISA Affiliate for the
benefit of any Employee, or pursuant to which Existing Sub, Parent, any
Subsidiary or any ERISA Affiliate has or may have any liability, contingent or
otherwise.
"DEPARTMENT" means the U.S. Department of Labor.
"EMPLOYEE AGREEMENT" means each management, employment, severance,
consulting, non-compete, confidentiality, or similar agreement or contract
between Existing Sub, Parent or any Subsidiary and any Employee pursuant to
which Existing Sub, Parent or any Subsidiary has or may have any liability
contingent or otherwise.
"ERISA AFFILIATE" means each business or entity which is a member of a
"controlled group of corporations," under "common control" or an "affiliated
service group" with Existing Sub or Parent, as the case may be, within the me of
Sections 414(b), (c) or (m) of the Code, or required to be aggregated with
Existing Sub or Parent, as the case may be, under Section 414(o) of the Code, or
is under "common control" with Existing Sub or Parent, as the case may be,
within the meaning of Section 4001(a)(14) of ERISA.
"MULTI-EMPLOYER PLAN" means each Company Benefit Plan which is a
"multi-employer plan" within the meaning of Sections 3(37) or 4001(a)(3) of
ERISA.
"PBGC" means the Pension Benefit Guaranty Corporation.
"PENSION PLAN" means each Company Benefit Plan (other than a Multi-
Employer Plan) which is an "employee pension benefit plan" within the meaning of
Section 3(1) of ERISA.
32
<PAGE>
"WELFARE PLAN" means each Company Benefit Plan which is an "employee
welfare benefit plan" within the meaning of Section 3(1) of ERISA.
(b) Schedule 5.20 contains a true and complete list of each Company
Benefit Plan and each Employee Agreement. Neither Parent, any of its
Subsidiaries, including, without limitation, Existing Sub, nor any ERISA
Affiliate has any plan or commitment, whether legally binding or not, to
establish any new Company Benefit Plan, to enter into any Employee Agreement or
to modify or to terminate any Company Benefit Plan or Employee Agreement (except
to the extent required by law or to conform any such Company Benefit Plan or
Employee Agreement to the requirements of any applicable law, in each case as
previously disclosed to Buyers, or as required by this Agreement), nor has any
intention to do any of the foregoing been communicated to Employees.
(c) Existing Sub or Parent has provided, or has caused to be provided,
to Buyers (i) current, accurate and complete copies of all documents embodying
or relating to each Company Benefit Plan and each Employee Agreement, including
all amendments thereto, written interpretations thereof and trust or funding
agreements with respect thereto, (ii) the two (2) most recent annual actuarial
valuations, if any, prepared for each Company Benefit Plan; (iii) the two (2)
most recent annual reports (Series 5500 and all schedules thereto), if any,
required under ERISA in connection with each Company Benefit Plan or related
trust; (iv) a statement of alternative form of compliance pursuant to Department
of Labor Regulation (S)2520.104-23, if any, filed for each Company Benefit Plan
which is an "employee pension benefit plan" as defined in Section 3(2) of ERISA
for a select group of management or highly compensated employees; (v) the most
recent determination letter received from the IRS, if any, for each Company
Benefit Plan and related trust which is intended to satisfy the requirements of
Section 401(a) of the Code; (vi) if the Company Benefit Plan is funded, the most
recent annual and periodic accounting of Company Benefit Plan assets; and (vii)
the most recent summary plan description together with the most recent summary
of material modifications, if any, required under ERISA with respect to each
Company Benefit Plan.
(d) With respect to each Company Benefit Plan (i) Existing Sub,
Parent, each Subsidiary and each ERISA Affiliate have performed all material
obligations required to be performed by them under each Company Benefit Plan and
Employee Agreement and neither Existing Sub, Parent, any Subsidiary nor any
ERISA Affiliate is in default under or in violation of, any Company Benefit
Plan, (ii) each Company Benefit Plan has been established and maintained in
accordance with its terms and in substantial compliance with all applicable
laws, statutes, orders, rules and regulations, including but not limited to
ERISA and the Code, including without limiting the foregoing, the timely filing
of all required reports, documents and notices, where applicable, with the IRS
and the Department; (iii) each Company Benefit Plan intended to qualify under
Section 401 of the Code is, and since its inception has been, so qualified and a
determination letter has been issued by the IRS to the effect that each such
Company Benefit Plan is so qualified and that each trust forming a part of any
such Company Benefit Plan is exempt from tax pursuant to Section 501(a) of the
Code and no circumstances exist which could adversely affect this qualification
or exemption; (iv) no "prohibited transaction," within the meaning of Section
4975 of the Code or Section 406 of ERISA, has occurred with respect to any
Company Benefit Plan; (v) no action or failure to act and no transaction or
holding of any asset by, or with respect to, any Company Benefit Plan has or may
subject Existing Sub, Parent, any Subsidiary or any ERISA Affiliate or any
fiduciary to any tax,
33
<PAGE>
penalty or other liability, whether by way of indemnity or otherwise, (vi) there
are no actions, proceedings, arbitrations, suits or claims pending, or to the
knowledge of Existing Sub, Parent, any Subsidiary or any ERISA Affiliate,
threatened or anticipated (other than routine claims for benefits) against
Existing Sub, Parent, any Subsidiary or any ERISA Affiliate or any
administrator, trustee or other fiduciary of any Company Benefit Plan with
respect to any Company Benefit Plan or Employee Agreement, or against any
Company Benefit Plan or against the assets of any Company Benefit Plan; (vii) no
event or transaction has occurred with respect to any Company Benefit Plan that
would result in the imposition of any tax under Chapter 43 of Subtitle D of the
Code; (viii) each Company Benefit Plan can be amended, terminated or otherwise
discontinued without liability to Existing Sub, Parent, any Subsidiary or any
ERISA Affiliate; (ix) Existing Sub, Parent, each Subsidiary and each ERISA
Affiliate have made all payments to or in respect of all Company Benefit Plans
required to have been made prior to the date hereof, and will make a pro-rata
payment for the period ending as of the Closing Date, in each case which are
required by each Company Benefit Plan, each related trust, each collective
bargaining agreement or by law to be made to, or with respect to each Company
Benefit Plan (including all insurance premiums or intercompany charges with
respect to each Company Benefit Plan); (x) no Company Benefit Plan is under
audit or investigation by the IRS, the Department or the PBGC, and to the
knowledge of Existing Sub, Parent, any Subsidiary or any ERISA Affiliate no such
audit or investigation is pending or threatened; and (xi) no liability under any
Company Benefit Plan has been funded nor has any such obligation been satisfied
with the purchase of a contract from an insurance company as to which Existing
Sub, Parent or any Subsidiary has received notice that such insurance company is
insolvent or is in rehabilitation or any similar proceeding.
(e) Neither Existing Sub, Parent, any Subsidiary, nor any ERISA
Affiliate presently sponsors, maintains, contributes to, nor is Existing Sub,
Parent, any Subsidiary or any ERISA Affiliate required to contribute to, nor has
Existing Sub, Parent, any Subsidiary or any ERISA Affiliate ever sponsored,
maintained, contributed to, or been required to contribute to, a Pension Plan
which is subject to Title IV of ERISA.
(f) At no time since September 25, 1980 has Existing Sub, Parent, any
Subsidiary or any ERISA Affiliate contributed to or been required to contribute
to, or incurred any withdrawal liability (within the meaning of Section 4201 of
ERISA) to any Multi-Employer Plan.
(g) Neither Existing Sub, Parent, any Subsidiary nor any ERISA
Affiliate (i) maintains or contributes to any Company Benefit Plan which
provides, or has any liability to provide, life insurance, medical, severance or
other employee welfare benefits to any Employee upon his retirement or
termination of employment, except as may be required by Section 4980B of the
Code; or (ii) has ever represented, promised or contracted (whether in oral or
written form) to any Employee (either individually or to Employees as a group)
that such Employee(s) would be provided with life insurance, medical, severance
or other employee welfare benefits upon their retirement or termination of
employment, except to the extent required by Section 4980B of the Code.
(h) The execution of, and performance of the transactions contemplated
in, this Agreement will not (either alone or upon the occurrence of any
additional or subsequent events) (i) constitute an event under any Company
Benefit Plan, Employee Agreement, trust or loan that will or may result in any
payment (whether of severance pay or otherwise), acceleration, forgiveness of
34
<PAGE>
indebtedness, vesting, distribution, increase in benefits or obligation to fund
benefits with respect to any Employee, or (ii) result in the triggering or
imposition of any restrictions or limitations on the right of Existing Sub,
Parent or Buyers to amend or terminate any Company Benefit Plan. No payment or
benefit which will or may be made by Existing Sub, Parent, any Subsidiary,
Buyers or any of their respective affiliates with respect to any Employee will
be characterized as an "excess parachute payment," within the meaning of Section
280G(b)(1) of the Code.
(i) No Company Benefit Plan or Employee Agreement is funded by a trust
described in Section 501(c)(9) of the Code.
(j) With respect to each Welfare Plan, all claims incurred (including
claims incurred but not reported) by Employees thereunder for which Existing Sub
or Parent is, or will become, liable are (i) insured pursuant to a contract of
insurance whereby the insurance company bears any risk of loss with respect to
such claims; (ii) covered under a contract with a health maintenance
organization (an "HMO") pursuant to which the HMO bears the liability for such
claims, or (iii) reflected as a liability or accrued for on the Closing Balance
Sheet and each such claim will be separately identified under Working Capital
Liabilities category.
(k) Neither Existing Sub nor Parent has any liability, contingent or
otherwise, to, or with respect to any Benefit Plan (other than the Company
Benefit Plans and Employee Agreements which are listed on Schedule 5.20), which
is now or previously has been sponsored, maintained, contributed to, or required
to be contributed to, by Existing Sub, Parent, any Subsidiary or any ERISA
Affiliate.
5.21 ACCOUNTS RECEIVABLE. The accounts and notes receivable reflected on
the Pro-Forma Year-End Balance Sheet as of December 31, 1997 and those accounts
and notes receivable of the Business acquired or created after the date of the
Pro-Forma Year-End Balance Sheet as of December 31, 1997 through and including
the Closing Date, (a) were, are and shall be bona fide accounts and notes
receivable created in the ordinary and usual course of business in connection
with bona fide transactions and consistent with past practice, including past
practice with respect to the provision of extended payment terms, (b) have been
collected in full or are reasonably expected to be collected when due at their
face amounts, except to the extent of the allowance for doubtful accounts
reflected in the financial statements which is reasonable and consistent with
past practice. Schedule 5.21 sets forth aging information on all accounts
receivable.
35
<PAGE>
5.22 ENVIRONMENTAL MATTERS.
(a) For purposes of this Agreement, the following terms shall have the
meanings set forth below:
"ENVIRONMENTAL LAWS" means, without limitation, the Comprehensive
Environmental Response, Compensation and Liability Act,, 42 U.S.C. (S)(S) 9601,
et seq. the Emergency Planning and Community Right-to-Know Act of 1986, 42
U.S.C. (S)(S) 11001, et seq.; the Resource Conservation and Recovery Act, 42
U.S.C., (S)(S) 6901, et seq.; the Toxic Substances Control Act, 15 U.S.C. (S)(S)
2601, et seq.; the Federal Insecticide, Fungicide, and Rodenticide Act, 7 U.S.C.
(S)(S) 136, et seq.; the Clean Air Act 42 U.S.C. (S)(S) 7401, et seq.; the Clean
Water Act (Federal Water Pollution Control Act), 33 U.S.C. (S)(S) 1251, et seq.;
the Safe Drinking Water Act, 42 U.S.C. (S)(S) 300f, et seq.; the Occupational
Safety and Health Act, 29 U.S.C. (S)(S) 651, et seq.; the Federal Food, Drug,
and Cosmetic Act, 21 U.S.C. (S)(S) 301, et seq.; the Hazardous Materials
Transportation Act, 49 U.S.C. (S)(S) 5101, et seq., as in effect as of the
Closing Date, all rules and regulations promulgated pursuant to any of the above
statutes, and any other applicable foreign, federal, state or local law,
statute, ordinance, rule or regulation governing Environmental Matters, as in
effect as of the Closing Date, including any common law cause of action, all
written indemnity agreements and other written contractual obligations, and all
applicable judicial and administrative decisions, orders, and decrees relating
to Environmental Matters, each as in effect as of the Closing Date.
"ENVIRONMENTAL MATTER" means any matter relating to pollution,
contamination, protection of the environment, human health or safety, and health
or safety of employees, and any matter relating to emissions, discharges,
releases or threatened releases, of Hazardous Substances into the air (indoor
and outdoor), surface water, groundwater, soil, land surface or subsurface,
buildings, facilities, real or personal property or fixtures or otherwise
relating to the manufacture, processing, distribution, use, treatment, storage,
disposal, transport or handling of Hazardous Substances.
"HAZARDOUS SUBSTANCES" means any pollutants, contaminants, toxic or
hazardous substances, materials, wastes, constituents, compounds or chemicals
(including, without limitation, petroleum or any by-products or fractions
thereof, any form of natural gas, lead, asbestos and asbestos-containing
materials, polychlorinated biphenyls ("PCBs") and PCB-containing equipment,
radon and other radioactive elements, and urea formaldehyde foam insulation)
that are regulated by any Environmental Laws.
