As filed with the Securities and Exchange Commission on August 9, 1996
Registration No. 333-_______________
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
CLAW ISLAND FOODS INC.
(Name of small business issuer in its charter)
<TABLE>
<S> <C> <C>
Delaware 2092 04-3042054
(State or other jurisdiction (Primary Standard (I.R.S. Employer
of incorporation or organization) Industrial Classification Code Number) Identification No.)
</TABLE>
3209 Gresham Lake Road, Suite 147
Raleigh, North Carolina 27615
(919) 954-1919
(Address and telephone number
of principal executive offices and principal place of business)
KEVIN J. MIGDAL
President and Chief Executive Officer
3209 Gresham Lake Road, Suite 147
Raleigh, North Carolina 27615
(919) 954-1919
(Name, address and telephone number
of agent for service)
Copies to:
GERALD F. ROACH, ESQ. LAWRENCE B. FISHER, ESQ.
CHRISTOPHER B. CAPEL, ESQ. ORRICK, HERRINGTON & SUTCLIFFE
SMITH, ANDERSON, BLOUNT, 666 Fifth Avenue
DORSETT, MITCHELL & JERNIGAN, L.L.P. New York, New York 10103
2500 First Union Capitol Center (212) 506-5000
Raleigh, North Carolina 27601
(919) 821-1220
_________________________
Approximate date of commencement of proposed sale to the public:
As soon as practicable after this registration statement becomes effective.
_________________________
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: |X|
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_| ____________
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_| _______________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
_________________________
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
====================================================================================================================================
Title of each class Proposed maximum Proposed maximum
of securities to be Amount to be offering price aggregate offering Amount of
registered registered (1) per unit (2) price (2) registration fee
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<S> <C> <C> <C> <C>
Common Stock, $.01 par value per share (3)....... 1,380,000 $6.00 $8,280,000 $2,855.17
- ------------------------------------------------------------------------------------------------------------------------------------
Redeemable Warrants (4).......................... 1,380,000 $0.10 $138,000 $47.59
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Redeemable Warrants (5).......................... 120,000 $0.12 $14,400 $4.97
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Representative's Warrants ....................... 120,000 $.001 $120 (6)
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Common Stock $.01 par value per share (7)........ 1,620,000 $7.20 $11,664,000 $4,022.07
- ------------------------------------------------------------------------------------------------------------------------------------
Total ........................................... $20,096,520 $6,929.80
====================================================================================================================================
</TABLE>
(1) Pursuant to Rule 416, there are also being registered an undeterminable
number of shares of the Registrant's Common Stock which may become
issuable pursuant to the anti-dilution provisions of the Redeemable
Warrants and the Representative's Warrants.
(2) Estimated solely for the purpose of calculation of the registration fee.
(3) Includes 180,000 shares of Common Stock subject to the Underwriters'
over-allotment option.
(4) Includes 180,000 Redeemable Warrants subject to the Underwriters'
over-allotment option.
(5) Reserved for issuance on exercise of the Representative's Warrants.
(6) No fee required pursuant to Rule 457(g).
(7) Includes 1,500,000 shares of Common Stock reserved for issuance on
exercise of the Redeemable Warrants (including the 120,000 Redeemable
Warrants issuable on exercise of the Representative's Warrants) and
120,000 shares of Common Stock reserved for issuance on exercise of the
Representative's Warrants.
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
SUBJECT TO COMPLETION, DATED August 9, 1996
PROSPECTUS
CLAW ISLAND FOODS INC. [CIF logo appears here]
1,200,000 Shares of Common Stock
and 1,200,000 Redeemable Warrants
Claw Island Foods Inc. (the "Company" or "Claw Island") offers hereby
1,200,000 shares of Common Stock, $.01 par value per share ("Common Stock"), and
1,200,000 Redeemable Warrants ("Redeemable Warrants"; the offering of Common
Stock and Redeemable Warrants made pursuant to this Prospectus is referred to
herein as the "Offering"). The shares of Common Stock and Redeemable Warrants
(sometimes hereinafter collectively referred to as the "Securities") may be
purchased separately and will be separately tradeable immediately upon issuance.
Each Redeemable Warrant entitles the holder to purchase one share of Common
Stock at an exercise price of $______ per share [120% of the initial public
offering price of the Common Stock], subject to adjustment in certain
circumstances, commencing ____________, 1997 [13 months after the date of this
Prospectus] until ___________, 2001 [5 years after the date of this Prospectus],
and is redeemable by the Company at a redemption price of $.10 per Redeemable
Warrant at any time after ____________, 1998 [18 months after the date of this
Prospectus] upon not less than 30 days' prior written notice, provided that
the average closing bid quotation of the Common Stock as reported on the over-
the-counter market or the closing sale price, if listed on a national securities
exchange, for a period of 20 consecutive trading days ending within 10 days
prior to the date of notice of redemption, equals or exceeds $_____ [150% of the
initial public offering price of the Common Stock] per share, subject to
adjustment in certain circumstances. See "Description of Securities - Redeemable
Warrants."
It is currently estimated that the initial public offering price of the
Common Stock will be between $5.00 and $6.00 per share and the initial public
offering price of the Redeemable Warrants will be $.10 per Redeemable Warrant.
Prior to the Offering, there has been no public market for the Common Stock or
the Redeemable Warrants, and there can be no assurance that any such market will
develop after the completion of the Offering or, if developed, that it will be
sustained. For information regarding the factors considered in determining the
initial public offering prices of the Securities and the terms of the Redeemable
Warrants, see "Risk Factors" and "Underwriting." Application has been made for
the inclusion of the Common Stock and the Redeemable Warrants on the Nasdaq
SmallCap Market(sm) ("Nasdaq") and the Boston Stock Exchange ("BSE") under the
proposed symbols "CLAW" and "CLAWW," respectively.
AN INVESTMENT IN THE SECURITIES OFFERED HEREBY INVOLVES A HIGH DEGREE OF
RISK AND IMMEDIATE SUBSTANTIAL DILUTION. SEE "RISK FACTORS,"
PAGE 9, AND "DILUTION," PAGE 22.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Price to Underwriting Proceeds to
Public Discounts(1) Company(2)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Per Share........................................... $ $ $
- ------------------------------------------------------------------------------------------------------------------------------------
Per Redeemable Warrant.............................. $ $ $
- ------------------------------------------------------------------------------------------------------------------------------------
Total(3)....................................... $ $ $
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Does not include additional compensation to First Allied Securities, Inc.
(the "Representative") in the form of a non-accountable expense
allowance. In addition, see "Underwriting" for information concerning
indemnification and contribution arrangements with the Underwriters and
other compensation payable to the Representative.
(2) Before deducting estimated expenses of $_____ payable by the Company,
including the non-accountable expense allowance payable to the
Representative.
(3) The Company and certain selling stockholders have granted to the
Underwriters an option, exercisable within 45 days after the date of this
Prospectus, to purchase up to 120,000 and 60,000 additional shares of
Common Stock, respectively, and the Company has granted to the
Underwriters a similar option with respect to 180,000 Redeemable Warrants
upon the same terms and conditions as set forth above, solely to cover
over-allotments, if any (the "Underwriters' Over-Allotment Option"). If
the Underwriters Over-Allotment Option is exercised in full, the total
Price to Public, Underwriting Discounts and Proceeds to Company will be
$_____, $_____, and $_____, respectively, and the total proceeds to the
selling stockholders will be $______, before deducting estimated expenses
of $______ payable by the selling stockholders. See "Underwriting." The
Company will not receive any proceeds from sales of Common Stock by such
selling stockholders.
The Common Stock and the Redeemable Warrants are being offered by the
Underwriters, subject to prior sale, when, as and if delivered to and accepted
by the Underwriters, and subject to approval of certain legal matters by counsel
and subject to certain other conditions. The Underwriters reserve the right to
withdraw, cancel or modify the Offering and to reject any order in whole or in
part. It is expected that delivery of the shares of Common Stock and the
Redeemable Warrants offered hereby will be made against payment therefor in New
York, New York on or about ____________, 1996.
[FAS logo appears here] FIRST ALLIED SECURITIES, INC.
The date of this Prospectus is ____________, 1996
_________________
[The following legend appears in red:]
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD
NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION
STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER
TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE
OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE
WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE
SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
[artwork appears here]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
AND/OR THE REDEEMABLE WARRANTS AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE
PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED
AT ANY TIME.
The Company intends to furnish to the registered holders of the Common
Stock and Redeemable Warrants annual reports containing financial statements
audited by its independent auditors.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and notes thereto appearing elsewhere in
this Prospectus. Except as otherwise specified, all information in this
Prospectus with respect to numbers and percentages of shares of Common Stock
gives effect to a 5.2-for-1 Common Stock reverse split and the conversion of all
of the Company's Preferred Stock into Common Stock, both to be consummated
contemporaneously with the closing of the Offering. See "Description of
Securities."
The Company
The Company is a processor and distributor of North American lobsters and
lobster products. North American lobsters, HOMARUS AMERICANUS, live only in the
North Atlantic and are commonly known and referred to in this Prospectus as
"Maine" lobsters. The Company uses its proprietary "SeaLock(R)" cooking and
fast-freezing process to preserve lobster freshness and quality without
compromising taste, texture or appearance when compared to live Maine lobsters
and Maine lobster products.
Historically, Maine lobster sales and distribution have been limited by the
fact that lobster taste, texture and appearance suffer considerably if the
lobster is not kept alive until preparation. The Company believes the taste,
texture and appearance of its frozen Maine lobsters and lobster products are
comparable to those of live lobster cooking and far superior to those of
lobsters processed with conventional freezing methods. An independent taste test
conducted for the Company prior to commercial production in 1991 showed the
Company's SeaLock(R) Maine lobsters to be comparable to live Maine lobsters in
taste and texture and superior in appearance. The SeaLock(R) process enables the
Company to distribute high quality whole Maine lobsters and Maine lobster
products worldwide without the price and supply fluctuations, expense,
administrative burden and disease and mortality risks inherent in traditional
live delivery.