(b) Except as set forth in Schedule 5.22: (i) Parent and Existing Sub
are, and in the last five years have been, in compliance in all material
respects with all applicable Environmental Laws, including, without limitation,
all permits, licenses, authorizations, registrations and other governmental
consents required by applicable Environmental Laws in connection with the
operation of the Business ("ENVIRONMENTAL PERMITS"); (ii) neither Parent nor,
after the Closing, Existing Sub, has received any written notice of any claims,
civil, criminal or administrative actions, suits, hearings, investigations or
proceedings which are pending or, to the knowledge of Parent, threatened against
the Parent or, after the Closing, Existing Sub, in each case that relate to any
Environmental Matters) (iii) there are no present or, to the knowledge of
Parent, former underground or aboveground storage tanks or incinerators at, on,
under or within any of the real property currently
36
<PAGE>
owned, operated, or controlled by Parent or Existing Sub; (iv) neither Parent
nor Existing Sub has received any written notice or other written communication
that it is or may be a potentially responsible party or otherwise liable under
Environmental Law in connection with any location used for the disposal of any
Hazardous Substances, and (v) during the period of Parent's and Existing Sub's
ownership, lease or operation, or, to the knowledge of Parent, at any other
time, there has been no release, discharge or disposal of any Hazardous
Substances at, on, under, migrating from or, to the knowledge of Parent,
migrating to any real property currently, or to the knowledge of Parent,
formerly owned, leased or operated by Parent or Existing Sub (other than in
accordance with Environmental Laws); (vi) Parent or, as of the Closing, Existing
Sub holds all Environmental Permits necessary for the conduct of the Business;
(vii) all Environmental Permits held by Parent and Existing Sub (currently and
after the Closing) are in full force and effect; and (viii) Parent has provided
Buyers with copies of all environmental studies, reports, monitoring data,
assessments, audits and information in Parents custody or under its control.
5.23 INVENTORY. All inventories Related to the Business, including,
without limitation, raw materials, packaging, finished goods, work in process,
samples and trade promotional materials wherever located (collectively, the
"INVENTORY") are marketable or useable in the ordinary course of the Business
and are not misbranded, contaminated or defective except to the extent of any
provision for obsolescence in the Pro-Forma Financial Statements or Interim
Financial Statements. The Inventory has been produced according to
manufacturing and quality control standards and specifications as of the date
hereof.
5.24 BOOKS AND RECORDS. All the Books and Records and accounts of Parent
and its Subsidiaries are in all material respects true and complete, are
maintained in accordance with good business practice and all laws applicable to
its business, and accurately present and reflect in all material respects all of
the transactions therein described. Parent has previously delivered to Buyers
true and complete texts of all of the minutes of Existing Sub and all other
minutes Relating to the Business relating to meetings of the stockholders, board
of directors and committees of the board of directors of Parent and each
Subsidiary for the past five years.
5.25 TRANSACTIONS WITH AFFILIATES. Except as set forth in Schedule 5.25,
none of Parent's shareholders, directors, officers, Employees, Affiliates nor
any of their respective relatives or Affiliates is involved in any business
arrangement or relationship with Parent (whether written or oral), and none of
Parent's shareholders, directors, officers, Employee, Affiliates nor any of
their respective relatives or Affiliates owns any property or right, tangible or
intangible, which is used in connection with the Business.
5.26 BROKERS. Neither Parent nor any of its Subsidiaries has engaged any
finder, broker or investment adviser, and has no obligation to pay any fees, in
connection with the transactions contemplated hereby, other than Growth Capital
Partners and Penn Hudson Financial Group, Inc., whose fees and expenses shall be
borne by Parent.
5.27 MAJOR CUSTOMERS. Since December 31, 1997, Parent has not received
oral or written notice from any customer of the Business which accounted for
more than five percent (5%) of the aggregate gross sales for the year ended
December 31, 1997, that such customer has terminated or
37
<PAGE>
reduced, expects to terminate or reduce or is considering terminating or
reducing any of such business.
5.28 TRADE DEALS AND PROMOTIONS. Other than as accrued for in the Working
Capital liabilities or as set forth in Schedule 5.28, Parent has not, with
respect to the Business, offered or become bound by and/or is not a party to any
trade deals, trade promotions or programs, trade refunds or cooperative programs
or any consumer promotions and programs (including, without limitation, coupon,
premiums and rebate programs), with respect to the period after December 31,
1997, whether oral or written. Since December 31, 1997, Parent has incurred
such promotions liabilities only in the ordinary course of business.
5.29 DISCLOSURE. Neither this Agreement nor any Ancillary Document nor any
certificate, instrument or written statement furnished or made to Buyers by or
on behalf of Parent pursuant to such documents contains any untrue statement of
a material fact or omits to state a material fact necessary in order to make the
statements contained herein and therein not misleading.
5.30 SECURITIES LAW MATTERS. Parent is acquiring shares of common stock in
Existing Sub in connection with the Contribution for its own account and not
with a view to its distribution within the meaning of Section 2(11) of the
Securities Act of 1933, as amended.
ARTICLE 6
REPRESENTATIONS AND WARRANTIES OF BUYERS
Buyers hereby represents and warrants to Parent as follows:
6.1 ORGANIZATION AND STANDING. Buyers are duly organized, validly
existing and in good standing under the laws of their respective jurisdictions
of incorporation or establishment.
6.2 AUTHORIZATION OF AGREEMENT AND ANCILLARY DOCUMENTS.
(a) Each Buyer has all requisite corporate or equivalent power and
authority to execute, deliver and perform this Agreement and all other Ancillary
Documents being delivered at or prior to the Closing to which such Buyer is a
party and to consummate the transactions contemplated hereby and thereby.
(b) Each Buyer has taken all action required by Law and necessary
action to authorize the execution, delivery and performance of this Agreement
and the Ancillary Documents to which such Buyer is a party and the consummation
of the transactions contemplated hereby and thereby. This Agreement and the
Ancillary Documents to which a Buyer is a party have been duly and validly
authorized, executed and delivered by such Buyer and constitute the valid and
binding obligation of such Buyer enforceable against the Buyer in accordance
with their respective terms.
6.3 GOVERNMENTAL CONSENTS. Except as may be required by the HSR Act, no
consent, approval, order or authorization or approval of, exemption or waiver by
or registration, declaration or filing with any Authority is required to be made
or obtained by any Buyer in connection with the
38
<PAGE>
execution and delivery of this Agreement or any Ancillary Document or the
consummation of the transactions contemplated hereby or thereby.
6.4 NO CONFLICT. The execution and delivery of this Agreement and the
Ancillary Documents to which each Buyer is a party by such Buyers and the
consummation of the transactions contemplated hereby and thereby will not (with
or without the giving of notice or the lapse of time or both) violate any
provision of Laws applicable to such Buyer or any provision of its limited
liability company agreement.
6.5 ACQUISITION OF SHARES FOR INVESTMENT. The Shares purchased by Buyers
pursuant to this Agreement are being acquired for investment only and not with a
view to any public distribution thereof.
6.6 BROKERS. Parent has not incurred and will not incur, as a result of
any action taken by any Buyer, any liability for brokers, finders or other
similar fee in connection with the transactions contemplated by this Agreement.
ARTICLE 7
PRE-CLOSING COVENANTS
7.1 REASONABLE EFFORTS; COOPERATION BY PARTIES.
(a) In addition to all other obligations prescribed in this Agreement
and subject to the terms and conditions hereof, promptly after the execution
hereof, each of the parties hereto shall cooperate with each other and use all
reasonable efforts to take, or cause to be taken, all actions and to do, or
cause to be done, all things necessary, proper or advisable to ensure that the
conditions set forth in Articles IX and X are satisfied and to consummate and
make effective the transactions contemplated by this Agreement, including
obtaining all consents, approvals, transfers, permissions, waivers, orders,
licenses, registrations or authorizations of all courts, Authorities and other
third parties which are necessary or advisable to consummate and make effective
the transactions contemplated by this Agreement and the Ancillary Documents, to
transfer the Business and the Contributed Assets to Existing Sub and to enable
Existing Sub to enjoy after the Closing all rights and benefits under the
Contributed Assets. Each of Parent, Existing Sub, and Buyers shall provide
information requested by such other party pertaining to it and its Subsidiaries
and Affiliates which is reasonably necessary to enable such other party to take
such actions and file in a timely manner all reports and documents required to
be so filed by or under applicable Law.
(b) If any court, domestic or foreign, issues or otherwise promulgates
any injunction, decree or similar order prior to the Closing which prohibits the
consummation of the transactions contemplated hereby, the parties hereto will
use all reasonable efforts to have such injunction dissolved or otherwise
eliminated as promptly as possible and, prior to or after the Closing, to pursue
any underlying litigation diligently and in good faith.
39
<PAGE>
7.2 CONDUCT OF BUSINESS. Except as set forth in Schedule 7.2,
(a) During the period from the date of this Agreement until the
Closing Date, except as Buyers may otherwise consent to in writing or as
otherwise specifically contemplated by this Agreement or any Ancillary Document,
Parent will:
(i) operate the Business only in the usual regular and ordinary
course, in accordance with past practice;
(ii) use all reasonable efforts to keep available the services of
its current employees, agents and consultants involved in the Business;
(iii) maintain all the Contributed Assets to enable them to be
operated after the Closing in the manner in which they are currently operated
(ordinary wear and tear excepted);
(iv) maintain insurance in full force and effect with respect to the
Business with responsible companies, comparable in amount, scope and coverage to
that in effect on the date of this Agreement;
(v) use all reasonable efforts to preserve its favorable business
relationships with the suppliers, licensors, licensees, customers, brokers and
distributors and others having business dealings involving the Business, and to
preserve the ongoing operations of the Business;
(vi) preserve and protect its ownership, license or other rights or
interest in all Intellectual Property, including all rights to Intellectual
Property set forth on Schedule 2.2(d) and rights under all agreements set forth
on Schedule 5.11;
(vii) maintain its Books and Records in the usual, regular and
ordinary manner, on a basis consistent with prior years;
(viii) perform and comply with its obligations under the Assigned
Contracts, Real Property Leases, Personalty Leases and the Permits listed on the
Schedules.
(b) During the period from the date of this Agreement until the
Closing Date, except as set forth on Schedule 7.2(b) or as Buyers may otherwise
consent to in writing (provided that such writing need not be requested or
delivered in accordance with the notice procedures set forth in Section 13.7) or
as otherwise specifically contemplated by this Agreement, Parent will not,
Existing Sub will not, and Parent will cause Existing Sub to not, with respect
to the Business:
(i) other than in the ordinary course of the Business or as
otherwise contemplated by the Budget acquire, by purchase or otherwise, any
assets, except where already required by contract or for an aggregate
consideration not exceeding $25,000;
(ii) vary or amend the terms of any Assumed Liability;
(iii) subject any of the Contributed Assets to any
Encumbrance, other than a Permitted Encumbrance;
40
<PAGE>
(iv) sell, lease, transfer, assign or otherwise dispose of
any of the Contributed Assets, provided that Parent may collect accounts
receivable in the ordinary course of business;
(v) enter into, modify, terminate, amend or grant any waiver
in respect of any Assigned Contract, Real Property Lease, Personalty Lease or
Permit listed on the Schedules;
(vi) grant to any salaried Employee any increase in
compensation in excess of 5% in any form or grant any general "across-the-board"
increase in wages for hourly Employees or enter into, vary the terms of, or
terminate any employment agreement, independent contractor and/or consulting
agreement involving annual compensation in excess of $50,000, or hire or engage
any employee, independent contractor or consultant whose annual compensation
exceeds $50,000 or establish, amend or terminate any "employee benefit plans"
(as defined in Section 3(3) of ERISA), other employment practices, policies,
agreement or understandings with respect to any Employee;
(vii) transfer, grant, amend, knowingly terminate or fail to
prosecute or protect any of its rights under any of the Intellectual Property
Rights;
(viii) directly or indirectly redeem, purchase or otherwise
acquire or agree to redeem, purchase or otherwise acquire any shares of Existing
Sub's capital stock, except as contemplated hereby;
(ix) enter any transaction, take any action, or by inaction
permit any event to occur, that would result in any of die representations and
warranties of Parent contained herein or in any Ancillary Document not being
true and correct , immediately after the occurrence of such transaction, action
or event or on the Closing Date;
(x) enter into any compromise or settlement of any
litigation, proceeding or governmental investigation Related to the Business, or
related to or affecting, indirectly or directly, the Contributed Assets or the
Assumed Liabilities;
(xi) notice, convene or hold any meeting of their respective
shareholders;
(xii) authorize the sale, issuance, grant or encumbrance of
shares of voting stock, or any option, call, warrant or right to acquire voting
stock to any person or persons except, in the case of Parent, in connection with
the due exercise of options granted in the ordinary course of business
consistent with past practice, and in no event to any person or persons (other
than Lawrence Field) who would hold securities as a result of such issuance in
excess of 19.9% of the outstanding shares of Parent's voting capital stock, or
who would have the right to purchase as a result of such issuance securities
such that such Person's total holdings upon purchase or exercise would be in
excess of 19.9% of the outstanding shares of Parent's voting capital stock;
(xiii) amend or permit the adoption of any amendment to its
certificate of incorporation or bylaws or other charter or organizational
documents, or effect or become a party to any merger, consolidation, share
exchange, business combination, recapitalization, reclassification of shares,
stock split, reverse stock split or similar transaction;
41
<PAGE>
(xiv) form any Subsidiary of Existing Sub or permit Existing
Sub to acquire any equity interest or other interest in any other entity;
(xv) make any material tax election;
(xvi) agree or otherwise commit to take any of the actions
set forth in the foregoing subparagraphs (i) through (xv).
7.3 REQUIRED NOTICES. At all times prior to the Closing Date, Parent
shall promptly give written notice to Buyers of, to the extent Parent has actual
knowledge of such events, (i) any fact or circumstances or the occurrence of any
event or the failure of any event to occur, which will or may result in, (x) an
adverse effect on Parent's or Existing Sub's ability to consummate the
transactions contemplated hereby or by the Ancillary Documents or to satisfy its
obligations hereunder, or (y) a breach of any representation or warranty made by
Parent in this Agreement or in any Ancillary Document, (ii) any failure by
Parent or Existing Sub to comply with any covenant, condition or agreement
contained in this Agreement, (iii) any complaints, investigations or hearings
(or communications indicating that the same may be contemplated) of any
Authority with respect to this Agreement, the Business, the Contributed Assets
or the transactions contemplated hereby or by the Ancillary Documents, (iv) the
institution or the threat of institution of any litigation or similar action
with respect to this Agreement the Business, the Contributed Assets or the
consummation of the transactions contemplated hereby and (v) the occurrence of
any event which will or may result in the failure to satisfy any condition set
forth in Article IX or X. Should any such fact or condition require any change
to the Schedules attached hereto, Parent shall promptly deliver to Buyers a
supplement to such Schedules specifying such change. During the period from the
date of this Agreement to the Closing Date, Parent will cause one or more of its
representatives to confer on a regular basis with representatives of Buyers to
report on the general status of the ongoing operations of the Business. No
notification given to Buyers pursuant to this Section 7.3 shall limit or
otherwise affect any of the representations, warranties, covenants or
obligations of Parent or Existing Sub contained in this Agreement.
7.4 ACCESS AND CONFIDENTIALITY.
(a) Subject to paragraph (b) below, during the period commencing on
the date hereof and ending on the Closing Date, (i) Parent shall provide, or
cause to be provided to, Buyers and their respective representatives and Buyers'
or Existing Sub's sources of financing and their respective representatives (A)
such financial and operating data and other information as Buyers, the funding
sources, or their respective representatives may from time to time reasonably
request with respect to the Business, the Contributed Assets and the
transactions contemplated by this Agreement and (B) full access during normal
business hours to the assets, properties, offices, and other facilities,
Contributed Assets and Books and Records of Existing Sub and Parent, as Buyers
or the funding sources may from time to time reasonably request; and (ii)
Buyers, the funding sources, and their respective representatives shall be
entitled to consult with the representatives, officers, Employees and
accountants of Parent and Existing Sub with respect to the Business. Parent
agrees that no investigation by Buyers, the funding sources or their respective
representatives shall affect or limit the scope of the representations and
warranties of Parent or Existing Sub contained herein or in any
42
<PAGE>
Ancillary Document delivered pursuant hereto or limit liability for breach of
any such representation or warranty.
(b) Unless otherwise required by law as advised by counsel to a
party hereto, parties hereto shall use all reasonable efforts to keep
confidential the fact that Buyers and Parent are having discussions with respect
to the transactions contemplated hereby and any terms of such discussion. The
parties hereto may disclose such information to their respective representatives
and, in the case of Buyers, their sources of financing, and the parties hereto
shall use all reasonable efforts to keep such information confidential. If any
party determines that any such disclosure is required by law, the parties hereto
shall make good faith efforts to reach an agreement on the content and timing of
any such disclosure. Failing such agreement, the party required by law to
disclose may make such disclosures only to the extent as is so required .
7.5 NO SHOP.
(a) During the period from the date of this Agreement until the
earliest of (i) the termination of this Agreement and (ii) the Closing Date,
neither Parent nor Existing Sub shall, directly or indirectly, or authorize or
permit any of their respective Affiliates or representatives to, (i) solicit,
initiate, encourage or induce the making, submission or announcement of any
Acquisition Proposal or take any action that could reasonably be expected to
lead to an Acquisition Proposal, (ii) furnish any information regarding the
Business, Existing Sub, the Contributed Asset or the Assumed Liabilities to any
Person in connection with or in response to an Acquisition Proposal, (iii)
engage in discussions or negotiations with any Person with respect to any
Acquisition Proposal, (iv) approve or endorse or recommend any Acquisition
Proposal or (v) enter into any letter of intent or similar document or any
contract or agreement contemplating or otherwise relating to any Acquisition
Transaction, provided, however, that (A) nothing contained in this Agreement
shall prevent Parent's Board of Directors from disclosing to Parent's
shareholders a position with respect to a tender offer pursuant to Rules 14d-9
and 14e-2 promulgated under the Securities Exchange Act of 1934, as amended, and
(B) prior to the adoption and approval of this Agreement, the Ancillary
Documents and the transactions contemplated herein and therein by Parent's
shareholders, Parent shall not be prohibited by this Section 7.5 from (x)
providing nonpublic information regarding the Business, Existing Sub, the
Contributed Assets and the Assumed Liabilities to any Person in response to an
Acquisition Proposal that is submitted by such Person (and not withdrawn), or
(y) entering into discussions with any Person in response to a Superior Offer
that is submitted by such Person (and not withdrawn) if, in either such case:
(1) neither Parent, Existing Sub nor any of their Affiliates or representatives
shall have violated any of the restrictions set forth in Section 7.5(a), (2)
Parent's Board of Directors believes in good faith, based upon the advice of its
outside legal counsel, that such action is required in order for Parent's Board
of Directors to comply with its fiduciary obligations under applicable law, and
(3) prior to furnishing any such nonpublic information to, or entering into
discussions with, such Person, Parent gives Buyers written notice of the
identity of such Person and of Parent's intention to furnish nonpublic
information to, or enter into discussions with, such Person, and Parent receives
from such Person an executed confidentiality agreement reasonably satisfactory
to Buyers. Without limiting the generality of the foregoing, Parent acknowledges
and agrees that any violation of any of the restrictions set forth in the
preceding sentence by Existing Sub, any Affiliate or representative of Parent or
Existing Sub, whether or not such Affiliate or
43
<PAGE>
representative purports to act on behalf of Parent or Existing Sub, shall be
deemed to constitute a breach of this Section 7.5 by Parent.
(b) Parent shall promptly advise Buyers orally and in writing of
any Acquisition Proposal (including the identity of the Person making such
Acquisition Proposal and the terms thereof) that is made or submitted by any
Person after the date of this Agreement and prior to the Closing or termination
of this Agreement, whichever is earlier. Parent shall keep Buyers fully informed
with respect to the status of any such Acquisition Proposal and any modification
thereto.
(c) Parent and Existing Sub shall immediately cease and cause to be
terminated any existing discussions with any Person that relate to any
Acquisition Proposal.
7.6 FUNDING. Buyers and Parent shall use all reasonable efforts to cause
Existing Sub to, and Existing Sub shall, take or cause to be taken, all actions,
and to do, or cause to be done all things necessary or advisable, including the
execution of any necessary documents, to obtain the Debt Financing.
7.7 SHAREHOLDER APPROVAL. Parent agrees to take in accordance with
applicable law and its respective articles or certificate of incorporation and
by-laws all action necessary to convene a meeting of its shareholders to
consider and vote upon the transactions as contemplated by, this Agreement
including, without limitation, the Contribution and sale of the Shares and any
other matter required to be approved by Parent's shareholders for consummation
of the transactions contemplated hereunder (including any adjournment or
postponement, the "PARENT SHAREHOLDERS' MEETING"), as promptly as practicable.
Nothing in this Section 7.7 shall prevent Parent's Board of Directors from
withdrawing, amending or modifying its recommendation in favor of this
Agreement, the Ancillary Documents and the transactions contemplated herein and
therein at any time prior to approval of such documents and transactions at the
Parent's Shareholders' Meeting if (i) a Superior Offer is made to Parent and is
not withdrawn, (ii) neither Parent, Existing Sub nor any of their respective
Affiliates and representatives shall have violated any of the restrictions set
forth in Section 7.5, and (iii) Parent's Board of Directors concludes in good
faith, based upon the advice of its outside counsel, that, in light of such
Superior Offer, the withdrawal, amendment or modification or such recommendation
is required in order for Parent's Board of Directors to comply with its
fiduciary obligations under applicable law. Nothing contained in this Section
7.7 shall limited Parent's obligation to call, give notice of, convene and hold
the Parent Shareholders' Meeting (regardless of whether the unanimous
recommendation of Parent's Board of Directors shall have been withdrawn, amended
or modified).
7.8 ASSETS FREE OF ENCUMBRANCE. Immediately prior to, or simultaneously
with, the Closing, Parent shall pay off all debts pursuant to any loan
agreements that grant an Encumbrance on any of the Contributed Assets to any
Person, including, without limitation, (a) the Loan Agreement, as amended, dated
April 11, 1995, 1998, by and between Parent, Silverado Marketing Services, Inc.,
Texas B&B, Inc., Lawrence D. Field and Cynthia Field, and Liberty Bank and Trust
Company of Tulsa, National Association and (b) the Promissory Note dated April
29, 1997, payable by Parent to Bank of Oklahoma, N.A.
44
<PAGE>
7.9 EMPLOYEES. Buyers shall cause Existing Sub to make offers of
employment to substantially all of the employees of the Business as of the
Closing Date; provided that nothing herein shall require Existing Sub to
continue to employ any employee at any time after the Closing Date.
7.10 REQUIRED APPROVALS AND CONSENTS. As promptly as practicable after the
date of this Agreement, the parties hereto shall make all filings required by
Law to be made by them in order to consummate the transactions provided for
herein and in the Ancillary Documents. The parties hereto shall fully cooperate
with each other with respect to all such filings (including taking all actions
requested by Buyers to cause early termination of any applicable waiting period
under the HSR Act). Parent and Existing Sub shall use their respective best
efforts in obtaining all consents identified in Schedule 5.11. Parent and Buyers
agree to cooperate and use their best efforts to make all filings which are or
may become required under the HSR Act. Parent and Buyers will furnish each other
such necessary information and reasonable assistance as the other may reasonably
request in connection with its preparation of necessary filings or submissions
to any United States or foreign governmental agency or body of competent
jurisdiction.
7.11 LOCATION OF CONTRIBUTED ASSETS. Except as set forth on Schedule 7.11,
Parent shall ensure that all Contributed Assets are, to the extent not located
to Parent's Tulsa facilities, moved to such facilities prior to the Closing
Date.
ARTICLE 8
POST-CLOSING AGREEMENTS
Parent hereby covenants and agrees with Buyers and Existing Sub as
follows:
8.1 FURTHER ASSURANCES. At any time and from time to time after the
Closing, the parties hereto agree to cooperate with each other, to execute and
deliver such other documents, Consents, instruments of transfer or assignment or
assumption, files, books and records and do all such further acts and things as
may be necessary or desirable (a) to sell, transfer, assign, deliver and convey
to Existing Sub the Contributed Assets free and clear of all Encumbrances other
than Permitted Encumbrances, (b) for Existing Sub to assume the Assumed
Liabilities, or (c) to otherwise carry out the intent of the parties hereunder
and pursuant to the Ancillary Documents. If, at any time or from time to time
after the Closing, Buyers shall identify an asset, property or right Related to
the Business (other than an Excluded Asset) owned by Parent or, any Affiliate of
Parent, as of the date hereof or hereafter acquired prior to the Closing, but
not transferred, assigned, delivered or contributed to Existing Sub pursuant to
Section 2.2 or Section 2.5, the parties agree to cooperate with each other to
cause such asset, property or right to be promptly transferred, assigned,
delivered or contributed to Existing Sub (and such associated liabilities, if
any, as are mutually agreed to be assumed by Existing Sub).
8.2 RIGHTS OF ENFORCEMENT AND SETTLEMENT. Subject to Article XII, from and
after the Closing, Existing Sub shall have complete control over the payment,
settlement or other disposition of any dispute involving the Assumed Liabilities
and the right to commence, conduct and control all negotiations and proceedings
with respect thereto. Parent shall notify Existing Sub promptly of
45
<PAGE>
any claim made with respect to any Assumed Liabilities or Contributed Assets and
shall not, without Existing Sub's prior written consent, voluntarily pay, settle
or offer to settle, or consent to any compromise or admit liability with respect
to, any Assumed Liabilities or Contributed Assets. Parent shall cooperate with
Existing Sub and Buyers in any reasonable manner requested by Existing Sub
and/or Buyers in connection with any negotiations or proceedings involving any
Assumed Liabilities or Contributed Assets and shall promptly provide to Buyers
any information, records or other information reasonably requested in connection
therewith.
8.3 MAIL, PAYMENTS.
(a) Parent hereby authorizes Existing Sub from and after the
Closing to receive and open all mail and other communications relating to the
Business, and to act with respect to such communications in such manner as
Existing Sub may elect to the extent that such communications relate to the
rights and obligations of Existing Sub with respect to the Contributed Assets or
the Assumed Liabilities. If any communication does not relate exclusively to the
rights and obligations of Existing Sub with respect to the Contributed Assets or
the Assumed Liabilities, Existing Sub shall forward the original or a copy of
such communication promptly to Parent. After the Closing, Existing Sub shall
have the right and authority to endorse, without recourse, the name of Parent on
any check or any other instrument of payment received by Existing Sub on account
of any of the Contributed Assets transferred by Parent pursuant to this
Agreement, and Parent shall deliver to Existing Sub at the Closing letters of
instruction sufficient to permit Existing Sub to deposit such checks or other
instruments of payment in bank accounts in the name of Existing Sub.
(b) Parent shall promptly deliver to Existing Sub the original or a
copy of any mail or other communication received by it after the Closing
pertaining to the Business and shall deliver to Existing Sub any moneys, checks
or other instruments of payment (net of returned checks and similar items) to
which Existing Sub is entitled.
8.4 CERTAIN TAX MATTERS.
(a) Buyers, Parent, and Existing Sub agree that each shall take the
position in all Tax Returns and in any other relevant documents that the
Contribution will be treated as a taxable sale and not as a transaction
qualifying under Section 351 of the Code for federal, state and local income Tax
purposes.
(b) The sum of (i) the Repurchase Price, (ii) the Purchase Price
divided by 0.9, (iii) Assumed Liabilities, and (iv) any other relevant items
(together, the "TOTAL CONSIDERATION") shall be allocated among the Contributed
Assets, in accordance with Section 1060 of the Code. A schedule setting forth
such allocation shall be prepared by Buyers and delivered to Parent as soon as
practicable following the date hereof and Parent and Buyers covenant and agree
to apply all reasonable efforts to agree on such allocation. Buyers agree that
Parent shall have the right to consult with Buyers in the preparation of the
allocation, and Buyers shall take into account any comments of Parent in good
faith. Each of Buyers, Parent and Existing Sub agree to make any Tax Return or
other document or filing consistent with the allocations as agreed following the
Closing.
(c) Any Tax sharing contracts or agreements between Existing Sub
and Parent (or any Affiliate of Parent) shall be terminated on the Closing Date,
and no Person shall have any
46
<PAGE>
rights or obligations under such Tax sharing contracts or agreements after such
termination. Any power of attorney granted by Existing Sub to any other Person
with respect to Taxes shall be terminated as of the Closing Date.