Due to working capital limitations, the Company has been unable to purchase
sufficient quantities of Maine lobster inventory to support larger-scale sales,
marketing and distribution. Working capital limitations also have impaired the
Company's ability to purchase lobster inventory consistently during lower-priced
"in season" months, sometimes forcing the Company to purchase inventory in
"out-of- season" months to satisfy customer orders. The Maine lobster harvest is
seasonal, occurring primarily from May through January. In out-of-season
months, wholesale Maine lobster prices can reach two or more times their
in-season levels, significantly reducing the Company's sales margins.
The Company believes that sufficient financing will enable the Company to
purchase larger quantities of lobster inventory during lower-priced in-season
months and, using its SeaLock(R) process, maintain an inventory to provide
customers a consistent, year-round supply of Maine lobsters and lobster products
at consistent, competitive prices despite the seasonal nature of the industry.
The Company believes adequate financing and inventory also will enable the
Company to expand its customer base domestically and abroad. The Company's
strategy is to (1) increase penetration in and expand the domestic and
international food service and retail markets into which the Company distributes
its Maine lobster products, using lower-priced lobster inventory purchased
during in-season months, and (2) eventually increase its product base to include
other SeaLock(R)-processed crustaceans and crustacean products for sale through
the Company's established distribution channels.
3
<PAGE>
The Company's proprietary SeaLock(R) process, key aspects of which the
Company licenses from two inventors, involves freezing cooked Maine lobsters at
extremely cold temperatures promptly after live delivery to the Company's
processing facilities in Vinalhaven, Maine and Lockeport, Nova Scotia. Unlike
conventional freezing methods, which involve freezing at temperatures of
approximately -20(degrees)F and can take as long as 24 hours, the SeaLock(R)
process freezes the Company's Maine lobster products with -300(degrees)F liquid
nitrogen and takes only 10-15 minutes. The speed of the SeaLock(R) process,
together with use of a sugar solution as a protective agent during freezing,
enables the Company's products to maintain considerably more of their original
flavor, texture, moisture and appearance than conventionally frozen products.
Also, the Company's Maine lobsters and lobster products prepared with the
SeaLock(R) process have quality shelf lives of at least 12 months, three times
that for typical conventionally frozen lobster products.
The Company's current product line consists of whole and half Maine
lobsters, "Down East(R)" stuffed whole Maine lobsters, and Maine lobster meat,
all prepared with the SeaLock(R) process. In addition, the Company has test
processed and shelf-life tested the SeaLock(R) process successfully on a variety
of other crustacean products, including Maine lobster tails and claws and whole
Dungeness and red crabs, which the Company is considering adding to its product
line. The Company provides an unconditional satisfaction guarantee for all of
its products. The Company is a three-time recipient of the Award of Excellence
of the Fine Beverage and Food Federation, a former industry group.
The Company distributes its Maine lobsters and lobster products in the
United States and internationally to restaurants, caterers and other food
vendors and through selected retail vendors. The Company currently has over 100
customers, including Amelia Island Plantation, Hyatt Hotels and Resorts, Price
Costco, Princess Cruise Lines, and Sysco Food Service. In fiscal 1996, the
Company generated approximately 95% of its revenues from customers that
purchased the Company's products in 1995. The Company also recently entered
into an agreement under which the QVC cable television shopping network will
offer the Company's "Down East(R)" stuffed Maine lobster product on the air in
fall 1996 during a two-week Maine segment.
Live North American crustacean products are scarce and costly abroad,
resulting in greater market acceptance of frozen crustacean products than in the
United States. The Company achieved repeat sales in Korea, Taiwan, Singapore,
Sweden and England in fiscal 1996. Although these sales constituted less than
10% of the Company's revenues for that period, the Company believes that it can
increase sales to customers in these countries and begin sales in several other
European and Asian countries, including Germany, France, Italy and Japan, in
fiscal 1997 and thereafter.
4
<PAGE>
The Offering
<TABLE>
<S> <C>
Securities offered........................................ 1,200,000 shares of Common Stock and
1,200,000 Redeemable Warrants. The Common
Stock and the Redeemable Warrants may be
purchased separately and will be separately
tradable immediately upon issuance.
Terms of Redeemable Warrants.............................. Each Redeemable Warrant entitles the holder to
purchase one share of Common Stock at an
exercise price of $______ per share [120% of the
initial public offering price of the Common Stock]
and, subject to redemption, will be exercisable
commencing _______________, 1997 [13 months
after the date of this Prospectus] until
_____________________, 2001 [5 years after the
date of this Prospectus]. Under certain
circumstances, the Redeemable Warrants will be
redeemable by the Company at a price of $.10 per
Redeemable Warrant at any time after
_______________, 1998 [18 months after the date
of this Prospectus] if the market price of the
Common Stock equals or exceeds $____________
[150% of the initial public offering price of the
Common Stock] for a period of 20 consecutive
trading days ending within 10 days prior to the
date of the notice of redemption. See
"Description of Securities-Redeemable
Warrants."
Securities Outstanding(1)
Common Stock outstanding before the
Offering(2).......................................... 1,582,233
Common Stock outstanding after the
Offering............................................. 2,782,233
Redeemable Warrants outstanding after the
Offering............................................. 1,200,000
5
<PAGE>
Use of proceeds........................................... Lobster inventory, sales and marketing, new
product development, and working capital. See
"Use of Proceeds."
Risk factors.............................................. An investment in the Securities offered hereby
involves a high degree of risk and substantial
immediate dilution. See "Risk Factors" and
"Dilution."
Proposed Nasdaq and BSE symbols........................... Common Stock - "CLAW"
Redeemable Warrants - "CLAWW"
</TABLE>
- --------------------
(1) Unless otherwise indicated herein to the contrary, all share and per
share information presented throughout this Prospectus does not give
effect to the issuance of: (i) up to an additional 120,000 shares of
Common Stock issuable upon exercise of the Underwriter's Over-Allotment
Option, (ii) up to an additional 180,000 shares of Common Stock issuable
upon exercise of up to an additional 180,000 Redeemable Warrants included
in the Underwriter's Over-Allotment Option, (iii) up to an additional
1,200,000 shares of Common Stock issuable upon the exercise of the
1,200,000 Redeemable Warrants offered hereby, (iv) up to an additional
120,000 shares of Common Stock issuable upon exercise of the
Representative's Warrants, (v) up to an additional 120,000 shares of
Common Stock issuable upon exercise of the Redeemable Warrants issuable
upon exercise of the Representative's Warrants, and (vi) up to an
additional 1,025,912 shares of Common Stock issuable upon exercise of
outstanding warrants and options having a weighted average exercise price
of approximately $7.68 per share.
(2) Reflects the conversion of all outstanding Series C Preferred Stock,
Series D Preferred Stock and Series E Preferred Stock into shares of
Common Stock upon completion of the Offering. See "Description of
Securities - Preferred Stock."
6
<PAGE>
SUMMARY FINANCIAL DATA
The statement of operations data set forth below with respect to the years
ended June 30, 1995 and 1996 and the balance sheet data at June 30, 1995 and
1996 are derived from, and are qualified by reference to, the Company's audited
financial statements included elsewhere in this Prospectus. The statement of
operations data for the 12-month period ended June 30, 1994 are derived from
unaudited financial statements. The statement of operations data for the year
ended May 31, 1993 are derived from audited financial statements. The
information presented below should be read in conjunction with and is qualified
by reference to "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Statement of Operations Data:
<TABLE>
<CAPTION>
12-Month(3)
Year Ended Period Ended Year Ended Year Ended
May 31, 1993 June 30, 1994 June 30, 1995 June 30, 1996
------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net Sales..................................... $ 1,225,309 $ 3,132,730 $ 3,679,616 $ 3,320,113
Cost of sales................................. $ 923,885 $ 2,595,162 $ 3,055,477 $ 2,802,514
Other operating expenses(1)................... $ 1,638,160 $ 1,763,179 $ 1,743,898 $ 1,734,692
--------- --------- --------- ---------
Loss from operations.......................... $ (1,336,736) $ (1,225,611) $ (1,119,759) $ (1,217,093)
Other income (expense) ....................... $ (104,878) $ ( 137,392) $ (156,600) $ (165,000)
----------- --------- --------- ----------
Extraordinary loss upon extinguishment
of debt.................................. $ - $ - $ - $ (80,000)
Net loss...................................... $ (1,441,614) $ (1,363,003) $ (1,276,359) $ (1,462,093)
========= ========= ========= =========
Pro forma net loss per share(2)............... $ (.69) $ (.61) $ (.61) $ (.68)
=== === === ===
Pro forma Weighted average shares outstanding(2) 2,082,499 2,230,785 2,108,852 2,145,953
========= ========= ========= =========
</TABLE>
Balance Sheet Data:
<TABLE>
<CAPTION>
June 30, 1996
------------------------------------------
June 30, 1995 Actual As Adjusted(4)
<S> <C> <C> <C>
Working capital.............................................. $ 225,868 $ 1,457,132 $ 6,857,132
Total assets................................................. $ 1,852,296 $ 2,335,571 $ 7,735,571
Total long-term liabilities.................................. $ 529,937 $ 133,332 $ 133,332
Accumulated deficit.......................................... $ (7,295,982) $ (8,758,075) $ (8,758,075)
Stockholders' equity......................................... $ 340,062 $ 1,905,183 $ 7,305,183
</TABLE>
- --------------------
(1) Includes costs related to marketing, promotional and sales activities in
addition to office, administrative, royalty and other plant costs.
(2) See Notes to Financial Statements for an explanation of the determination
of the pro forma number of shares and share equivalents used in computing
share amounts.
7
<PAGE>
(3) During fiscal 1994, the Company elected to change its fiscal year end from
May 31 to June 30. The Company's audited financial statements for fiscal
1994 included 13 months. The unaudited 1994 summary financial data above
has been presented on a 12-month basis to be comparable with other fiscal
years presented. Unaudited summary financial data for the month of June
1993 (excluded from the amounts above) consists of the following: net sales
were $265,373, cost of sales were $193,004, other operating expenses were
$200,357 and net loss was ($137,003).