(d) For purposes of Section 12.2(g)(i), with respect to any Taxes
payable for a taxable period which begins before and ends after the Closing
Date, the portion of such Taxes which is payable for the portion of such taxable
period ending on the Closing Date shall be (i) in the case of any Tax other than
a Transfer Tax or a Tax based upon or measured by income or receipts, the amount
of such Tax for the entire taxable period (or, in the case of such Taxes
determined on an arrears basis, the amount of such Tax for the immediately
preceding period) multiplied by a fraction, the numerator of which is the number
of days in the portion of such taxable period ending on the Closing Date and the
denominator of which is the number of days in the entire taxable period and (ii)
in the case of a Transfer Tax or a Tax based upon or measured by income or
receipts, the amount which would be payable if the relevant taxable period ended
at the end of the Closing Date. In the event that Existing Sub, whether before
or after the Contribution, owns an interest in any partnership or other pass-
through entity, the taxable period of such partnership or pass-through entity in
which Existing Sub is a partner or other beneficial interest holder shall be
deemed to terminate on the Closing Date.
(e) For federal, state and local Tax purposes, Buyers, Parent, and
Existing Sub agree to treat all indemnification payments made under Section 12.2
or any other provision of this Agreement as adjustments to the Total
Consideration.
8.5 COVENANT NOT TO COMPETE. In order that Buyers may have and enjoy the
full benefit of the Business, Parent agrees that Parent and its Subsidiaries
will not, without the written approval of Buyers, (i) engage, directly or
indirectly, in any activity involving the manufacture, production, marketing,
advertising, distribution or sale of the products of the Business being produced
or sold by the Company on the date hereof or on the Closing Date, or any
products in the baked goods industry (the "COMPETITIVE PRODUCTS") anywhere in
the world (the "COMPETITIVE ACTIVITY"), or (ii) directly or indirectly invest in
any equity of or manage, operate or control or become a consultant with respect
to any Competitive Activity for any Person that engage in any Competitive
Activity for the period beginning on the Closing Date and ending on the fifth
anniversary of the Closing Date (the "NONCOMPETITIVE PERIOD"). Notwithstanding
the foregoing, nothing contained herein shall limit the right of Parent to hold
and make passive investments in securities of any Person that is registered on a
national securities exchange or admitted to trading privileges thereon or
actively traded in a generally recognized over-the-counter market; provided,
that Parent's and any of Parent's Subsidiaries' aggregate beneficial equity
interest therein shall not exceed 5% of the outstanding shares or interests in
such Person. Except as the parties hereto shall otherwise agree, for a period of
two years after the Closing Date, Parent and its Subsidiaries shall not,
directly or indirectly, hire or solicit to hire any Employee of Existing Sub or
Buyers to leave (or cause or seek to cause to leave) the employee of Existing
Sub or Buyers, provided, that the foregoing provision will not prevent Parent
from hiring any person (a) whose employment was terminated by Existing Sub or
Buyers or (b) who responds to a general solicitation of employment not
specifically directed towards employees of Existing Sub or Buyers.
47
<PAGE>
ARTICLE 9
CONDITIONS TO BUYERS' OBLIGATIONS
The obligations of Buyers to effect the transactions contemplated hereby
shall be subject to the satisfaction or written waiver. on or before the Closing
Date, of each of the following conditions:
9.1 REPRESENTATIONS AND WARRANTIES TRUE. The representations and
warranties made by Parent herein and in each Ancillary Document, schedule,
exhibit, and certificate delivered pursuant to this Agreement shall be true,
complete and accurate in all material respects on the date of this Agreement and
on and as of the Closing Date, with the same force and effect as though made on
and as of the Closing Date, except for changes expressly contemplated by this
Agreement or such Ancillary Document, schedule, exhibit or certificate, as the
case may be, and except that any representation and warranty made as of a
specified date shall have been true, complete and accurate in all material
respects on and as of such date (it being understood that, for purposes of
determining the completeness and accuracy of such representations and
warranties, all "material adverse effect" and other materiality qualifications
contained in such representations and warranties shall be disregarded, and any
update of or modification to the Schedules hereto made or purported to have been
made after the date of this Agreement shall be disregarded).
9.2 PERFORMANCE OF AGREEMENTS. Each of Parent and Existing Sub shall have
performed and complied in all material respects with all of its agreements and
covenants contained herein or in any Ancillary Document to be performed or
complied with by it on or prior to the Closing Date.
9.3 CONSUMMATION OF CONTRIBUTION. The Contribution shall have been
effected such that Existing Sub shall have received from Parent the Contributed
Assets and shall have only the Assumed Liabilities, except for the Debt
Financing.
9.4 CONSUMMATION OF REPURCHASE. The Repurchase shall have been effected
such that Parent shall have transferred, conveyed and delivered the Repurchased
Shares to Existing Sub.
9.5 NO INJUNCTION, ETC. Neither any preliminary or permanent injunction
or other order issued by any court of competent jurisdiction or by any Authority
nor any Law promulgated or enacted by any United States federal or state
governmental authority which, in either case, restrains, enjoins, makes illegal
or otherwise prohibits the transactions contemplated hereby shall be in effect.
9.6 EXECUTIVE OFFICER'S CERTIFICATES. Buyers shall have received
certificates from executive officers of each of Parent and Existing Sub, dated
as of the Closing Date, reasonably satisfactory in form and substance to Buyers
and its counsel, certifying as to the satisfaction of the conditions specified
in Sections 9.1 and 9.2 hereof.
9.7 APPROVALS AND CONSENTS. All material consents, approvals, orders, or
authorizations of, registrations or filings with, declarations of, or exemptions
or waivers by, any Authority or any other Person including, without limitation,
approvals or consents from Parent's shareholders (collectively, "CONSENTS"),
reasonably satisfactory in form and substance to Buyers and its counsel, which
are reasonably required for the consummation of the transactions contemplated
hereby (including, without limitation, pursuant to the Ancillary Documents) or
for preventing the
48
<PAGE>
termination of any material right, privilege, Permit or Commitment Related to
the Business or any material loss or disadvantage to Buyers or Existing Sub upon
the consummation of tile transactions contemplated hereby, shall have been
obtained, made or filed, as the case may be.
9.8 ASSIGNMENT AND ASSUMPTION. In connection with the Contribution,
Parent shall have executed and delivered to Existing Sub an Assignment and
Assumption Agreement (the "ASSIGNMENT AND ASSUMPTION AGREEMENT") in a form
acceptable to Buyers and Existing Sub.
9.9 OPINION. Counsel to Parent and Existing Sub shall have delivered to
Buyers an opinion in a form acceptable to Buyers and their counsel.
9.10 EMPLOYMENT AGREEMENT. Timothy G. Bruer ("Bruer") shall have duly
executed and delivered to Buyers an employment agreement in a form acceptable to
Buyers and Bruer.
9.11 SHAREHOLDER AGREEMENT. Parent shall have duly executed and delivered
to Buyers a shareholder agreement concerning shares of common stock of Existing
Sub, in a form acceptable to Buyers.
9.12 GUARANTEE. Buyers shall have received from Lawrence D. Field a
guarantee in the amount of $750,000 securing Parent's indemnification
obligations under this Agreement in a form acceptable to Buyers.
9.13 WARRANT. Existing Sub shall have issued, and Lawrence D. Field shall
have purchased in exchange for $2 million in cash, a warrant (the "FIELD
WARRANT") to purchase shares of Existing Sub's common stock in a form
satisfactory to Buyers, exercisable upon the attainment by Existing Sub of
certain financial criteria to be agreed between the parties hereto.
9.14 FINANCING. Existing Sub shall have obtained and received the Debt
Financing necessary for Existing Sub to repurchase the Repurchased Shares and to
pay the Expenses (as hereinafter defined) and any other funds necessary to
otherwise consummate the transactions contemplated under this Agreement on terms
satisfactory to Buyers; and Buyers shall have received the funds necessary to
pay the Purchase Price, on terms satisfactory to Buyers.
9.15 OPERATION IN ACCORDANCE WITH BUDGET. During the period from July 1,
1998, until the end of the month preceding the Closing Date, the Business shall
have achieved cumulative EBITDA equal to or greater than the projected
cumulative EBITDA reflected on the budget attached hereto as Exhibit 9.15 (the
"BUDGET") and Parent shall have operated the Business in a manner substantially
consistent with the Budget.
9.16 NO ENCUMBRANCE ON ASSETS. As of the Closing Date, none of the
Contributed Assets shall be subject to any Encumbrance.
49
<PAGE>
9.17 NO MATERIAL ADVERSE EFFECT. Since the date hereof until the Closing
Date, there shall not have been any events which, individually or in the
aggregate, have, or reasonably could be expected to have, a material adverse
effect or change on the business, assets, liabilities, operations, results of
operations, financial condition or prospects of the Business.
9.18 NO PROCEEDINGS. Since the date of this Agreement, there must not have
been commenced or, to the knowledge of the parties hereto, threatened, against
Parent, Buyers or Existing Sub, any proceeding (a) involving any challenge to,
or seeking damages or other relief in connection with, any of the transactions
contemplated by this Agreement or any of the Ancillary Documents, or (b) that
may have the effect of preventing, delaying, making illegal, imposing
limitations or conditions on, or otherwise interfering with any of the
transactions contemplated by this Agreement or any of the Ancillary Documents.
9.19 SATISFACTORY COMPLETION OF PRE-ACQUISITION REVIEW. Buyers shall have
satisfactorily completed its pre-acquisition legal, financial and business
investigation and review and shall be satisfied with the results of that
investigation and review.
9.20 ACCOUNTANT'S LETTER. Buyers shall have received from Pricewaterhouse
Coopers, LLP, Buyer's independent auditors, a letter dated as of the Closing
Date, in form and substance reasonably satisfactory to Buyers, to the effect
that the transactions contemplated herein shall be accounted for as a
recapitalization.
9.21 RECAPITALIZATION ACCOUNTING AND TAX TREATMENT. No facts or
circumstances shall exist that would prevent the transactions contemplated
herein from (a) being accounting for as a recapitalization; and (b) treated as a
taxable transaction.
9.22 LOCATION OF CONTRIBUTED ASSETS. Except as set forth on Schedule 7.11,
all Contributed Assets shall be located at Parent's Tulsa facilities.
ARTICLE 10
CONDITIONS TO PARENT'S OBLIGATIONS
The obligations of Parent to effect the transactions contemplated hereby
shall be subject to the satisfaction or written waiver on or before the Closing
Date, of each of the following conditions:
10.1 REPRESENTATIONS AND WARRANTIES TRUE. The representations and
warranties of Buyers contained herein and in each Ancillary Document, schedule,
exhibit and certificate delivered pursuant to this Agreement shall be true,
complete and accurate in all material respects on the date of this Agreement and
on and as of the Closing Date, with the same force and effect as though made on
and as of the Closing Date, except for changes expressly contemplated by this
Agreement or such Ancillary Document, schedule, exhibit or certificate, as the
case may be, and except that any representation and warranty made as of a
specified date shall have been true, complete and accurate in all material
respects on and as of such date (it being understood that, for purposes of
determining the completeness and accuracy of such representations and
warranties, all materiality qualifications shall be disregarded).
50
<PAGE>
10.2 PERFORMANCE OF AGREEMENTS. Buyers shall have performed and complied
in all material respects with all of their respective agreements and covenants
contained herein or in any Ancillary Document to which any Buyer is a party to
be performed or complied with by any Buyer on or prior to the Closing Date.
10.3 DELIVERIES. Parent shall have received from Buyers (i) the Purchase
Price in accordance with Section 3.1, subject to certain adjustments as provided
for herein and (ii) the certificates and the other documents contemplated by
Section 4.2.
10.4 NO INJUNCTION, ETC. Neither any preliminary or permanent injunction
or other order issued by any court of competent jurisdiction or by any Authority
nor any Law promulgated or enacted by any United States federal or state
governmental authority which, in either case, restrains, enjoins, makes illegal
or otherwise prohibits the transactions contemplated hereby shall be in effect.
10.5 PARENT'S SHAREHOLDERS APPROVALS AND CONSENTS. All consents and
approvals from Parent's shareholders) which are required for the consummation of
the transactions contemplated hereby (including, without limitation, pursuant to
the Ancillary Documents) shall have been obtained.
10.6 REPURCHASES. Payment of the Repurchase Price shall have been
delivered to Parent in accordance with Section 4.2(d).
10.7 OPINION. Counsel to Buyers shall have delivered to Parent an opinion
in a form acceptable to Parent and its counsel.
ARTICLE 11
TERMINATION PRIOR TO CLOSING
11.1 TERMINATION BY MUTUAL CONSENT. This Agreement may be terminated at
any time prior to the Closing, before or after approval by the stockholders of
the Parent, by the mutual consent of Parent and Buyers.
11.2 TERMINATION BY EITHER PARENT OR BUYERS. This Agreement may be
terminated by written notice of either Parent or Buyers if (a) the transactions
contemplated hereunder shall not have been consummated by December 31, 1998
(unless the failure to consummate the transactions contemplated hereunder is
attributable to a failure on the part of the party seeking to terminate this
Agreement to perform any material obligation required to be performed by such
party at or prior to the Closing), or (b) the approval of Parent's shareholders
in accordance with applicable law and its certificate of incorporation and by-
laws shall not have been obtained at a meeting duly convened therefor or at any
adjournment or postponement thereof, or (c) a United States federal or state
court of competent jurisdiction or United States federal or state governmental,
regulatory or administrative agency or commission shall have issued an order,
decree or ruling or taken any other action permanently restraining, enjoining or
otherwise prohibiting the transactions contemplated by this Agreement and such
order, decree, ruling or other action shall have become final and non-
appealable; provided that the party seeking to terminate this Agreement pursuant
to clause (c) above shall have used all commercially reasonable efforts to
remove such injunction, order or decree.
51
<PAGE>
11.3 OTHER TERMINATION RIGHTS.
(a) This Agreement may be terminated at any time prior to the
Closing by written notice given
(i) by Buyers, following a breach of any covenant or
agreement of Parent or Existing Sub contained in this Agreement, or if any
representation or warranty of Parent contained in this Agreement shall be or
shall have become inaccurate, in either case such that any of the conditions set
forth in Sections 9.1 and 9.2 would not be satisfied as of the time of such
breach or as of the time such representation or warranty was or shall have
become inaccurate; provided, however, that: (A) if such breach or inaccuracy is
curable by Parent or Existing Sub, then Buyers may not terminate this Agreement
under this Section 11.3(a) with respect to the particular breach or inaccuracy
prior to or during the 30-day period commencing upon delivery by Buyers of
written notice to Parent or Existing Sub of such breach or inaccuracy, provided
Parent continues to exercise all reasonable efforts to cure such breach or
inaccuracy; and (B) the right to terminate this Agreement under this Section
11.3(a) shall not be available to Buyers if the breach is the result of any
willful act on the part of Buyers, designed to impede the consummation of any
transaction contemplated hereby.
(ii) by Parent or Existing Sub, following a breach of any
covenant or agreement of Buyers contained in this Agreement, or if any
representation or warranty of Buyers contained in this Agreement shall be or
shall have become inaccurate, in either case such that any of the conditions set
forth in Sections 10.1 or 10.2 would not be satisfied as of the time of such
breach or as of the time such representation or warranty was or shall have
become inaccurate; provided, however, that: (A) if such breach or inaccuracy is
curable by Buyers, then neither Parent nor Existing Sub may terminate this
Agreement under this Section 11.3(b) with respect to the particular breach or
inaccuracy prior to or during the 30-day period commencing upon delivery by
Parent or Existing Sub or written notice to Buyers of such breach or inaccuracy,
provided Buyers continues to exercise all reasonable efforts to cure such breach
or inaccuracy, and (B) the right to terminate this Agreement under this Section
11.3 (b) shall not be available to Parent or Existing Sub if the breach is the
result of any willful act on the part of Parent or Existing Sub, designed to
impede the consummation of any transaction contemplated hereby.
(b) This Agreement may be terminated immediately by Buyers by
written notice given by Buyers to Parent if (i) Parent's Board of Directors
shall have withdrawn or modified or amended, in a manner adverse to Buyers,
either its approval or recommendation (pursuant to Section 7.8 hereof) that the
Parent's shareholders approve the transactions as contemplated by this Agreement
including, without limitation, the Contribution and sale of the Shares and any
other matter required to be approved by the Parent's stockholders in connection
thereto, (ii) Parent shall have failed to include in its proxy statement
distributed in connection with the Parent Shareholders' Meeting the
recommendation in favor of the adoption and approval of this Agreement and the
Ancillary Documents and approval of the transactions contemplated herein and
therein, or (iii) at any time Buyers shall have determined that it is not
satisfied with the results of its pre-acquisition legal, financial and business
investigation and review.
52
<PAGE>
(c) This Agreement may be terminated immediately by Buyers by
written notice given by Buyers to Parent if Lawrence Field has not entered into
a Voting Agreement, on terms reasonably satisfactory to Buyers, by the earlier
of (i) ten business days after the date of this Agreement; and (ii) the date
upon which a proxy statement or similar document is sent to Parent's
shareholders in connection with the transactions contemplated herein.
11.4 EFFECT ON OBLIGATIONS. Termination of this Agreement pursuant to this
Article XI shall terminate all obligations of the parties hereunder, except for
the obligations under Sections 7.4, 11.4, 13.6, 13.7 and 13.10; provided,
however that termination pursuant to Sections 11.2 or 11.3 shall not relieve any
defaulting or breaching party or parties from any liability to the other parties
hereto.
ARTICLE 12
INDEMNIFICATION
12.1 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS. Each
representation and warranty made in this Agreement, other schedules, exhibits
and certificates delivered or to be delivered pursuant to this Agreement shall
survive the Closing and any investigation at any time made by or on behalf of
the parties hereto and each such representation and warranty shall expire on the
second anniversary of the Closing Date, except for the representations and
warranties set forth in Section 5.10 (only with respect to Equipment and
inventory) which shall expire six (6) months from the Closing Date and in
Section 5.23 which shall expire on the later of four and a half (4 1/2) months
from the Closing Date and February 15, 1999 and except for the representations
and warranties set forth in Sections 5.09, 5.19, 5.20 and 5.22, which shall
survive the Closing until sixty (60) days after the expiration of the applicable
statute of limitations (including all waivers or extensions thereof). After the
expiration of such periods, any claim by a party hereto based upon any such
representation or warranty, shall be of no further force and effect, except to
the extent a party has asserted a claim for breach of any such representation or
warranty (including matters not then quantifiable) prior to the expiration of
such period, in which event any representation or warranty to which such claim
relates shall survive with respect to such claim until such claim is resolved as
provided in this Article XII. The covenants and agreements contained herein to
be performed or complied with after the Closing (including, without limitation,
the covenants set forth in Sections 4.2 and 4.3) shall survive the Closing for
so long as such covenants and agreements shall remain executory in nature. The
right to indemnification, reimbursement, or other remedy based on such
representations, warranties, covenants and obligations will not be affected by
any investigation conducted with respect to, or any knowledge acquired (or
capable of being acquired) about, the accuracy or inaccuracy of or compliance
with, any such representation, warranty, covenant or obligations. The waiver of
any condition based on the accuracy of any representation or warranty, or on the
performance of or compliance with any covenant or obligation, will not affect
the right to indemnification, reimbursement, or other remedy based on such
representations, warranties, covenants and obligations.
53
<PAGE>
12.2 INDEMNIFICATION BY PARENT. From and after the Closing, Parent shall
indemnify and hold harmless Existing Sub, Buyers, their respective Affiliates,
members, Affiliates' members (as applicable), officers, directors, employees,
agents, representatives, successors and assigns (the "BUYER INDEMNITEES"), from
and against any and all Losses incurred by any of them arising out of, relating
to or resulting from any of the following:
(a) the failure by Parent to pay, perform or discharge when due any
of the Retained Liabilities;
(b) any breach by Parent of any of the representations or
warranties made by Parent in this Agreement (without giving effect to any update
to the Disclosure Schedule), the Disclosure Schedule, any update to the
Disclosure Schedule, the Executive Officers' Certificates described in Section
9.6 herein, any conveyance instrument or any other certificate or document
delivered by Parent or Existing Sub pursuant to this Agreement;
(c) any failure by Parent or, prior to the Closing, Existing Sub to
perform any of its covenants or agreements contained in this Agreement or in any
other document, writing or instrument delivered by Parent or Existing Sub
pursuant to this Agreement;
(d) the items set forth on Schedule 5.12;
(e) any and all Losses which may be incurred by Existing Sub or its
Affiliates as a result of noncompliance with any such "bulk sales" provisions or
laws or other transfer laws including, but not limited to, Losses attributable
to liability for Taxes for which Existing Sub is liable pursuant to Section 6901
of the Code, or any analogous provision of local, state, federal or foreign law,
or otherwise;
(f) any action taken or not taken in connection with the sale
contemplated hereby and by the Ancillary Documents related to (i) the
termination of employment of any Employee by Parent or, prior to Closing,
Existing Sub, or the termination by Parent or, prior to Closing, Existing Sub,
of any independent contractor or consulting agreement; or (ii) the employment or
retirement status with Parent or Existing Sub of any Employee or former
Employee;
(g) without duplication, any Taxes (including reasonable attorneys'
and accountants' fees and other reasonable out-of-pocket expenses incurred in
connection therewith), including, without limitation, any Taxes imposed by
reason of the transactions contemplated by this Agreement, (i) imposed on or
payable by Existing Sub with respect to any taxable period or portion thereof
that ends on or before the Closing Date or (ii) imposed on or payable by
Existing Sub under Treasury Regulation 1.1502-6 (or any similar provision of
state, local or foreign law) by reason of Existing Sub being included in any
consolidated, affiliated, combined or unitary group at any time on or before the
Closing Date; and
(h) any Loss, arising out of or relating to, the funding,
operation, administration, amendment termination of, or withdrawal or partial
withdrawal from, any Benefit Plan established, maintained or contributed to by
Existing Sub, Parent, any Subsidiary or ERISA Affiliate as of, or prior to, the
Closing Date, whether such liabilities, obligations or Loss arise out of or
relate to, any event or state of facts occurring or existing before, on or after
the Closing Date, and including, but
54
<PAGE>
not limited to liabilities, obligations or Loss arising under Title IV of ERISA,
Section 302 of ERISA or Section 412 or 4971 of the Code.
except that that any materiality (or correlative meaning) qualifications
included in the representations and warranties set forth in Article V shall have
no effect on any provisions in this Section 12.2 concerning the indemnities of
Parent and Existing Sub with respect to such representations and warranties,
each of which is given as though there were no materiality qualification for
purposes of such indemnities.
12.3 INDEMNIFICATION BY BUYERS. From and after the Closing, Buyers shall
indemnify and hold harmless Parent and their respective Affiliates and
respective officers, directors, employees, agents, consultants, representatives,
successors and assigns of any of the foregoing (the "PARENT INDEMNITEES"), from
and against any and all Losses incurred by any of them arising out of, relating
to or resulting from any of the following:
(a) any breach by Buyers of any of the representations or
warranties made by Buyers in this Agreement;
(b) any failure by Buyers to perform any of its covenants or
agreements contained in this Agreement;
(c) the failure by Existing Sub, after the Closing to pay, perform
or discharge when due any of the Assumed Liabilities,
(d) any Taxes (including reasonable attorneys' and accountants'
fees and other reasonable out-of-pocket expenses incurred in connection
therewith), imposed on or payable by Existing Sub with respect to any taxable
period or portion thereof beginning after the Closing Date; and
(e) subject to Section 2.4(b) and 12.2(h) hereof, any Loss, arising
out of or relating to, the funding, operation, administration, amendment,
termination of, or withdrawal or partial withdrawal from, any Benefit Plan
established, maintained or contributed to by Existing Sub or Buyers after the
Closing Date, to the extent such liabilities, obligations or Loss arise out of
or relate to, any event or state of facts occurring after the Closing Date, and
including, but not limited to liabilities, obligations or Loss arising under
Title IV of ERISA, Section 302 of ERISA or Section 412 or 4971 of the Code.
except that any materiality (or correlative meaning) qualifications included in
the representations and warranties set forth in Article VI shall have no effect
on any provisions in this Section 12.03 concerning the indemnity of Buyers with
respect to such representations and warranties, each of which Is given as though
there were no materiality qualification for purposes of such indemnities.
12.4 RIGHT OF SET-OFF. Upon notice to Parent specifying in reasonable
detail the basis for such set-off, a Buyer Indemnitee may set-off any amount to
which it may be entitled under this Article 12 against amounts otherwise payable
to Parent pursuant to Section 3.4 or Section 3.5 herein. The exercise of such
right of set-off by a Buyer Indemnitee in good faith, whether or not ultimately
determined to be justified, will not constitute an event of default under
Section 3.4 or Section 3.5
55
<PAGE>
herein. Neither the exercise of nor the failure to exercise such right of
set-off will constitute an election of remedies or limit any Buyer Indemnitee in
any manner in the enforcement of any other remedies that may be available to it.
12.5 PROCEDURE FOR INDEMNIFICATION.
(a) Any Indemnitee shall give the Indemnitor, prompt written notice
of any claim, assertion, event or proceeding by or in respect of a third party
of which such Indemnitee has knowledge concerning any Loss as to which such
Indemnitee may request indemnification hereunder; provided that failure of the
Indemnitee to give the Indemnitor prompt notice as provided herein shall not
relieve the Indemnitor of any of its obligations hereunder except to the extent
that the Indemnitor. is prejudiced thereby. The Indemnitor shall have the right
to direct, through counsel of its own choosing, which counsel shall be
reasonably satisfactory to the Indemnitee, the defense or settlement of any
claim or proceeding the subject of indemnification hereunder at its own
expenses. If the Indemnitor elects to assume the defense of any such claim or
proceeding, the Indemnitee may participate in such defense, but in such case the
expenses of the Indemnitee shall be paid by the Indemnitee. The Indemnitee
shall. upon reasonable notice, provide the Indemnitor with reasonable access to
its records and personnel relating to any such claim, assertion, event or
proceeding during normal business hours and shall otherwise cooperate with the
Indemnitor in the defense or settlement thereof, and the Indemnitor shall
promptly reimburse the Indemnitee for all its reasonable out-of-pocket expenses
in connection therewith. If the Indemnitor elects to direct the defense of any
such claim or proceeding, the Indemnitee shall not pay, or permit to be paid,
any part of any claim or demand arising from such asserted liability unless the
Indemnitor consents in writing (which consent shall not be unreasonably
withheld) to such payment or unless the Indemnitor withdraws from or fails to
maintain the defense of such asserted liability or unless a final judgment from
which no appeal may be taken by or on behalf of the Indemnitor is entered
against the Indemnitee for such liability. No settlement in respect of any third
party claim may be effected by the Indemnitor without the Indemnitee's prior
written consent unless the settlement involves only a monetary payment and no
other obligations on Indemnitee's part and a full and unconditional release of
the Indemnitee. If the Indemnitor shall fail to undertake tile defense or
settlement thereof, Indemnitee shall have the right to take exclusive control of
the defense, negotiation and/or settlement of such third party claim, at the
Indemnitor's expense. If the Indemnitee assumes the defense of any such claim or
proceeding pursuant to this Section, it may conduct such defense as it
reasonably deems appropriate (without regard to the availability of
indemnification hereunder), and the Indemnitor shall be responsible for and pay
all reasonable costs and expenses of such defense, including its compromise or
settlement.
(b) Notwithstanding the foregoing, with respect to any claim or demand
that the Indemnitor is defending, the Indemnitee shall have the right to retain
separate counsel to represent it and the Indemnitor shall pay the fees and
expenses of such separate counsel if there are conflicts that make it reasonably
necessary for separate counsel to represent the Indemnitee and the Indemnitor.