(4) Adjusted to give effect to the sale of the Common Stock and Redeemable
Warrants offered hereby at assumed initial public offering prices of $5.50
and $.10, respectively.
8
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE SECURITIES OFFERED HEREBY INVOLVES A HIGH DEGREE OF
RISK AND IMMEDIATE SUBSTANTIAL DILUTION. PURCHASERS OF THE SECURITIES SHOULD
CONSIDER, AMONG OTHER MATTERS DISCUSSED IN THIS PROSPECTUS, THE FOLLOWING RISK
FACTORS:
Possible Need for Additional Financing
Until the Company realizes revenues sufficient to satisfy its cash
requirements, it will depend on its current cash and short-term investments to
meet its working capital and operating requirements. Although the Company
anticipates that its existing funds, as well as revenues from operations, will
be sufficient to sustain its existing operations for at least the next 12
months, there are no assurances that such funds will be sufficient. If
additional funds become necessary to sustain existing operations, the Company
will be required to seek additional financing, and there can be no assurance
that such financing will be obtainable or that, if available, such financing
will be on terms favorable or acceptable to the Company. In order to fund its
growth, however, the Company requires additional financing and the net proceeds
of the Offering will be used to finance the Company's growth, principally
through the purchase of lobster inventory for processing and sale. Similarly,
the Company used substantially all of the net proceeds from a recent financing
to purchase lobster inventory. The Company may need additional financing in
order to sustain its anticipated growth, in the event it does not generate
revenues sufficient to satisfy its cash requirements for future growth.
Obtaining additional financing for such purposes may be difficult or impossible,
or financing may only be available on terms unfavorable or unacceptable to the
Company. See "Risk Factors - Seasonality; Quarterly Fluctuations; Working
Capital Limitations," "The Company - Recent Financing," "Use of Proceeds" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Seasonality; Quarterly Fluctuations; Working Capital Limitations
The seasonality of the Company's business requires funding of its working
capital requirements to provide for lobster purchases and increased inventory
levels during the lobster harvest seasons. Lobster harvests are concentrated
during May through January. The Company expects that its business will continue
to experience a significant seasonal pattern for the foreseeable future. The
long-term success and growth of the Company is dependent on the Company having
sufficient working capital to make its lobster purchases at favorable prices
during the harvest months. Working capital limitations previously have impaired
the Company's ability to purchase sufficient quantities of lobster inventory to
support larger-scale sales, marketing and distribution, as well as its ability
to purchase lobster inventory during lower-priced harvest months. The Company
intends to apply the net proceeds of the Offering primarily to purchase Maine
lobster inventory, and to make such purchases during lower-priced harvest months
for distribution throughout the year. Although the Company intends to use the
net proceeds of the Offering to fund its anticipated growth, there are no
assurances that the Company will continue to have sufficient working capital at
the times when lobster prices are favorable, which is necessary to sustain
long-term growth. See "Risk Factors - Possible Need for Additional Financing"
and "-Management of Growth" and "Management's Discussion and Analysis of
Financial Conditions and Results of Operations - Quarterly Results."
History of Losses
The Company was established in February 1989 and has incurred net losses
since its inception. The Company incurred net losses of $1.46 million for its
fiscal year ended June 30, 1996, with a cumulative net loss (accumulated
deficit) of $8.76 million for the period from February 1989 (inception) to June
30,
9
<PAGE>
1996. There can be no assurance that losses will not continue or that the
Company will achieve profitability in the future. Although the Company
anticipates that the net proceeds of the Offering can be used to increase
revenues substantially, there can be no assurance that higher revenues will be
achieved or sustained. The Company has financed its operations to date primarily
through private sales of its debt and equity securities and various loans from
stockholders. See "The Company - Recent Financing," "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Certain
Transactions" and the Company's financial statements and related notes thereto.
Dependence on Key Products and Technology; Market Acceptance
The Company is dependent upon market acceptance of its products, and in
particular frozen whole Maine lobsters, processed with the Company's SeaLock(R)
technology to achieve profitability. There can be no assurance that a
significant market will develop for the Company's products, or that, if a market
does develop, that the Company's products, will be profitable or that
profitability, if attained, can be sustained. Market acceptance will require,
among other factors, consumer acceptance of the Company's whole frozen lobsters
in lieu of live whole lobsters and acceptance of the Company's frozen lobsters
in lieu of those frozen using conventional methods and in lieu of other upscale
entrees. The inability of the Company to generate demand for its products, and
particularly for its whole Maine lobsters, would have a material adverse effect
on the Company. See "Risk Factors - Competition" and "Description of Business."
Management of Growth
Rapid and sustained growth of the Company's business may strain the
Company's management, operational and technological resources significantly.
Although there can be no assurance that the Company's products will achieve
widespread market acceptance, if market acceptance is gained, the Company will
be required to process and distribute products at higher volumes than in the
past, increase processing capacity, and hire additional employees. The Company
has no experience in delivering large volumes of its products on a regular
basis. There can be no assurance that the Company will be able to fill orders on
a timely basis or manage the other requirements of rapid growth. Failure to
manage growth would have a material adverse effect on the business of the
Company. See "Description of Business Manufacturing and Distribution" and
"-Facilities."
Dependence on Certain Customers
The Company has in the past derived, and may in the future derive, a
significant portion of its revenues from a relatively limited number of
customers. In fiscal 1996, the Company had sales to three customers which each
accounted for over 10% of total revenues and collectively accounted for
approximately 68% of total revenues. In fiscal 1995, sales to one of the
Company's customers accounted for 38% of total revenues, which was the only
customer over 10%. These customers order from the Company on a purchase order
basis. The loss of any of its large customers, or a substantial portion of these
accounts, would have a material adverse effect on the Company. At June 30, 1996,
there were two customers that together accounted for 81% of the Company's
accounts receivable. There can be no assurances that such concentrations will
not occur in the future given the Company's reliance on certain large customers.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Description of Business - Marketing and Customers."
General Risks of Food Industry; Economic and Product Quality Sensitivity
Food product manufacturing industries, including the seafood industry, are
subject to the risk of adverse changes in general economic conditions; lack of
attractiveness of a particular food product line after
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its novelty has worn off; evolving consumer preference and nutritional and
health-related concerns; federal, state and local food processing controls;
consumer product liability claims; risks of product tampering; and the
availability and expense of liability insurance. In addition, the demand for
seafood products supplied by the Company may be adversely affected by sporadic
incidents of consumption or sale of tainted seafood products which result in the
dissemination of adverse news stories in the national, regional or local media.
Potential Product Liability and Recall; Insurance
The sale of food products for human consumption involves the risk of injury
to consumers as a result of product contamination or spoilage. No assurance can
be given that some food products sold by the Company may not contain or develop
harmful substances. The Company's products also may become damaged or spoiled
during storage, handling or transportation. In the event that one or more lots
of the Company's products was to become spoiled or contaminated for any reason,
and a consumer was to become ill due to his or her consumption of the product,
the Company may be subject to product liability or other claims by the consumer
and/or regulatory agencies. The Company maintains product liability insurance
coverage of $1.0 million per incident and $2.0 million in the aggregate, which
the Company considers adequate against such claims and which the Company
believes is consistent with industry practice. However, in the event damages
were awarded against the Company in excess of such insurance coverage, the
Company would be adversely affected. Further, in the event that a lot or
shipment of the Company's products were to become spoiled or contaminated for
any reason, the Company may be forced to recall and destroy the affected lots of
product, at possible significant costs, depending on the extent of any
contamination. Such an event could delay the production and shipment of products
to the Company's customers and could adversely affect the Company. The level of
insurance coverage obtained by the Company generally is determined by
requirements of its customers, who may be named as additional insureds under the
insurance policy. See "Description of Business - Potential Product Liability and
Recall; Insurance."
Product Guarantee
The Company offers an unconditional guarantee on all of its products, which
provides that the Company will replace the product or refund the purchase price
at the customer's option if the customer is not satisfied. The occurrence of a
substantial number of demands under the Company's guarantee which were not
covered by insurance of the Company or a third party could adversely affect the
Company. See "Description of Business - Marketing and Customers."
Government Regulation
The Company is subject to various laws and regulations relating to the
operation of its production facilities, the production, packaging, labeling and
marketing of its products, and pollution control, which are administered by
federal, state, and other governmental agencies. The Company's production
facilities in Maine are subject to regular inspection by the National Marine
Fisheries Service, under authority of the United States Food and Drug
Administration, the United States Environmental Protection Agency, the Maine
Department of Environmental Protection and the Maine Department of Marine
Resources. The Company's production in Canada is subject to regulation by the
Canadian Department of Fisheries and Oceans and the Nova Scotia Department of
Labor. Additionally, regulatory requirements come under periodic review and may
become more burdensome on the Company in the future. Although the Company
believes it has been in compliance to date, failure of the Company to comply
with existing or future regulations applicable to its operations could have a
material adverse effect on the Company's business and financial performance. See
"Description of Business - Potential Product Liability and Recall; Insurance"
and "-Government Regulation."
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International Sales
The Company intends to continue its efforts to expand its international
markets. International sales accounted for approximately 8%, 11% and 2% of
revenues in fiscal 1996, 1995 and 1994, respectively. The volume and consistency
of international sales is subject to economic and political conditions in the
international markets in which the Company does business, which are beyond the
Company's control. See "Description of Business - Marketing and Customers."
Dilution
Investors purchasing shares of Common Stock in the Offering will incur
immediate dilution in net tangible book value of their investment in the Company
of $2.90 per share of Common Stock, or approximately 53% dilution per share.
Dilution represents the difference between the price of the Common Stock sold
hereby and the pro forma net tangible book value per share of the Company after
the Offering.
See "Dilution."