12.6 PAYMENT. With respect to Claims by third parties for which
indemnification is payable hereunder, such indemnification shall be paid by the
Indemnitor promptly upon (i) the entry of a judgment against the Indemnitee and
the expiration of any applicable appeal period; (ii) the entry
56
<PAGE>
of a non-appealable judgment or final appellate decision against the Indemnitee;
or (iii) the closing under any settlement agreement. Notwithstanding the
foregoing, expenses of the Indemnitee for which the Indemnitor is responsible
shall be reimbursed on a current basis by the Indemnitor.
12.7 LIMITATION ON RIGHT OF INDEMNIFICATION. Notwithstanding any other
provision of this Agreement, an Indemnitee shall be entitled to assert a claim
for indemnification under 12.2 (a) through (f) or 12.2(h), only to the extent
the aggregate amount of all such claims exceed $220,000, in which event the
Indemnitee shall be entitled to seek indemnification for the full amount of such
claims in excess of $220,000.
12.8 OTHER INDEMNIFICATION PROVISIONS. The foregoing indemnification
provisions are in addition to, and not in derogation of, any statutory,
equitable, or common law remedy Indemnitee may have for breach of any
representation, warranty, covenant or agreement; provided that, in the absence
of fraud, the limitations on right of indemnification set forth above shall
apply to such remedies.
ARTICLE 13
MISCELLANEOUS
13.1 INTERPRETIVE PROVISIONS. It is understood and agreed that the
specification of any dollar amount in the representations and warranties
contained in this Agreement or the inclusion of any specific item in the
schedules hereto is not intended to imply that such amounts or any higher or
lower amounts, or the items so included or other items, are or are not material,
and neither party shall use the fact of the setting of such amounts or the fact
of the inclusion of any such item in the schedules hereto as to whether any
obligation, item or matter not described herein or included in a schedule is or
is not material for purposes of this Agreement.
13.2 ENTIRE AGREEMENT. This Agreement (including the exhibits, any other
schedules and other documents referred to herein), and the Ancillary Documents
constitute the entire agreement between the parties hereto and supersedes all
prior agreements and understandings, oral and written, between the parties
hereto, with respect to the subject matter hereof.
13.3 SUCCESSORS AND ASSIGNS; BENEFITS. The terms and conditions of this
Agreement shall inure to the benefit of and be binding upon the respective
successors and assigns of the parties hereto; except that this Agreement may not
be assigned by Parent or Existing Sub without the prior written consent of
Buyers or by Buyers without the prior written consent of Parent; provided,
however, that this Agreement may be assigned by Buyers in whole or part to an
Affiliate of Buyers or to third parties (for the purpose of allowing such third
parties to purchase a portion of the Shares) without the prior written consent
of Parent. Any such assignee shall execute a counterpart of this Agreement
agreeing to be bound by the provisions hereof. Nothing in this Agreement,
express or implied, is intended to, or shall confer on, any Person other than
any of the parties hereto any rights, benefits or remedies of any nature
whatsoever under or by reason of this Agreement.
57
<PAGE>
13.4 HEADINGS. The headings of the articles, sections and paragraphs of
this Agreement are inserted for convenience only and shall not be deemed to
constitute part of this Agreement or to affect the construction hereof.
13.5 MODIFICATION AND WAIVER. This Agreement may be amended or modified,
and any provision of this Agreement may be discharged or waived, only by a
document signed by the party against which the amendment modification,
discharge, or waiver is sought to be enforced, provided, however, that Exhibit A
may be amended by Swander Pace Capital Fund, L.P. at any time prior to the
Closing without the consent of any other party, so long as any parties added to
Exhibit A shall sign a counterpart signature page to this Agreement and shall at
that time be deemed a party hereto, and provided further, that Swander Pace
Capital Fund, L.P. shall at all time be a party to this Agreement. No waiver of
any of the provisions of this Agreement shall be deemed to or shall constitute a
waiver of any other provision hereof (whether or not similar). No delay on the
part of any party in exercising any right, power or privilege hereunder shall
operate as a waiver thereof.
13.6 EXPENSES. Except as otherwise expressly contemplated by this
Agreement, whether or not the transactions contemplated by this Agreement are
consummated, each of the parties hereto shall pay all costs and expenses
incurred by it or on its behalf in connection with the negotiation, preparation,
execution and performance of this Agreement, the Ancillary Documents and the
transactions contemplated hereby and thereby, including, without limitation,
fees, expenses and disbursements of its own financial consultants, accountants
and counsel ("EXPENSES"), provided, however, that in the event this Agreement is
terminated in accordance with Article XI, then Parent shall, within 60 days of
such termination, pay all out-of-pocket third party Expenses of Buyers
(including, without limitation, the reasonable fees and expenses of Buyers'
counsel and fees payable to the Debt Financing entities and their respective
counsel or other advisors and to other financing sources utilized by Buyers for
purposes of the transactions contemplated herein and in the Ancillary Documents,
and all reasonable consulting fees payable to Swander Pace & Co.), unless
failure to consummate the transactions contemplated herein is the result of a
breach of Buyers' representations and warranties or Buyers' failure to perform
its covenants and agreements contained herein, and provided further, that in no
event shall Parent pay to Buyers in excess of $200,000 for Buyers' Expenses,
excluding the fees of legal counsel and any fees payable to banks. Upon
consummation of the transactions contemplated by this Agreement, Existing Sub
shall, within 30 days after the Closing Date, in immediately available funds
reimburse Buyers by wire transfer for all of its Expenses and shall also pay to
Buyers in cash the sum of $500,000.
13.7 NOTICES. Any notice, request, response, demand, claim or other
communication required or permitted hereunder (or in any Ancillary Document not
containing an alternative notice provision) by any party hereto to any other
party shall be in writing and transmitted, delivered or sent by (a) personal
delivery, (b) courier or messenger service, whether overnight or same day (c)
certified United States mail postage prepaid, return receipt requested, or (d)
prepaid telecopy or facsimile (except, that no request for indemnification may
be provided by telecopy or facsimile),
58
<PAGE>
If to Parent, to:
Silverado Foods, Inc.
6846 South Canton
Suite 110
Tulsa, Oklahoma 74136
Telephone: (918) 496-2400
Telecopier: (918) 491-6290
Attention: Lawrence D. Field
With a copy to:
Conner & Winters
3700 First Place
15 East Fifth Street
Tulsa, Oklahoma 74103
Telephone: (918) 586-8540
Telecopier: (918) 586-8548
Attention: R. Kevin Redwine, Esq.
If to Buyers, to:
Swander Pace Capital Fund, L.P.
345 California Street, Suite 2500
San Francisco, California 94104
Telephone: (415) 477-8500
Telecopier: (415) 477-8510
Attention: Andrew H. Richards
With a copy to:
Cooley Godward LLP
One Maritime Plaza, 20th Floor
San Francisco, California 94111-3580
Telephone: (415) 693-2000
Telecopier: (415) 951-3699
Attention: Samuel M. Livermore, Esq.
59
<PAGE>
If to Existing Sub, to:
Mom's Best Services, Inc.
c/o Silverado Foods, Inc.
6846 South Canton
Suite 110
Tulsa, Oklahoma 74136
Telephone: (918) 496-2400
Telecopier: (918) 491-6290
Attention: Timothy G. Bruer
or at such other address for a party as shall be specified by like notice. Each
communication transmitted, delivered, or sent (a) in person, by courier or
messenger service, or by certified United States mail (postage prepaid and
return receipt requested) shall be deemed given, received, and effective on the
date delivered to or refused by the intended recipient (with the return receipt
or the equivalent record of the courier or messenger being deemed conclusive
evidence of delivery or refusal); or (b) by telecopy or facsimile transmission
or by electronic mail shall be deemed given, received, and effective on the date
of actual receipt (with the confirmation of transmission or the electronic
receipt being deemed conclusive evidence of such receipt, except where the
intended recipient has promptly notified the other Party that the transmission
is illegible).
Nevertheless, if the date of delivery or transmission is not a Business
Day, or if the delivery or transmission is after 5:00 p.m., local time in Tulsa,
Oklahoma on a Business Day, the communication shall be deemed given, received,
and effective on the next Business Day.
13.8 SPECIFIC PERFORMANCE. The parties hereto hereby acknowledge that
each party hereto would suffer irreparable injury and would not have an adequate
remedy at law for money damages if the provisions of this Agreement were not
performed in accordance with their terms. Each party hereto agrees that the
other parties hereto shall be entitled to specific enforcement of the term's of
this Agreement in addition to any other remedy to which they are entitled, at
law or in equity. Furthermore, if any action or proceeding shall be instituted
to enforce the provisions hereof, any party against whom such action or
proceeding is brought hereby waives the claim or defense therein that there is
an adequate remedy at law, and agrees not to urge in any such action or
proceeding the claim or defense that such remedy at law exists.
13.9 GOVERNING LAW. The validity, performance and enforcement of this
Agreement and all Ancillary Documents, unless expressly provided to the
contrary, shall be governed by the laws of the State of Delaware, without giving
effect to the principles of conflicts of law thereof, except that with respect
to matters regarding the transfer of right, title to and interest in any
Assigned Contract or Permit, the laws governing such Assigned Contract or Permit
shall govern, without giving effect to the principles of conflicts of law
thereof.
13.10 PUBLIC ANNOUNCEMENTS. Neither Parent nor Existing Sub, on the
one hand, nor Buyers on the other hand, shall make any public announcements,
including, without limitation, any press releases, pertaining in any way to this
Agreement and the transactions contemplated hereby without, the prior consent of
the other party, which consent shall not be unreasonably withheld,
60
<PAGE>
except as may be required by law; provide however, that without such prior
consent, any party hereto shall be free to make comments to its stockholders,
members and employees and to financial analysts and the press which are
substantially consistent with disclosures in such public announcements.
13.11 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall for all purposes be deemed to be an original
and all of which together shall constitute one and the same instrument.
61
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement of
Stock Purchase and Sale to be executed on its behalf as of the date first above
written.
SILVERADO FOODS, INC.
By: /s/ Lawrence D. Field
----------------------------------------
Name: Lawrence D. Field
Title: Chairman of the Board of Directors
MOM'S BEST SERVICES, INC.
By: /s/ Dorvin D. Lively
----------------------------------------
Name: Dorvin D. Lively
--------------------------------------
Title: Vice President and Chief
--------------------------------------
Financial Officer
--------------------------------------
SWANDER PACE CAPITAL FUND, L.P.
By Swander Pace Capital LLC,
its General Partner
By: /s/ Andrew Richards
--------------------------------------
Name: Andrew Richards
--------------------------------------
Title: Managing Director
--------------------------------------
SPC GP FUND, LLC
By: /s/ Andrew Richards
--------------------------------------
Name: Andrew Richards
--------------------------------------
Title: Managing Director
--------------------------------------
SPC EXECUTIVE ADVISORS FUND, LLC
By: /s/ Andrew Richards
--------------------------------------
Name: Andrew Richards
--------------------------------------
Title: Managing Director
--------------------------------------
62
<PAGE>
EXHIBIT A
BUYERS
NAME OF BUYER NUMBER OF SHARES PERCENTAGE OF PURCHASE
PURCHASED PRICE PAID
- ----------------------------------------------------------------------------
Swander Pace Capital Fund, 871,111 96.79
L.P.
- ----------------------------------------------------------------------------
SPC GP Fund, LLC 14,489 1.61
- ----------------------------------------------------------------------------
SPC Executive Advisors 14,400 1.6
Fund, LLC
- ----------------------------------------------------------------------------
63
<PAGE>
List of Schedules (Intentionally Omitted)
2.2(a) Hardware
2.2(c) Personalty Leases
2.2(d) Intellectual Property Rights
2.3 Excluded Assets
5.1 Organization and Standing
5.2(c) Authorization
5.6(a)/(b) Financial Statements
5.7 Insurance Policies
5.8 Absence of Changes
5.9(a) Liens and Encumbrances
5.9(b) Real Property
5.10 Condition of Buildings, Structures, Equipment, etc.
5.11 Agreements, Plans and Arrangements, etc.
5.12 Legal Proceedings
5.13 Notice of Proceeding, Violation, etc.
5.15 Permits
5.17 The Business
5.18 Employment Matters
5.19 Tax Matters
5.20 Employee Benefit Plans and Employee Agreements
5.21 Accounts Receivable
5.22 Environmental Matters
5.25 Transactions with Affiliates
5.28 Trade Deals and Promotions
7.2 Conduct of Business
7.2(b) Conduct of Business
7.11 Location of Assets
Exhibits
Exhibit A: List of Buyers
Exhibit 5.6(b):Interim Financial Statements (Intentionally Omitted)
Exhibit 9.15: Budget of the Business (Intentionally Omitted)
<PAGE>
AMENDMENT TO
AGREEMENT OF STOCK PURCHASE AND SALE
THIS AMENDMENT TO AGREEMENT OF STOCK PURCHASE AND SALE (this "AMENDMENT"),
made and entered into this 28th day of October, 1998, by and among SILVERADO
FOODS, INC., an Oklahoma corporation ("PARENT"), MOM'S BEST SERVICES, INC., a
Florida corporation and a wholly owned subsidiary of Parent ("EXISTING SUB"),
and the other entities set forth on Exhibit A attached hereto ("BUYERS").
WHEREAS, Parent, Existing Sub, Swander Pace Capital Fund, L.P., SPC
Executive Advisers Fund, LLC and SPC GP Fund, LLC entered into an Agreement of
Stock Purchase and Sale dated as of August 14, 1998 (the "AGREEMENT"), pursuant
to which the parties thereto set forth the term and conditions under which they
would effect a recapitalization of Existing Sub;
WHEREAS, the parties hereto and the parties to the Agreement desire to
amend the Agreement as set forth herein;
NOW, THEREFORE, in consideration of the premises herein contained and for
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, and intending to be legally bound hereby, each of the
parties hereto agrees as follows. Certain terms used and not otherwise defined
herein have the meanings ascribed to such terms in the Agreement.
A. ADDITION OF PARTY TO AGREEMENT
1. Section 13.5 of the Agreement provides that Exhibit A to the Agreement
may be amended by Swander Pace Capital Fund, L.P. at any time prior to the
Closing without the consent of any other party, so long as, among other things,
any parties added as parties to the Agreement pursuant to Section 13.5 shall
sign a counterpart signature page to the Agreement.