Dependence on Executive Officers
The continued development of the Company's business and operations has been
and will continue to be dependent upon its two principal executive officers,
Messrs. Kevin Migdal and Edgar Hardy. The Company has entered into employment
agreements with each of these executives and each agreement has a remaining term
of approximately three years. The loss of the services of either of these
executives could have a material adverse effect on the Company. The Company has
obtained "key man" life insurance policies for which it is the sole beneficiary
in the amount of $500,000 for each of Mr. Migdal and Mr.
Hardy. See "Directors and Executive Officers."
Raw Materials
The availability of live lobsters and other crustaceans is subject to
market conditions and supply fluctuations caused by weather conditions,
commercial fishing practices, diseases, and other factors, some of which are
beyond the Company's control. Shortages in the supply and increases in the
prices of lobsters could cause a decrease in the Company's sales or profit
margins and have an adverse impact on its profitability.
Competition
The markets in which the Company sells its products are highly competitive.
The Company's whole lobster products are sold in competition with live lobsters,
frozen lobsters and other frozen seafood products. The Company also competes
with other upscale entrees, such as steak and certain other seafood items. In
the whole lobster market, the Company competes principally with the network of
live lobster dealers, which is fragmented. Some of the Company's future products
may compete with conventionally frozen crustacean products. Conventionally
frozen lobster products consist principally of lobster parts, such as tails and
claws, rather than whole lobsters. Some of the conventionally frozen crustacean
products are packaged under well known brands of companies with significantly
greater marketing capabilities and financial and other resources than the
Company. Several larger companies exist, predominantly in Canada, which produce
conventionally frozen lobster products. Although the Company believes that it
currently does not compete significantly with these companies, because these
companies' sales are predominantly outside the United States, the Company may
compete with such companies if and when the Company expands its international
sales. These larger companies have substantially greater financial and other
resources than the Company. In the upscale entree market generally, the Company
competes with a broad
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spectrum of wholesale and retail vendors, many of which have substantially
greater resources than the Company. There can be no assurance that others
will not develop similar technology which may compete with the Company's
process. See "-Proprietary Rights" and "-Dependence on Key Products and
Technology; Market Acceptance."
Security Interest in Assets
The Company has granted a security interest in substantially all of its
assets to Foothill Capital Corporation ("Foothill") to secure a revolving line
of credit of up to $2,000,000 with Foothill and any future indebtedness or
obligations of the Company to Foothill. As of June 30, 1996, the Company had an
outstanding balance of $36,049 under the Foothill line of credit. In the event
of a default by the Company on its obligations to Foothill, Foothill could
declare the Company's indebtedness due and payable immediately and foreclose on
the Company's assets. Moreover, without the consent of Foothill, the assets of
the Company are not available to secure further indebtedness, which may
adversely affect the Company's ability to borrow funds in the future. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Proprietary Rights
The Company cooks and quick freezes crustaceans using the Company's
proprietary SeaLock(R) process. The SeaLock(R) technology consists of a patented
process and related trade secrets licensed by the Company, along with
complementary trade secrets developed independently by the Company. The Company
believes that its success will depend in part on its ability to protect its
proprietary process through trade secret laws and non-disclosure and
confidentiality agreements with its employees and certain other persons who have
access to the SeaLock(R) processing technology and to a lesser degree on
enforcement of the patent. No assurance can be given that others will not
independently develop substantially equivalent proprietary technology or
otherwise gain access to or disclose the Company's proprietary technology, or
that the Company will be able to protect its rights in its unpatented
proprietary technology adequately. There can be no assurance that the patent
licensed by the Company will provide the Company with significant competitive
advantages, or that challenges will not be instituted against the validity or
enforceability of the patent or, if instituted, that such challenges will not be
successful. The cost of litigation to uphold the validity of a patent and
enforce it against infringement can be substantial. In addition, there can be no
assurance that others will not independently develop similar technologies or
duplicate the Company's process, or design around the patented aspects of the
process. Neither the Company nor the owners of the patent hold any foreign
patents regarding the SeaLock(R) process. Furthermore, the Company has not
obtained an opinion regarding the degree of patent protection within the United
States. There can be no assurance that the Company can protect its proprietary
rights adequately. See "Description of Business The SeaLock(R) Process" and
"-Proprietary Rights and Patents."
The Company licenses the patent and certain trade secrets involved in its
SeaLock(R) cooking and freezing process under a Patent and Know-How License
Agreement with the inventors of the patented process. The Company's rights under
the agreement are perpetual, subject to termination by the Licensors upon an
uncured breach by the Company. There can be no assurance that the Company will
not breach its obligations under the license agreement, thereby creating a basis
for termination by the patent's inventors and jeopardizing the Company's rights
in the SeaLock(R) process. The Company is not aware of any such breach or of any
circumstances likely to give rise to any such breach in the future.
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The Company's rights under the license agreement are exclusive until five
years after the expiration of the patent, or June 2004. Thereafter, the
Company's rights become non-exclusive. Upon expiration of the underlying patent
in June 1999, the inventions claimed therein will enter the public domain and
become available without charge to the Company's competitors. In addition, the
patent's inventors may elect to license their know-how relating to the patented
components of the SeaLock(R) process to parties other than the Company,
including the Company's competitors, after the Company's rights become
non-exclusive in 2004. There can be no assurance that a competitor of the
Company will not develop a crustacean freezing process substantially comparable
or superior to the Company's prior to expiration of the patent underlying the
Company's SeaLock(R) process, after the patented technology enters the public
domain upon expiration of the patent in 1999, or after the Company's rights to
the patent's inventors' know-how become non-exclusive in 2004. The Company is
not aware of any competitor contemplating use of the patented process after
expiration of such patent or after the Company's rights in the patent's
inventors' know-how become non-exclusive, although the Company can offer no
assurance that a competitor will not attempt to do so or, if attempted, succeed
in implementing a process substantially equivalent to the Company's. Development
of a comparable or superior process by a competitor could have a material
adverse effect on the Company's business.
Effect of Shares Eligible for Future Sale on Market Price
Future sales of shares of Common Stock, or the perception that such sales
could occur, by existing stockholders under Rule 144 of the Securities Act of
1933, as amended (the "Securities Act"), or through the exercise of outstanding
registration rights or the issuance of shares of Common Stock upon the exercise
of options or warrants, could materially adversely affect the market price of
the Common Stock and could materially impair the Company's future ability to
raise capital through an offering of equity securities. The 1,200,000 shares of
Common Stock and the 1,200,000 Redeemable Warrants sold in the Offering and the
Common Stock issuable upon exercise of such Redeemable Warrants will be freely
tradable without restriction or future registration under the Securities Act,
except for any securities purchased by "affiliates" of the Company as that term
is defined in Rule 144 promulgated under the Securities Act, which shares will
be subject to the resale limitations of Rule 144. Of the 2,782,233 shares of
Common Stock to be outstanding after the completion of the Offering, 1,582,233
shares were issued by the Company in private transactions and are thus treated
as "restricted securities" for purposes of Rule 144, 382,737 of which are
currently eligible for resale in compliance with Rule 144. Of these, __________
are subject to agreements among the holders of such shares, the Company and an
affiliate of the Representative not to sell such shares prior to 13 months after
the date of this Prospectus except with the prior written consent of the Company
and the Representative ("Lock-Up Agreements"). These calculations doe not
reflect shares of Common Stock subject to certain outstanding options and
warrants. See "Shares Eligible for Future Sale," "Description of Securities" and
"Underwriting."
Current Prospectus and State "Blue Sky" Registration Required to Exercise the
Redeemable Warrants
The Redeemable Warrants provide that the Company shall not be obligated to
issue shares of Common Stock upon exercise of the Redeemable Warrants unless
there is a current prospectus relating to the Common Stock issuable upon the
exercise of the Redeemable Warrants under an effective registration statement
filed with the Securities and Exchange Commission (the "Commission"), and unless
such Common Stock is qualified for sale or exempt from qualification under
applicable state securities laws of the jurisdictions in which the various
holders of the Redeemable Warrants reside. In accordance with the Securities
Act, a prospectus ceases to be current nine months after the date of such
prospectus if the information therein (including financial statements) is more
than 16 months old or if there have been other fundamental changes in the
matters discussed in the prospectus. Although the Company has agreed to use its
best efforts to meet such regulatory requirements in the jurisdictions in which
the Securities are sold in
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<PAGE>
the Offering, there can be no assurance that the Company can continue to meet
these requirements. The Securities are not expected to be qualified for sale or
exempt under the securities laws of all states. Although the Securities will not
knowingly be sold to purchasers in jurisdictions in which the Securities are not
qualified for sale or exempt, purchasers may buy Redeemable Warrants in the
secondary market or may move to jurisdictions in which the shares of Common
Stock issuable upon exercise of the Redeemable Warrants are not so qualified or
exempt. In this event, the Company would be unable lawfully to issue shares of
Common Stock to those persons upon exercise of the Redeemable Warrants unless
and until the Common Stock issuable upon exercise of the Redeemable Warrants is
qualified for sale or exempt from qualification in jurisdictions in which such
persons reside. There is no assurance that the Company will be able to effect
any required registration or qualification. The value of the Redeemable Warrants
could be adversely affected if a then current prospectus covering the Common
Stock issuable upon exercise of the Redeemable Warrants is not available
pursuant to an effective registration statement or if such Common Stock is not
qualified for sale or exempt from qualification in the jurisdictions in which
the holders of the Redeemable Warrants reside. Under the terms of the agreement
under which the Redeemable Warrants will be issued, the Company is not permitted
to redeem such warrants unless a current prospectus is available at the time of
notice of redemption and at all subsequent times to and including the date of
redemption. See "Description of Securities - Redeemable Warrants."
Potential Adverse Effect of Redemption of Redeemable Warrants; Possible
Expiration Without Value; Effect of Redeemable Warrants and Representative's
Warrants on Value of Common Stock
The Redeemable Warrants are redeemable by the Company in whole or in part,
upon 30 days' prior written notice, for $.10 per Redeemable Warrant, beginning
18 months after the date of this Prospectus and provided certain specified
market conditions are met. Redemption of the Redeemable Warrants could force the
holders to exercise the Redeemable Warrants and pay the exercise price at a time
when it may be disadvantageous for the holders to do so, to sell the Redeemable
Warrants at the then current market price when they might otherwise wish to hold
the Redeemable Warrants for possible additional appreciation, or to accept the
redemption price, which is likely to be substantially less than the market value
of the Redeemable Warrants at the time of redemption. In addition, if the market
price of the Common Stock does not exceed the exercise price of the Redeemable
Warrants at the expiration of the exercise period, the Redeemable Warrants may
expire without value. The exercise of the Redeemable Warrants and the
Representative's Warrants and the sale of the underlying shares of Common Stock
(or even the potential of such exercise or sale) may have a depressive effect on
the market price of the Company's securities. The exercise of such warrants also
may have a dilutive effect on the interest of investors in the Offering.
Moreover, the terms upon which the Company will be able to obtain additional
equity capital may be adversely affected because the holders of the outstanding
warrants can be expected to exercise them, to the extent they are able to, at a
time when the Company would, in all likelihood, be able to obtain any needed
capital on terms more favorable to the Company than those provided in the
warrants. As a result of the Redeemable Warrants and the Representative's
Warrants being outstanding, the Company may be deprived of favorable
opportunities to obtain additional equity capital, if it should then be needed,
for its business. It is also possible that, as long as the Redeemable Warrants
and the Representative's Warrants remain outstanding, their existence might
limit increases in the price of the Common Stock. See "Risk Factors -
Representative's Potential Influence on the Market" and "-Current Prospectus and
State 'Blue Sky' Registration Required to Exercise the Redeemable Warrants,"
"Description of Securities - Redeemable Warrants" and "Underwriting."
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Use of Proceeds
The Company intends to apply the majority of the net proceeds of the
Offering to purchase Maine lobster inventory for processing and sale and the
balance to sales and marketing, new product development and working capital. The
Company's intended uses of the net proceeds of the Offering are estimates only,
and there could be variations in the uses of proceeds due to changes in
business, industry or economic or other circumstances. Accordingly, the Company
reserves the right to reallocate the uses of proceeds depending upon any such
change of circumstances. See "Use of Proceeds."
No Dividends; Issuance of Preferred Stock
To date, the Company has not paid any dividends. The Company does not
anticipate paying any dividends in the foreseeable future. The Company intends
to retain any future earnings to finance the growth and development of its
business. Any future determination as to the payment of dividends will be at the
discretion of the Board of Directors and will depend on the Company's operating
results, financial condition, capital requirements and such other factors as the
Board of Directors may deem relevant. In addition, following completion of the
Offering, the Company's Board of Directors will have authority, without
obtaining stockholder approval, to issue shares of preferred stock and to fix
the rights, preferences, privileges and restrictions, including voting rights,
of the preferred stock. Accordingly, the terms of such preferred stock could
provide for preferential dividend rights or otherwise restrict the ability of
the Company to pay dividends to the holders of Common Stock. See "Dividend
Policy" and "Description of Securities - Preferred Stock."
Net Operating Loss Carryforward Limitation
As of June 30, 1996, for federal income tax purposes, the Company reported
an aggregate of approximately $8,500,000 of available net operating losses
("NOL") carryforwards under Section 172 of the Internal Revenue Code, as amended
(the "Code"). Under Section 382 of the Code, however, the utilization of NOL
carryforwards is limited after an ownership change, as defined in Section 382,
to an annual amount equal to the market value of the loss corporation's
outstanding stock immediately before the date of the ownership change multiplied
by the highest federal long-term tax exempt rate in effect for any month in the
three calendar month period ending with the calendar month in which the
ownership change occurred. Prior issuances of equity securities by the Company,
and the issuance of shares of Common Stock in the Offering, have resulted in a
change in control for federal income tax purposes that will significantly limit
the amount of the NOL that can be used to offset future taxable income in any
one year.
Quotation of Securities on Nasdaq; Possible Delisting of Securities; Risks
Relating to Low-Price Stocks
The Company has applied for the quotation of the Securities on Nasdaq upon
completion of the Offering. However, there can be no assurance that a liquid and
active trading market will develop after completion of the Offering or, if
developed, that it will be sustained. In addition, there can be no assurance
that the Company will continue to meet the maintenance criteria for continued
listing of the Securities on Nasdaq. The continued listing criteria for Nasdaq
include, among other things, assets of at least $2.0 million, capital and
surplus of at least $1.0 million, and a minimum bid price per share of $1.00 or,
alternatively, a market value of the public float of $1.0 million and $2.0
million in capital and surplus. In addition, continued inclusion on Nasdaq
requires two market makers. Failure to meet the maintenance criteria may result
in the discontinuance of the inclusion of the Securities in the Nasdaq system.
In such event, trading, if any, in the Securities may continue to be conducted
in non-Nasdaq over-the-counter markets, but investors may find it more difficult
to dispose of, or to obtain accurate quotations as to price of the Securities.
The Common Stock would then also be subject to the risk that it could become
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characterized as low priced or "penny stock," which characterization could
severely affect market liquidity. Unless an exception is available, the penny
stock rules require, among other things, the delivery to a prospective
purchaser, prior to any transaction involving a penny stock, of a disclosure
schedule explaining the penny stock rules and the other risks associated
therewith. The Commission's regulations governing low-priced or penny stocks
could limit the ability of broker-dealers to sell the Securities and thus the
ability of holders of Securities to sell the Securities in the secondary market.
The Company also has applied for listing the Securities on the Boston Stock
Exchange, which also has maintenance criteria. There can be no assurance that
the Company will continue to meet such criteria. Failure to meet such criteria
could result in delisting of the Securities from such exchange, which could make
it more difficult for the holders of Securities to sell them.
No Prior Public Market; Determination of Offering Prices; Volatility of Prices
of the Securities
Prior to the Offering there has been no public market for the Securities,
and there can be no assurance that an active public market for the Securities
will develop or be sustained after the Offering. The initial public offering
prices of the Securities and the terms of the Redeemable Warrants has been
arbitrarily determined by negotiations between the Company and the
Representative, do not necessarily bear any relationship to the Company's
assets, book value, revenues or other established criteria of value, and should
not be considered indicative of future value. The trading prices of the
Securities could be subject to wide fluctuations in response to variations in
the Company's operating results, announcements by the Company or others,
developments affecting the Company or its competitors, suppliers or customers
and other events and factors. In addition, the stock market in general has
experienced extreme price and volume fluctuations in recent years. These
fluctuations have had a substantial effect on the market prices for many
companies, often unrelated to their performance, and may adversely affect the
market prices for the Securities. See "Underwriting."
Anti-Takeover Measures; Possible Preferred Stock Issuances
Following completion of the Offering, the Company will be subject to the
provisions of Section 203 of the Delaware General Corporation Law regulating
corporate takeovers. This statute prevents certain Delaware corporations from
engaging, under certain circumstances, in a "business combination" (which
includes a merger or sale of more than 10% of the corporation's assets) with any
"interested stockholder" (a stockholder who acquired 15% or more of the
corporation's outstanding voting stock without the prior approval of the
corporation's board of directors) for three years following the date that such
stockholder became an "interested stockholder." A Delaware corporation may "opt
out" of this anti-takeover statute with an express provision in its original
certificate of incorporation or an express provision in its certificate of
incorporation or bylaws resulting from an amendment approved by at least a
majority of the outstanding voting shares. The Company has not "opted out" of
the provisions of this statute.
Following completion of the Offering, the Company's Board of Directors will
have authority, without obtaining stockholder approval, to issue shares of
preferred stock having rights, preferences, privileges and restrictions,
including voting rights, that could materially adversely affect the voting power
of the holders of the Common Stock. The ability to issue such preferred stock
provides desirable flexibility in connection with possible acquisitions, future
financings and other corporate purposes. However, potential acquirors of the
Company may find it more difficult or be discouraged from attempting to effect
an acquisition transaction with the Company, thereby possibly depriving holders
of the Securities of certain opportunities to sell or otherwise dispose of such
Securities at a premium pursuant to such transactions. Furthermore, such
preferred stock may have other rights, including economic rights, senior to the
Common Stock, and as a result, the issuance of such stock could have a material
adverse effect on the market value of the
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Common Stock. The Company has no current plans to issue shares of preferred
stock. See "Description of Securities."
The Company may in the future adopt other measures that may have the effect
of delaying, deferring or preventing a change in control of the Company. Certain
of such measures may be adopted without any further vote or action by the
stockholders. The Company has no current plans to adopt any such measurers.
Concentration of Ownership
Following the completion of the Offering, management of the Company and
their affiliated entities together will beneficially own approximately 48% of
the outstanding shares of Common Stock. Accordingly, such persons will be in a
position to influence the election of the Company's directors and the outcome of
corporate actions requiring stockholder approval. The concentration of ownership
may have the effect of delaying or preventing a change of control of the
Company. See "Principal Stockholders."
Representative's Potential Influence on the Market
A significant number of the Securities offered hereby may be sold to
customers of the Representative and its affiliates. Such customers subsequently
may engage in transactions for the sale or purchase of such Securities through
or with the Representative and its affiliates. Moreover, if the Representative
exercises the Representative's Warrants and distributes the underlying shares of
Common Stock or Redeemable Warrants issuable upon exercise thereof or acts as
warrant solicitation agent for the Redeemable Warrants, the Representative
and/or its affiliates may be required under the Securities Exchange Act of 1934,
as amended, to suspend their market-making activities temporarily. The prices
and liquidity of the Securities may be significantly affected by the degree, if
any, of such affiliates' participation in such market. See "Underwriting."
Inexperience of Representative
First Allied Securities, Inc., the Representative of the Underwriters, has
previously acted as an underwriter of only three public offerings. There can be
no assurance that the Representative's lack of experience will not adversely
affect the public offering of the Securities and subsequent development, if any,
of a trading market for the Securities. See "Underwriting."