2. The parties hereto hereby agree that Exhibit A to the Agreement shall
be amended by adding SPC Associates Fund, LLC to Exhibit A to the Agreement and
in every other way replacing Exhibit A to the Agreement with Exhibit A to this
Amendment. The parties further agree that execution of this Amendment shall be
accepted as a counterpart signature page to both the Agreement and to this
Amendment. All parties hereto shall be deemed to be a party to the Agreement, as
amended by this Amendment.
B. DEFINITIONS
1. The reference to the "Field Warrant" in Article I of the Agreement
shall be removed. Section 9.13 of the Agreement shall be deleted. The numeration
of the other sections of Article 9 shall not be affected.
1.
<PAGE>
2. The following definition shall be added to Article I of the Agreement:
"FURTHER DEBT FINANCING": as set forth in Section 2.1(d).
C. PURCHASE AND REPURCHASE
1. The parties hereto hereby agree that in Section 2.1(a):
(a) each appearance of the amount of $24 million in Section 2.1(a) of
the Agreement shall be replaced with the amount of $17.0 million;
(b) the words "and the purchase price of the Field Warrant" shall be
deleted from Section 2.1(a)(ii)(A); and
(c) the clause "- Field Warrant" shall be deleted from the
mathematical formula.
2. The parties hereto hereby agree that in Section 2.1(b):
(a) each appearance of the amount of $24 million in Section 2.1(b) of
the Agreement shall be replaced with the amount of $17.0 million;
(b) the words "and the purchase price of the Field Warrant" shall be
deleted from Section 2.1(b)(ii)(A); and
(c) the clause "- Field Warrant" shall be deleted from the
mathematical formula.
3. The following Sections 2.1(c) and 2.1(d) shall be added immediately
after Section 2.1(b):
(c) The following term shall have the following meaning: "YEAR-END PAYMENT
PERIOD" shall mean the twelve month period ending on December 31, 1998.
(d) Existing Sub shall pay to Parent an amount in cash ("YEAR-END
PAYMENT") equal to the product of (A) a fraction, the numerator of which is
equal to (x) EBITDA (as defined in Section 3.5(a)) for the Year-End Payment
Period, minus (y) $2 million (which numerator, if such difference equals a
negative number, shall equal zero, and if such difference is greater than $0.3
million, shall equal $0.3 million), and the denominator of which is equal to
$0.3 million, and (B) $3 million.
(i) Subject to Section 2.1(d)(ii) below, any Year-End Payment paid
pursuant to this Section shall be delivered from Existing Sub to Parent as soon
as reasonably practicable following the availability of audited financial
statements for the Business relating to the relevant Year-End Payment Period.
2.
<PAGE>
(ii) Notwithstanding the foregoing, if a Year-End Payment is payable
under this Section and there exists any outstanding claim for indemnification
asserted by any Buyer Indemnitee pursuant to Article XII hereof, the portion of
the Year-End Payment equal to the amount of such outstanding claim for
indemnification asserted by any Buyer Indemnitee (the "YEAR-END HOLDBACK
AMOUNT"), to be paid by Buyers to Parent shall be delayed until the final
resolution of such claim. The excess, if any, of the Year-End Payment payable to
Parent over the Year-End Holdback Amount shall be paid in accordance with
paragraph (i) above. If any Buyer Indemnitee is subsequently entitled to be
indemnified pursuant to Article XII hereof, then a portion of the Year-End
Holdback Amount equal to the amounts owed to Buyer Indemnitee shall be paid to
Buyer Indemnitee.
(iii) Parent shall, in cooperation with Buyers, cause Existing Sub
to have available to it a credit facility specifically for the purpose of making
the Year-End Payment, with terms reasonably satisfactory to Buyers, the amount
available under which shall be adequate for the Year-End Payment (the "FURTHER
DEBT FINANCING").
D. REPURCHASE PRICE ADJUSTMENT. The dollar amount $2,196,475 found in Section
3.2 shall be replaced with the dollar amount $2,696,475.
E. EARN-OUT PAYMENTS
1. The definition of "Additional Earn-Out Date" set forth in Section
3.5(a) shall be October 31, 1999, instead of September 30, 1999.
2. Section 3.5(b) of the Agreement shall be replaced in its entirety with
the following text:
"(b) Subject to paragraph (c) of this Section,
(i) Existing Sub shall pay to Parent an amount in cash ("INITIAL
EARN-OUT PAYMENT") equal to the product of (A) a fraction, the numerator of
which is equal to (x) EBITDA for the Initial Earn-Out Period, minus (y) $3
million (which numerator, if such difference equals a negative number,
shall equal zero, and if such difference is greater than $1 million, shall
equal $1 million), and the denominator of which is equal to $1 million, and
(B) $3 million;
(ii) Existing Sub shall pay to Parent an amount in cash ("ADDITIONAL
EARN-OUT PAYMENT") equal to the product of (A) a fraction, the numerator of
which is equal to (x) Plant-Level EBITDA for the Additional Earn-Out
Period, minus (y) $8.6 million (which numerator, if such difference equals
a negative number, shall equal zero, and if such difference is greater than
$1 million, shall equal $1 million), and the denominator of which is equal
to $1 million and (B) $ 5 million."
3.
<PAGE>
F. CONDITIONS TO BUYERS' OBLIGATIONS.
1. The following Section 9.23 shall be added immediately after Section
9.22:
"9.23 HSR ACT. The waiting period applicable to the consummation of the
transactions contemplated herein under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended, shall have expired or been terminated."
2. Buyers acknowledge that the due and valid entering into of a sub-
lease from Parent to Existing Sub of the property located at 3920 East Pine
Street, Tulsa, Oklahoma (the "PROPERTY") and the receipt or entering into of any
other agreements, documents, approvals or consents related thereto, each on
terms reasonably satisfactory to Buyers, shall fulfill the condition set forth
in Section 9.3 with respect to such Property, as well as any other provisions of
the Agreement requiring an assignment of the lease covering the Property.
3. The following sentence shall be added to Section 9.14:
"The Further Debt Financing shall have been made available to Existing Sub
to make the Year-End Payment on terms satisfactory to Buyers."
G. MISCELLANEOUS
1. This Amendment may be executed in several counterparts, each of which
shall constitute an original and all of which, when taken together, shall
constitute one agreement.
2. This Amendment shall be construed in accordance with, and governed in
all respects by, the internal laws of the State of Delaware (without giving
effect to principles of conflicts of laws).
3. Except as amended hereby, the Agreement shall remain in full force and
effect.
4.
<PAGE>
The parties hereto have caused this Amendment to Agreement of Stock
Purchase and Sale to be executed and delivered as of the date first written
above.
SILVERADO FOODS, INC.
By: /s/ Lawrence D. Field
--------------------------------------------
Name: Lawrence D. Field
Title: Chairman of the Board of Directors
MOMS' BEST SERVICES, INC.
By: /s/ Tim Bruer
--------------------------------------------
Name: Tim Bruer
Title: President
SWANDER PACE CAPITAL FUND, L.P.,
a Delaware limited partnership
By: SWANDER PACE CAPITAL, L.L.C.,
a Delaware limited liability company, its general partner
By: /s/ Andrew Richards
--------------------------------------------
Andrew H. Richards
SPC EXECUTIVE ADVISERS FUND, LLC,
a Delaware limited liability company
By: SWANDER PACE CAPITAL L.L.C.,
a Delaware limited liability company, its manager
By: /s/ Andrew Richards
--------------------------------------------
Andrew H. Richards
5.
<PAGE>
SPC GP FUND, LLC,
a Delaware limited liability company
By: SWANDER PACE CAPITAL L.L.C.,
a Delaware limited liability company, its manager
By: /s/ Andrew Richards
--------------------------------------------
Andrew H. Richards
SPC ASSOCIATES FUND, LLC,
a Delaware limited liability company
By: SWANDER PACE CAPITAL L.L.C.,
a Delaware limited liability company, its manager
By: /s/ Andrew Richards
--------------------------------------------
Andrew H. Richards
6.
<PAGE>
EXHIBIT A
NAME OF BUYER NUMBER OF SHARES PERCENTAGE OF PURCHASE
PURCHASED PRICE PAID
Swander Pace Capital Fund,
L.P.
SPC GP Fund, LLC
SPC Executive Advisers Fund,
LLC
SPC Associates Fund, LLC
7.
<PAGE>
APPENDIX B
[PENN HUDSON LETTERHEAD APPEARS HERE]
PRIVATE AND CONFIDENTIAL
October 28, 1998
Board of Directors
Silverado Foods, Inc.
6846 S. Canton, Suite 110
Tulsa, OK 74136
Members of the Board:
We have been informed by Silverado Foods, Inc. ("Silverado" or the
"Company") that Silverado, Mom's Best Services, Inc., a Florida corporation and
wholly-owned subsidiary of the Company ("Existing Sub"), has entered into an
agreement date August 14, 1998, with Swander Pace Capital Fund, L.P., SPC GP
Fund, LLC and SPC Executive Advisors Fund, LLC ("SPC") whereby the Company and
Existing Sub will sell to SPC substantially all of the business, operations and
assets of the Company's Nonni's Biscotti business to SPC through a
recapitalization of Existing Sub. Pursuant to an amendment to the sale agreement
dated October 23, 1998, the value obtainable by the Company under the sale
agreement is approximately $28 million comprised of $17 million in cash and the
10% equity retention (the cash portion is estimated to be approximately $15.9
million), a $3 million year-end payment subject to adjustment and up to $8
million in earn-out payments (collectively, the "Offer"), as more fully
described in the sale agreement, as amended (the "Agreement"). In conjunction
with the proposed purchase by SPC of Nonni's, certain members of management will
remain with Nonni's and participate, through an option program, in the ownership
of the entity to be formed by SPC.
You have requested our opinion as to the fairness from a financial point
of view to the stockholders of Silverado of the Offer.
In conducting our analysis and arriving at the opinion expressed herein,
we have reviewed and considered the following materials:
(i) a summary of the financial terms of the Agreement provided by
Silverado;
(ii) certain publicly available historical financial and operating
data concerning Silverado including the Annual Report on Form
10-K for the year ended December, 1997 and the Quarterly Reports
on Form 10-Q for the quarters ended March, 1998 and June, 1998;
<PAGE>
(iii) certain information of the Company, including financial forecasts
relating to the business, earnings, cash flow, assets and prospects
of Nonni's prepared by managemnet of Nonni's and SPC;
(iv) certain industry information prepared by management of Nonni's and LF
Capital Partners LLC;
(v) publicly available financial, operating and stock market data
concerning certain companies engaged in business we deemed relatively
comparable to Nonni's or otherwise relevant to our inquiry;
(vi) the financial terms of certain recent transactions we deemed
relevant to our inquiry; and
(vii) the historical market prices of common shares of Silverado.
We have, with your approval, also relied upon Silverado in all material
respects as to its description of the financial terms of the Agreement and the
forecasts prepared by Nonni's and SPC. With your permission, we did not
undertake any independent verification of such information or undertake an
independent appraisal of the assets or liabilities of the Company. Furthermore,
we have been directed by Nonni's to not rely upon previous forecasts provided to
us.
As part of our engagement, we retained Concordia, Inc. ("Concordia") to
provide to us financial advisory services regarding, among other things,
information on the specialty food industry and, more specifically, production
capabilities and marketplace opportunities relevant to Nonni's as well as
information pertaining to transactions comparable to the Offer. We were
subsequently informed by Concordia that the original purchaser of Nonni's had
withdrawn and that SPC, introduced by Concordia, was now to be the purchaser. As
such, we discontinued our retention with Concordia at that time, but have
continued to rely upon information previously provided by Concordia, including,
but not limited to, a detailed description of operating capacity, market
position, and prospects for Nonni's and the absence of information pertaining to
financial terms of certain recent transactions.
We spoke with management of Silverado and Nonni's by telephone on a number
of occasions regarding the history and prospects for Nonni's. In connection with
our review and analysis and in arriving at our opinion, we have relied upon the
accuracy and completeness of the financial and other information provided to us
by the Company, Nonni's, Concordia and otherwise publicly available and have not
undertaken any independent verification of such information or undertaken an
independent appraisal of the assets or liabilities of the Company or Nonni's.
With respect to the financial forecasts provided to us by the Company, we have
assumed that such forecasts (and the assumptions and bases therefor) have been
reasonably prepared and represent management's best currently available estimate
as to the future financial performance of Nonni's. Further, our opinion
2
<PAGE>
is necessarily based on economic, financial and market conditions as they exist
and can be evaluated as of the date hereof.
We were retained by the Company to render this opinion to the Board of
Directors of the Company in connection with the possible sale of Nonni's. We
have not been authorized by the Company or its Board of Directors to solicit,
nor have we solicited indications of interest from third parties for the
acquisition of Nonni's. Our opinion does not address the relative merits of the
Offer with any alternative business strategy that may be available to the
Company nor as to the appropriateness of the Agreement.
This letter and the opinion expressed herein are for the use of the Board
of Directors of the Company. This opinion does not constitute a recommendation
to the stockholders of the Company as to whether such stockholders should
approve or disapprove of such Offer. This opinion may not be reproduced,
summarized, excerpted from or otherwise publicly referred to or disclosed in any
manner, without our prior written consent, except that the Company may include
this opinion in its entirety in any disclosure document to be filed with the
Securities and Exchange Commission relating to the Offer; provided that it is an
express condition of our consent that the opinion not be changed, altered or
quoted and must be referred to as a self contained document.
Based upon and subject to the foregoing, we are of the opinion that, as of
the date hereof, the cash consideration to be received by the Company in the
Offer is fair from a financial point of view to the Company and its
shareholders.
Very truly yours,
PENN HUDSON FINANCIAL GROUP, INC.
<PAGE>
APPENDIX C
ACQUIRING PERSON STATEMENT
Pursuant to the Oklahoma Control Shares Act
Oklahoma Statutes, Title 18, Section 1150
------------------------------
SILVERADO FOODS, INC.