Forward-Looking Information May Prove Inaccurate
This Prospectus contains various forward-looking statements and information
that are based on management's beliefs as well as assumptions made by and
information currently available to management. When used in this document, the
words "expect," "anticipate," "estimate," and "believe," and similar expressions
are intended to identify forward-looking statements. Such statements are subject
to certain risks, uncertainties and assumptions including those identified
above. Should one or more of these risks or circumstances materialize, or should
underlying assumptions prove incorrect, actual results may vary materially from
those anticipated, estimated or projected.
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THE COMPANY
The Company was incorporated under the laws of the State of Delaware in
February 1989 as "Sea Fresh Foods Corporation" and changed its name to "Claw
Island Foods Inc." in October 1989. The Company maintains its executive offices
at 3209 Gresham Lake Road, Suite 147, Raleigh, North Carolina 27615. Its
telephone number is (919) 954-1919. The Company maintains processing facilities
in Vinalhaven, Maine and Lockeport, Nova Scotia.
Recent Financing
In March 1996, the Company commenced a private placement offering of its
Series E Preferred Stock at $2.60 per share, which resulted in the issuance in
June 1996 of an aggregate of 1,133,852 shares of Series E Preferred Stock. Of
those shares, 502,864 shares were purchased for cash, from which the Company
received proceeds of $1,307,405, and 630,988 shares were issued upon the
conversion of indebtedness of the Company. The Series E Preferred Stock and all
other Preferred Stock of the Company will be converted into Common Stock
contemporaneously with the completion of the Offering. The Company used
substantially all of the net proceeds of the Series E financing to purchase
lobster inventory. See "Certain Transactions" and "-Pre-Offering Events."
Pre-Offering Events
In ___________, 1996, the Board of Directors and stockholders of the
Company approved certain amendments to the Company's Certificate of
Incorporation, which will become effective contemporaneously with the completion
of the Offering, including an amendment to reduce from $10,000,000 to $5,000,000
the initial public offering amount at which shares of each series of the
Company's Preferred Stock convert automatically into shares of Common Stock.
These amendments, together with certain other terms of the Company's Certificate
of Incorporation, as so amended, will have the effect of recapitalizing the
Company contemporaneously with the completion of the Offering. Pursuant to the
Company's Certificate of Incorporation, as so amended, all issued and
outstanding shares of the Company's Preferred Stock (consisting of Series C, D
and E Preferred Stock) will be converted automatically into shares of Common
Stock (at conversion rates determined according to the Company's Certificate of
Incorporation, as so amended) contemporaneously with and as a result of
completion of the Offering. In addition, the amendments will effect a 5.2-for-1
Common Stock reverse split contemporaneously with the completion of the
Offering. Unless otherwise indicated herein to the contrary or the context
otherwise requires, all information presented throughout this Prospectus has
been restated to give effect to these events. See "Prospectus Summary" and
"Description of Securities."
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USE OF PROCEEDS
The net proceeds to the Company from the sale of the securities offered
hereby, after deduction of the underwriting discounts and other estimated
expenses of the Offering, are estimated to be approximately $5,400,000
($5,994,945 if the Underwriters' Over-Allotment Option is exercised in full),
assuming an initial public offering price of $5.50 per share of the Common Stock
and on the basis of an initial public offering price of $.10 for each Redeemable
Warrant. The Company intends to apply the net proceeds from the Offering
approximately as follows:
Use Estimated
Estimated Percentage of
Amount Net Proceeds
--------- ------------
Inventory(1) ...................................... $3,400,000 63.0%
Sales and marketing; new product development(2) ... $1,655,000 30.6%
Working capital(3) ................................ $ 345,000 6.4%
---------- ------
Total ........................... $5,400,000 100.0%
- ---------------
(1) The Company intends to apply the majority of the net proceeds of the
Offering to purchase Maine lobster inventory for processing and sale. The
Company believes this portion of the net proceeds of the Offering will
enable the Company to purchase larger quantities of lobster inventory,
and to make such purchases during lower-priced harvest months for
distribution throughout the year, thereby achieving considerably more
favorable margins. See "Description of Business - Strategy."
(2) The Company intends to apply this portion of the net proceeds of the
Offering to expand its sales and marketing staff by hiring three
employees and to develop and evaluate new products and product varieties,
including Maine lobster tail and claws and whole Dungeness and red crab
products. See "Description of Business Strategy," "-Marketing and
Customers" and "-Products."
(3) Includes approximately $245,000 the Company intends to apply to limited
capital improvements to improve efficiency at its existing processing
facilities. See "Description of Business - Manufacturing and
Distribution."
The allocation of proceeds described above represents management's
estimates based upon current business and economic conditions. Although the
Company does not contemplate material changes in the proposed allocation of
proceeds, to the extent the Company finds that adjustments are required by
reason of existing business conditions, the amounts shown may be adjusted among
the uses indicated above. The Company also may need additional financing in
order to sustain its anticipated growth, in the event it does not generate
revenues sufficient to satisfy its cash requirements for future growth. See
"Risk Factors - Possible Need for Additional Financing."
If the Underwriters' Over-Allotment Option is exercised, the Company
intends to apply the additional proceeds to purchase additional Maine lobster
inventory for processing and sale. The Company will not receive any of the
proceeds from the sale of Common Stock by the selling stockholders upon exercise
of the Underwriters' Over-Allotment Option.
The net proceeds of the Offering that are not expended immediately shall be
deposited in interest bearing accounts or invested in government obligations,
certificates of deposit or similar short-term, low risk investments.
20
<PAGE>
DIVIDEND POLICY
To date, the Company has not paid any dividends. The Company does not
anticipate paying any dividends in the foreseeable future. The Company intends
to retain any future earnings to finance the growth and development of its
business. Any future determination as to the payment of dividends will be at the
discretion of the Board of Directors and will depend on the Company's operating
results, financial condition, capital requirements and such other factors as the
Board of Directors may deem relevant. See "Risk Factors - No Dividends" and
"Description of Securities."
CAPITALIZATION
The following table sets forth the capitalization of the Company at June
30, 1996 and as adjusted to reflect the sale of the Securities in the Offering
and application of the estimated net proceeds therefrom. This table should be
read in conjunction with the Company's financial statements, related notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere herein.
<TABLE>
<CAPTION>
June 30, 1996
-------------------------------------------------
Actual As Adjusted(1)
------ --------------
<S> <C> <C>
Liabilities
Short-term capital lease obligations........................ $ 34,773 $ 34,773
Long-term liabilities....................................... 133,332 133,332
Stockholders' equity
Preferred Stock, $.01 par value per share; 1,863,653 shares authorized; no
shares issued and outstanding as adjusted(2)
Series C Preferred Stock; 350,983 shares authorized; 334,778 shares
issued and outstanding actual; no shares
issued and outstanding as adjusted...................... 3,348 -0-
Series D Preferred Stock; 70,362 shares authorized; 50,259
shares issued and outstanding actual; no shares issued and
outstanding as adjusted................................. 503 -0-
Series E Preferred Stock; 1,442,308 shares authorized;
1,149,237 shares issued and outstanding actual; no shares
issued and outstanding as adjusted...................... 11,492 -0-
Common Stock, $.01 par value per share; 2,788,462 shares
authorized; 47,959 shares issued and outstanding actual;
2,782,233 shares issued and outstanding as adjusted....... 480 27,822
Additional paid in capital................................ 10,647,435 16,035,436
Accumulated deficit.............................................. (8,758,075) (8,758,075)
--------- ---------
Total stockholders' equity....................................... 1,905,183 7,305,183
--------- ---------
Total capitalization............................................. $2,073,288 $7,473,288
========= =========
</TABLE>
- --------------------
(1) Reflects the conversion of all outstanding shares of Series C Preferred
Stock, Series D Preferred Stock and Series E Preferred Stock into shares
of Common Stock upon completion of the Offering. See "Description of
Securities Preferred Stock." Amounts are adjusted to give effect to the
sale of the Common Stock and Redeemable Warrants offered hereby at
assumed initial public offering prices of $5.50 and $.10, respectively.
(2) In addition to the authorized shares shown in this table, the Company has
authorized an additional 1,732 shares of Preferred Stock which are not
designated into series.
21
<PAGE>
DILUTION
The pro forma net tangible book value of the Common Stock as of June 30,
1996 was $1,822,183 or $1.15 per share. Pro forma net tangible book value per
share represents the amount of the Company's total assets, less liabilities and
intangible assets, divided by the number of shares of Common Stock outstanding,
1,582,233, after giving effect to the conversion of all of the Company's
Preferred Stock into shares of Common Stock.
Net tangible book value dilution per share represents the difference
between the amount per share paid by purchasers of shares of Common Stock in the
Offering and the pro forma net tangible book value per share of Common Stock
immediately after completion of the Offering. After giving effect to the sale by
the Company of the 1,200,000 shares of Common Stock (assuming an initial public
offering price of $5.50 per share) and 1,200,000 Redeemable Warrants (at an
initial public offering price of $.10 for each Redeemable Warrant) offered
hereby and the receipt by the Company of the estimated net proceeds therefrom,
the net tangible book value of the Company as of June 30, 1996 would have been
$7,222,183, or $2.60 per share of Common Stock. This represents an immediate
increase in net tangible book value of $1.45 per share to existing stockholders
and an immediate dilution in net tangible book value of $2.90 per share to
investors purchasing Securities at the initial public offering prices. The
following table illustrates this per share dilution:
<TABLE>
<CAPTION>
<S> <C> <C>
Initial public offering price per share of Common Stock.............................. $5.50
Pro forma net tangible book value per share before Offering.......................... $1.15
Increase in net tangible book value per share attributable to sale of Securities..... $1.45
----
Pro forma net tangible book value per share after Offering........................... $2.60
----
Net tangible book value dilution per share to investors in Offering(1)............... $2.90
====
</TABLE>
------------------------
(1) If the Underwriters' Over-Allotment Option is exercised in full, the
pro forma net tangible book value per share after Offering would be
$2.69 and the net tangible book value dilution per share to investors
in Offering would be $2.81.