(name of issuing public corporation)
6846 South Canton, Suite 100
Tulsa, Oklahoma 74136
(address of principal executive office)
-----------------------------
LAWRENCE D. FIELD
(name of acquiring person)
-----------------------------
Dated as of October 23, 1998
ITEM 1. Identity of the acquiring person:
LAWRENCE D. FIELD
ITEM 2. This statement is given pursuant to Sections 1145 through 1155,
inclusive, of title 18 of the Oklahoma Statutes (the "Control Shares
Act").
ITEM 3. The acquiring person owns, directly or indirectly, 4,220,009 shares
of Common Stock of Silverado Foods, Inc. (the "Company"), and such
shares were acquired on the dates and at the prices set forth on
Schedule I attached hereto.
ITEM 4. Except for Section 1149 of the Control Shares Act, the acquiring
person would be deemed to have voting power, as provided in Section
1145 of the Control Shares Act, with respect to 4,220,009 shares
of the Company's Common Stock, or 27.4 percent of the issued and
outstanding shares of the class.
ITEM 5. The acquiring person requests that the shareholders of the Company
approve the following resolution at its next regular meeting:
RESOLVED, that all of the shares of Common Stock of the Company
held by Lawrence D. Field that are deemed "control shares" under
the Control Shares Act are hereby accorded the same voting rights
as shares that are not "control shares."
ITEM 6. Not applicable.
<PAGE>
SCHEDULE I
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
Date of Number Date of Number
Acquisition of Shares Purchase Price Acquisition of Shares Purchase Price
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
8/4/94 25,000 $7.0000 5/22/95* 9,000 $0.4400
8/4/94 200 $7.0000 5/22/95 67,500 $1.2200
8/9/94 5,000 $6.7500 5/23/95 4,500 $3.3750
8/10/94 4,100 $7.0000 5/23/95 5,500 $3.2500
8/10/94 5,900 $6.8750 5/24/95 2,400 $3.7500
8/11/94 35,000 $7.1250 5/24/95 5,000 $3.3750
8/11/94+ 210,528 $2.2500 5/24/95 2,000 $3.2500
8/11/94 90,164 $2.2500 5/25/95 5,000 $3.3125
3/24/95 10,000 $3.3750 5/25/95 2,400 $3.5625
3/24/95 2,500 $3.5000 5/25/95* 11,250 $0.4400
3/27/95 11,500 $3.3750 5/26/95 1,800 $3.3750
3/27/95 6,000 $3.5000 5/26/95 2,400 $3.7500
3/27/95 2,500 $3.2500 5/26/95 1,200 $3.2500
3/28/95 5,000 $3.5000 5/30/95 7,000 $3.3750
3/28/95 2,000 $3.2500 5/30/95 3,000 $3.2500
3/28/95 3,000 $3.3750 6/5/95 2,000 $3.8750
3/29/95 11,250 $2.6300 6/6/95 5,000 $3.7500
3/29/95 2,500 $3.3750 6/9/95 2,700 $3.7500
3/29/95 5,000 $3.5000 6/9/95 1,100 $3.6250
3/30/95 5,000 $3.5000 6/12/95 10,000 $3.5000
4/3/95 3,000 $2.9375 6/14/95 4,000 $3.2500
4/3/95 10,000 $3.3750 6/15/95 2,700 $3.4375
4/3/95 3,500 $3.5000 6/16/95 7,700 $3.3750
4/3/95 10,000 $3.6250 6/19/95 1,900 $3.9575
4/4/95 1,500 $3.6250 6/19/95 3,000 $3.5000
4/4/95 5,000 $3.3750 6/19/95 3,700 $3.2500
4/4/95 5,000 $3.7500 6/20/95 5,000 $3.3750
4/6/95 3,000 $3.3750 6/21/95 2,700 $3.5000
4/7/95 3,000 $3.1250 6/27/95 300 $3.5000
4/11/95 3,000 $2.9375 6/29/95 2,000 $3.7500
4/13/95 6,000 $2.9375 6/29/95 3,000 $3.8750
5/16/95 4,000 $3.1875 6/30/95 7,500 $3.5000
5/19/95* 1,878 $0.4400 7/5/95 2,000 $3.8750
</TABLE>
C-2
<PAGE>
Date of Number Purchase Date of Number Purchase
Acquisition of Shares Price Acquisition of Shares Price
- ----------- --------- -------- ----------- --------- --------
7/6/95 7,500 $ 3.5000 5/21/96 10,000 $ 3.5000
8/15/95 5,300 $ 3.8750 6/12/96 5,000 $ 3.1250
8/16/95 2,000 $ 3.8750 8/20/96 4,000 $ 3.2500
8/18/95 2,000 $ 3.8750 8/20/96 1,000 $ 3.1250
8/21/95 5,000 $ 3.8750 9/3/96 2,000 $ 3.2500
8/22/95 1,200 $ 3.8750 9/19/96 2,000 $ 2.9400
11/17/95 10,000 $ 3.6701 9/25/96 2,000 $ 3.1300
11/20/95 9,000 $ 3.7500 9/25/96 5,000 $ 3.0000
11/20/95 9,900 $ 3.5000 9/30/96 2,500 $ 3.0000
11/24/95 16,000 $ 3.6880 9/30/96 2,000 $ 3.0000
11/27/95 5,000 $ 3.6880 10/1/96 5,000 $ 3.0000
11/28/95 2,000 $ 3.6880 10/2/96 2,000 $ 3.0000
11/29/95 2,500 $ 3.6250 10/4/96 2,000 $ 3.0000
11/30/95 5,500 $ 3.6250 11/4/96 10,000 $ 3.0620
12/1/95 7,500 $ 3.6100 11/11/96 10,000 $ 2.8630
12/4/95 2,500 $ 3.5000 11/12/96 10,000 $ 2.9980
12/15/95 21,600 $ 2.7500 11/18/96 10,000 $ 2.9880
12/15/95 5,500 $ 2.7600 11/20/96 10,000 $ 3.0000
12/18/95 5,000 $ 3.0000 11/21/96 5,000 $ 3.0000
12/18/95 2,600 $ 2.8750 11/26/96 5,000 $ 3.0000
12/18/95 5,000 $ 2.8750 11/29/96 10,000 $ 2.9970
12/18/95 5,000 $ 3.0000 12/2/96 5,000 $ 2.8800
12/19/95 1,500 $ 3.0000 12/2/96 7,000 $ 3.0000
12/19/95 200 $ 2.8750 12/2/96 10,000 $ 2.7500
12/20/95 8,000 $ 3.0000 12/2/96 3,000 $ 2.8800
12/22/95 10,000 $ 3.1250 12/3/96 5,000 $ 2.8500
12/26/95 5,000 $ 3.2500 12/12/96 18,400 $ 2.5000
12/28/95 2,200 $ 2.8750 12/12/96 31,600 $ 2.4400
1/3/96 2,200 $ 2.8750 12/18/96 50,000 $ 2.4050
1/12/96 3,100 $ 3.1250 12/30/96 20,000 $ 2.7500
3/28/96 5,000 $ 2.8250 12/30/96 5,000 $ 2.6900
3/29/96 3,000 $ 3.0000 12/31/96 35,000 $ 2.6212
3/29/96 2,000 $ 3.0000 1/8/97 1,000 $ 2.8125
5/20/96 15,000 $ 3.2917 1/8/97 4,000 $ 2.8750
<PAGE>
Date of Number Purchase Date of Number Purchase
Acquisition of Shares Price Acquisition of Shares Price
- ----------- --------- -------- ----------- --------- --------
1/29/97 7,800 $2.8750 4/15/97 50,000 $1.5000
1/29/97 2,200 $2.7500 5/6/97 27,211 $2.6200
1/29/97 10,000 $3.0000 6/3/97 5,000 $1.3750
1/30/97 10,000 $2.8750 6/3/97 25,000 $1.2500
3/17/97 1,000 $2.3750 6/3/97 4,500 $1.2500
3/17/97 14,000 $2.5000 6/4/97 35,000 $1.5000
3/17/97 10,000 $2.5000 6/5/97 24,200 $1.1767
3/18/97 20,000 $2.6250 6/5/97 20,000 $1.1250
3/26/97 20,000 $1.9750 6/6/97 5,000 $1.2500
3/27/97 25,000 $2.0000 6/10/97 25,000 $1.1875
3/27/97 20,000 $2.0000 6/10/97+ 34,123 $0.4400
3/31/97 10,400 $2.0000 6/17/97 25,000 $1.0750
3/31/97 9,600 $2.0630 6/18/97 20,000 $1.0630
3/31/97 7,000 $2.0000 6/27/97 47,700 $1.1250
4/1/97 20,000 $1.9750 6/27/97 2,300 $1.0630
4/2/97 20,000 $2.0000 8/14/97 25,000 $0.6850
4/2/97 25,000 $2.0000 9/30/97 1,790,694 $1.3125
4/4/97 5,000 $2.1250 3,652,298
4/11/97 50,000 $1.850
+ Acquired by Regent Private Capital Corp.
* Warrants to purchase shares.
Note: Shares of the Company's common stock ("shares") beneficially owned by the
Company's initial public offering included (1) 22,500 shares owned
directly by the acquiring person, (2) 476,412 shares owned indirectly
through Regent Private Capital Corp. ("Regent"), (3) 22,500 shares at
$1.22 per share, (5) warrants held directly by the acquiring person to
purchase 22,128 shares at $3.11 per share, (6) warrants held directly by
the acquiring person to purchase 42,424 shares at $8.25 per share (7)
warrants held by Regent to purchase 34,123 shares at $3.11 per share,
(8) Series C preferred stock held directly by the acquiring person and
convertible into 90,164 shares at $2.25 per share, and (9) Series C
preferred stock held by Regent and convertible into 210,528 shares at
$2.25 per share.
<PAGE>
SILVERADO FOODS, INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR THE ANNUAL MEETING OF SHAREHOLDERS TO BE HELD DECEMBER 22, 1998
The undersigned hereby appoints Lawrence D. Field and Timothy G. Bruer, and
each of them, with full power of substitution, as proxies to represent and vote
all of the shares of Common Stock the undersigned is entitled to vote at the
Annual Meeting of Shareholders of Silverado Foods, Inc. (the "Company") to be
held on the 22nd day of December, 1998, at 10:00 a.m., local time, at the
AmeriSuites hotel at 7037 South Zurich Avenue, Tulsa, Oklahoma 74136 and at any
and all adjournments thereof, on all matters coming before said meeting.
1. THE SALE TRANSACTION
Proposal to approve and adopt (a) the Agreement of Stock Purchase and Sale,
dated as of August 14, 1998, as amended on October 28, 1998 (as amended, the
"Sale Agreement"), by and among the Company, Mom's Best Services, Inc., a
Florida corporation and a wholly-owned subsidiary of the Company ("Existing
Sub"); and Swander Pace Capital Fund, L.P., SPC GP Fund, LLC, SPC Executive
Advisers Fund, LLC, SPC Associates Fund, LLC, and Silver Brands Partners,
L.P., as the buyers (collectively, "Buyer"), (b) the sale (the "Sale") of
substantially all of the business, operations and assets of the Company's
Nonni's(R) Biscotti business to Buyer through a recapitalization of the
Existing Sub, as contemplated by the Sale Agreement, and (c) the sale of the
remaining operating assets of the Company following the Sale.
[_] FOR[_] AGAINST[_] ABSTAIN
2. AMENDMENT OF CERTIFICATE OF INCORPORATION TO EFFECT A REVERSE STOCK SPLIT
Proposal to approve an amendment to the Company's Certificate of
Incorporation to effect a one-for-ten reverse stock split of the Company's
Common Stock.
[_] FOR[_] AGAINST[_] ABSTAIN
3. APPROVAL OF CONTROL SHARES
Proposal to confer and restore full voting rights to control shares of the
Common Stock of the Company held by Lawrence D. Field in accordance with
Section 1153 of the Oklahoma General Corporation Act.
[_] FOR[_] AGAINST[_] ABSTAIN
4. ELECTION OF DIRECTORS
For the election of the six directors listed below, thus leaving one vacancy
that may be filled by the Board of Directors at any time:
[_] FOR ALL nominees [_] WITHHOLD AUTHORITY
listed below to vote for all nominees below.
(except as marked
to the contrary
below)
Lawrence D. Field, Timothy G. Bruer, Gerald E. Milton, James K. Tolbert,
Milton D. McKenzie and Sam L. Susser.
INSTRUCTIONS: To withhold authority to vote for any individual nominee, write
the nominee's name in the space provided below.
------------------------------------------------------------------------------
(Continued on other side)
5. RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
Ratification of Arthur Andersen LLP as independent auditors of the Company
for 1998.
[_] FOR[_] AGAINST[_] ABSTAIN
6. ADJOURNMENT OR POSTPONEMENT OF THE MEETING
Proposal to approve an adjournment or postponement of the meeting to another
date or place for a period of not more than thirty (30) days for the purpose
of soliciting additional proxies if the number of shares of the Company's
Common Stock, represented at the meeting or by proxy is insufficient to
constitute a quorum or, if a quorum is present, there are insufficient votes
at the time of the meeting to approve the foregoing proposals.
[_] FOR[_] AGAINST[_] ABSTAIN
7. IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE UPON SUCH OTHER
BUSINESS AS MAY PROPERLY COME BEFORE THE MEETING AND AT ANY AND ALL
ADJOURNMENTS THEREOF.
[_] FOR[_] AGAINST[_] ABSTAIN
This Proxy, when properly executed, will be voted in the manner directed
herein by the shareholder. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED
FOR EACH OF THE PROPOSALS.
DATED: __________________, 1998
-------------------------------
Signature
-------------------------------
Signature if Held Jointly
Please sign exactly as name
appears hereon, date and
return promptly. When shares
are held by joint tenants,
both must sign. When signing
as attorney, executor,
administrator, trustee or
guardian, please give title as
such. If a corporation, please
sign in full corporate name by
duly authorized officer and
give title of officer. If a
partnership, please sign in
partnership name by authorized
person and give title or
capacity of person signing.
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY PROMPTLY USING THE ENCLOSED
ENVELOPE.