The following table summarizes, on a pro forma basis as of June 30, 1996,
the number of shares purchased from the Company and the total consideration and
average price per share paid by the existing securityholders and the investors
that purchase Securities in the Offering (assuming an aggregate initial public
offering price of $5.50 per share of Common Stock):
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
---------------- -------------------
Average
Price
Number Percent Amount Percent Per Share
------ ------- ------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders................ 1,582,233 56.9% $11,024,477 62.6% $6.97
New investors in the Offering........ 1,200,000 43.1% $ 6,600,000 37.4% $5.50
--------- ---- ---------- ---- ----
Total........................... 2,782,233 100.0% $17,624,477 100.0% $6.33
</TABLE>
The foregoing table assumes no exercise of outstanding Redeemable Warrants
or any other warrants. To the extent that any Redeemable Warrants or other
warrants are exercised, there may be further dilution to new investors in this
Offering. Shares purchased by existing stockholders consists of Common Stock
outstanding after giving effect to the conversion of all of the Company's
Preferred Stock into Common Stock.
22
<PAGE>
SELECTED FINANCIAL DATA
The statement of operations data set forth below with respect to the years
ended June 30, 1995 and 1996 and the balance sheet data at June 30, 1995 and
1996 are derived from, and are qualified by reference to, the Company's audited
financial statements, the related notes thereto and other financial statements
included elsewhere in this Prospectus. The statement of operations data for the
12-month period ended June 30, 1994 are derived from unaudited financial
statements. The statement of operations data for the year ended May 31, 1993 are
derived from audited financial statements. The information presented below
should be read in conjunction with and is qualified by reference to
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Statement of Operations Data:
<TABLE>
<CAPTION>
12-Month(3)
Year Ended Period Ended Year Ended Year Ended
May 31, 1993 June 30, 1994 June 30, 1995 June 30, 1996
------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net Sales..................................... $ 1,225,309 $ 3,132,730 $ 3,679,616 $ 3,320,113
Cost of sales................................. $ 923,885 $ 2,595,162 $ 3,055,477 $ 2,802,514
Other operating expenses(1)................... $ 1,638,160 $ 1,763,179 $ 1,743,898 $ 1,734,692
--------- --------- --------- ---------
Loss from operations.......................... $ (1,336,736) $ (1,225,611) $ (1,119,759) $ (1,217,093)
Other income (expense)........................ $ (104,878) $ ( 137,392) $ (156,600) $ (165,000)
----------- --------- --------- ----------
Extraordinary loss upon extinguishment
of debt.................................. $ - $ - $ - $ (80,000)
Net loss...................................... $ (1,441,614) $ (1,363,003) $ (1,276,359) $ (1,462,093)
========= ========= ========= =========
Pro forma net loss per share(2)............... $ (.69) $ (.61) $ (.61) $ (.69)
=== === === ===
Pro forma weighted average shares outstanding(2) 2,082,499 2,230,785 2,108,852 2,145,953
========== ========= ========= =========
</TABLE>
Balance Sheet Data:
<TABLE>
<CAPTION>
June 30, 1996
--------------------------------------------
June 30, 1995 Actual As Adjusted(4)
------------- ------ --------------
<S> <C> <C> <C>
Working capital............................................ $ 225,868 $ 1,457,132 $ 6,857,132
Total assets............................................... $ 1,852,296 $ 2,335,571 $ 7,735,571
Total long-term liabilities................................ $ 529,937 $ 133,332 $ 133,332
Accumulated deficit........................................ $ (7,295,982) $ (8,758,075) $ (8,758,075)
Stockholders' equity....................................... $ 340,062 $ 1,905,183 $ 7,305,183
</TABLE>
- --------------------
(1) Includes costs related to marketing, promotional and sales activities in
addition to office, administrative, royalty and other plant costs.
(2) See Notes to Financial Statements for an explanation of the determination
of the pro forma number of shares and share equivalents used in computing
share amounts.
(3) During fiscal 1994, the Company elected to change its fiscal year end from
May 31 to June 30. The Company's audited financial statements for fiscal
1994 included 13 months. The unaudited 1994 summary financial data above
has been presented on a 12-month basis to be comparable with other fiscal
years presented. Unaudited summary financial data for the month of June
1993 (excluded from the amounts above) consists of the following: net sales
were $265,373, cost of sales were $193,004, other operating expenses were
$200,357 and net loss was ($137,003).
(4) Adjusted to give effect to the sale of the Common Stock and Redeemable
Warrants offered hereby at assumed initial public offering prices of $5.50
and $.10, respectively.
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements and the related notes thereto appearing elsewhere in this Prospectus.
General
The Company is a processor and distributor of Maine lobsters and lobster
products. The Company uses it proprietary SeaLock(R) cooking and fast-freezing
technology to process lobsters promptly after harvest. Lobster harvests are
concentrated during May through January, with significantly diminished yield in
other months. Reduced availability during the non-harvest months increases
lobster prices dramatically, with wholesale lobster prices during out-of-season
months reaching as much as two or more times those in harvest months.
Accordingly, the Company's ability to have sufficient working capital during the
lobster harvest season to purchase and process sufficient inventory levels has a
significant impact on the Company's margins, operating results and cash flows.
The Company intends to purchase lobster inventory during in- season months at
prices more favorable than those in out-of-season months, thereby enabling the
Company to provide consistent and reasonable prices throughout the year at
favorable margins. See "Description of Business-Strategy."
Historically, due to working capital limitations, the Company has been
unable to purchase sufficient quantities of lobster to support larger-scale
sales, marketing and distribution. Working capital limitations have also
impaired the Company's ability to purchase lobster inventory consistently during
lower-priced "in season" months, sometimes forcing the Company to purchase
lobster inventory during out-of-season months to satisfy customer orders. The
Company believes that adequate financing and inventory will enable the Company
to purchase larger quantities of lobster inventory at more favorable in-season
prices and support higher sales. The Company's strategy is to increase
penetration in and expand the domestic and international food service and retail
markets into which the Company distributes its lobster products, using lobster
inventory purchased during in-season months and eventually to increase its
product base to include other SeaLock(R)-processed crustaceans and crustacean
products for sale through the Company's established distribution channels.
The Company commenced processing and marketing of its lobster products in
May 1992. Prior to that time, under the direction of former management, the
Company's business was focused on processing and marketing blue crabs. Although
the Company achieved blue crab product quality, this shift was made to take
advantage of significantly higher margins associated with lobster products.
The Company has in the past derived, and may in the future derive, a
significant portion of its revenues from a relatively limited number of major
customers. In fiscal 1996, the Company had sales to three customers which each
accounted for over 10% of total revenues, Hyatt Regency Waikiki, Agripac and
Dominion Fund II, L.P. which accounted for 19%, 23%, and 26%, respectively.
Dominion, a principal stockholder of the Company, purchased from the Company
on a one-time basis, primarily for resale to Hyatt Regency Waikiki. In fiscal
1995, Hyatt Regency Waikiki accounted for 38% of total revenues and was the
only customer over 10%. Most of the Company's customers, including Hyatt Regency
Waikiki and Agripac, order from the Company on a purchase-order basis.
24
<PAGE>
Prior to fiscal 1995, the Company sold substantially all of its products to
customers in the United States. Based on the results of its international sales
efforts since that time, the Company intends to continue its efforts to expand
its international markets. International sales accounted for approximately 8%,
11% and 2% of net sales in fiscal 1996, 1995 and 1994, respectively. To date,
the Company generally has realized higher margins on its international sales as
compared with its domestic sales.
Seasonality
Lobster harvest seasons are concentrated during May through January, and
lobster prices payable by the Company during that period are substantially lower
than during out-of-season months. The Company's operating strategy is to
purchase lobster inventory during in-season months at more favorable prices and
sell its products at favorable margins throughout the year. Because the Company
processes its live lobster inventory shortly after purchase, the Company's
production costs, as well as inventory costs, are concentrated during these
harvest months which include the Company's first and second fiscal quarters.
In contrast, over the long term the Company does not anticipate that net
sales will significantly be affected by seasonal patterns, assuming it has
adequate working capital during the lobster harvest seasons to purchase and
process sufficient inventory levels. Due to working capital shortfalls in the
past, however, the Company has been unable to purchase sufficient quantities of
lobster to support sales throughout the year, or to purchase lobster inventory
consistently at more favorable in-season prices. Based on the seasonality of the
Company's business, the Company's results of operations have fluctuated on a
quarterly basis and can be expected to continue to be subject to quarterly
fluctuations. See "Risk Factors - Seasonality; Quarterly Fluctuations; Working
Capital Limitations."
Results of Operations for the Year Ended June 30, 1996
NET SALES. Net Sales decreased 9.8% to $3,320,113 for the year ended June
30, 1996, from $3,679,616 for the year ended June 30, 1995, due to the decrease
in inventory available for sale between years. The decrease in inventory
available for sale was largely attributable to the lack of sufficient working
capital to purchase and process inventory in fiscal 1996. In December 1995, the
Company entered into an arrangement with Dominion Fund II, L.P., a principal
stockholder of the Company, whereby Dominion purchased $874,333 of inventory and
obtained an assignment of certain purchase orders for the same amount from
significant customers of the Company. Dominion then sold and delivered product
to these customers in fulfillment of the purchase orders. The Dominion purchase
arrangement was completed too late in the lobster harvest season to enable the
Company to purchase lobster at favorable prices. Therefore, the Company's net
sales of $3,320,113 in fiscal 1996 were concentrated in the first two quarters
of the year rather than evenly spread throughout the year as were net sales of
$3,679,616 in fiscal 1995.
COST OF SALES. Cost of sales decreased 8.3% to $2,802,514 for the year
ended June 30, 1996, from $3,055,477 for the year ended June 30, 1995. As a
result, gross profit also decreased 17.1% to $517,599 for the year ended June
30, 1996 from $624,139 for the year ended June 30, 1995. Gross profit as a
percentage of net sales decreased to 15.6% in fiscal 1996 from 17.0% in fiscal
1995. The decrease in the gross profit percentage between years was due to the
increased cost per pound of lobster compared to the prior year. This increase in
cost per pound was primarily influenced by the timing of purchases throughout
the year. Working capital constraints in fiscal 1996, coupled with the demand
for product, forced the Company to purchase lobsters at less favorable prices.
The average cost per pound paid by the Company was $3.37 in 1996 versus $3.29 in
1995. The decrease in margin was partially offset by the increase in the sale of
stuffed lobster in 1996 over 1995, which has a higher gross profit than whole
lobster.
25
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE COSTS. Selling, general and
administrative costs decreased 3.6% to $1,500,455 in 1996 from $1,555,958 in
1995. This decrease is due to a decrease in selling expenses between years,
based on reductions in the sales force headcount. In addition, the Company
attended two trade shows in fiscal 1996 versus four trade shows in 1995. Both
reductions in the sales force and in trade show expenses were precipitated by
the Company's lack of inventory to sell during the last two quarters of fiscal
1996. Overall, general and administrative costs remained relatively constant
between years.
Results of Operations for the Year Ended June 30, 1995
NET SALES. Net Sales increased 17.5% to $3,679,616 for fiscal 1995 from
$3,132,730 for fiscal 1994. The increase in sales between years was due mainly
to the increased sales to international customers. International sales were
approximately 11% of net sales in 1995 as compared to 2% of international sales
in 1994. However, in 1995, the Company significantly expanded its sales efforts
in non-U.S. countries.
COST OF SALES. Cost of sales increased 17.7% to $3,055,477 for fiscal 1995
from $2,595,162 for fiscal 1994. At the same time, gross margin as a percentage
of net sales fell to $17.0% in fiscal 1995 versus 17.2% for fiscal 1994. The
decrease in margin in 1995 was due primarily to the Company not having
sufficient inventory levels and the proper mix of products in inventory during
the year to fill orders, resulting in the Company shipping larger more expensive
lobsters to meet a significant customer's order without being able to increase
the selling price to that customer. This decrease was partially offset by
favorable margins on the sale of stuffed lobsters in 1995, which were introduced
in late 1994.
SELLING, GENERAL AND ADMINISTRATIVE COSTS. Selling, general and
administrative costs decreased 2.1% to $1,555,958 for fiscal 1995 from
$1,589,332 for fiscal 1994. This decrease was due to several variables.
Marketing expenses were higher in fiscal 1994 due to the Company's introduction
of the stuffed product and the associated packaging costs. In addition, the
Company decreased its brokerage expenses between years as it moved to more
direct sales focus for its product sales. Decreases in headcount during 1995
were partially offset by increased travel expenses related to international
sales over 1994 levels.
INTEREST EXPENSE. Interest expense increased 26.4% to $174,815 for fiscal
1995 from $138,280 for fiscal 1994. The increase in interest was due to the
increase in the average outstanding balances of the Company's line of credit in
1995 versus 1994. In addition, the Company obtained $865,000 of debt financing
in fiscal 1995 which subsequently converted into preferred stock, as explained
further under "Liquidity and Capital Resources" below.
26
<PAGE>
Quarterly Results
The following table sets forth certain unaudited quarterly income statement
data for the two years ended June 30, 1996:
<TABLE>
<CAPTION>
Quarters Ended
(in thousands)
---------------------------------------------------------------------------------------------------------
Sept. Dec. Mar. June Sept. Dec. Mar. June
30, 31, 31, 30, 30 31, 31, 30,
1994 1994 1995 1995 1995 1995 1996 1996
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales................. $939 $1,098 $742 $901 $1,298 $1,706 $220 $ 96
Cost of sales............. 697 851 622 886 1,013 1,343 267 179
Selling, general, and
administrative
costs(1).............. 450 321 348 512 350 426 367 383
Other plant
costs.................. 8 0 59 47 7 13 78 71
--- --- --- --- --- --- --- ---
Loss from
operations............. (216) (74) (287) (544) (72) (76) (492) (537)
Other income
(expense) net.......... (19) (33) (69) (36) (48) (54) (48) (55)
Extraordinary
loss upon
extinguishment
of debt................ 0 0 0 0 0 0 0 (80)
Net loss.................. $(235) $(107) $(356) $(580) $(120) $(130) $(540) $(672)
=== === === === === === === ===
</TABLE>
- -----------------------
(1) Selling, general, and administrative costs include royalty costs of 2% of
net sales.
The Company historically has had insufficient working capital to purchase
enough lobsters during lobster harvest season (generally the first two quarters
of the fiscal year) to support a consistent or increasing sales stream
throughout the rest of the fiscal year. As such, in the first two quarters of
the fiscal year, net sales have been higher than the last two quarters of the
fiscal year. In fiscal 1996, the Company sold almost all of its inventory by the
end of the second quarter, leaving little inventory available to be sold in the
third and fourth quarters. In 1995, the inventory balance was high enough to
support sales activities of the Company into the third quarter before the
balance was substantially depleted. In the fourth quarter of 1995, the Company
reopened its production for a brief period, which allowed the Company to have
more inventory available for sale during the fourth quarter. Such was not the
case in fourth quarter 1996, and thus there is a significant variance in net
sales for this quarter between fiscal years.
27
<PAGE>
As seen above, there are significant fluctuations in the other plant costs
throughout the year. The Company incurs certain fixed overhead expenses related
to plant facilities throughout the year (rent for the plant, equipment
depreciation utilities, etc.). Due to the seasonality of the lobster harvest
season, the processing facilities are primarily in production for seven months
during the year, which includes the first and second quarters of the Company's
fiscal year. During the production months, all plant costs are included in cost
of sales. During the periods the plant is not fully operating (primarily the
third and fourth quarters) such costs are accounted for as period expenses and
not included in the cost of sales. Accordingly, plant costs, as reported for
financial reporting purposes, are higher in the third and fourth quarters of the
Company's fiscal year.
In addition, interest expense is traditionally highest in the second and
third quarters due to high demands on working capital to purchase lobster during
these periods. Borrowings available under the Company's line of credit were
fully drawn during these quarters for the past two years, as the Company needed
cash to purchase lobster. The line of credit is normally substantially repaid as
the Company sells the inventory and collects from its customers as the year
progresses.
Losses have been lowest during the production months of the year when the
Company is operating efficiently. Losses increased in the third and fourth
quarters of fiscal 1996, as there was little inventory available to sell to
generate margins to cover fixed overhead expenses. In addition, the inventory
sold in the last two quarters had lower margins due to the cost of lobsters
being higher based on the timing of purchases. Sales and marketing efforts
during this non-production period focused on securing purchase orders for the
next fiscal year.
Liquidity and Capital Resources
At June 30, 1996, the Company had $1,457,132 of working capital, as
compared to $225,868 at June 30, 1995. The increase of $1,231,264 in working
capital from June 30, 1995 was primarily the result of the increase in cash and
the conversion of current debt in connection with the issuance of Series E
Preferred Stock in June 1995, partially offset by lower accounts receivable
balances and lower inventory levels. The Series E financing raised $1,307,405 in
cash proceeds and converted current and long-term debt of $1,534,978 to
preferred stock.
The Company has financed its operations to date primarily through private
placements of preferred stock and convertible debt instruments, principally to
its existing investors. Each of these financing transactions has brought changes
in the Company's working capital as described below.
In October 1994, the Company established a line of credit for working
capital up to $2,000,000 from Foothill Capital Corporation. The line of credit
is secured by substantially all of the assets of the Company, including accounts
receivable and inventory. Advances under the line of credit are subject to
levels of the Company's accounts receivable and inventory. The line of credit is
subject to renewal in October 1996. The Company intends to renew this line of
credit.
In September 1994, the Company entered into loan agreements with certain
shareholders and directors. Proceeds of these loans, which totaled $350,000,
were used to purchase lobster. At December 31, 1994, these loans, along with the
related accrued interest, were converted directly into shares of the Company's
Series D Preferred Stock.
28
<PAGE>
In June 1995, the Company entered into loan agreements with certain
shareholders. Proceeds of these loans which totaled $515,000, were used to
purchase lobsters. These loans, which had an initial interest rate of 14%, had
original maturities in August 1995. The balance outstanding on the loans at June
30, 1995, totaled $342,500. In July 1995, $332,500 of the June inventory loans
were amended to be payable on October 31, 1995. In connection with this
amendment, the noteholders were issued warrants to purchase a total of 15,379
shares of Common Stock at $17.68 per share. The Company was unable to repay the
obligations in October due to the need for cash to purchase lobsters and
replenish its inventory. The loans began accruing interest at 16% per annum on
November 1, 1995, and the Company issued 10,251 additional warrants.
Subsequently, the notes and the accrued interest were converted to 188,119
shares of Series E Preferred Stock.
In December 1995, Dominion Fund II, L.P., a principal stockholder, agreed
to purchase $874,333 of the Company's inventory along with assignments of
purchase orders from customers for the same amounts. The Company used the
proceeds from this arrangement to purchase and produce enough lobsters to cover
certain orders from its largest customer for the balance of fiscal 1996. In
connection with this transaction, Dominion received 20,177 warrants to purchase
shares of Common Stock at $13.00 per share and the right to receive $40,000 in
the form of the securities issued by the Company in its next round of financing
at the next round price. Subsequently, the Company issued 15,385 shares of
Series E Preferred Stock to Dominion in satisfaction of this $40,000 obligation.
In February 1996, the Company entered into bridge notes with several
existing stockholders and directors. These notes were non-interest bearing and
were secured by the Company's assets, subordinated to Foothill Capital. The
proceeds from these notes totaled $170,000 and were used to sustain the Company
during a period when it had exhausted its cash and had little inventory on hand
to borrow against under its line of credit. Additional short term bridge notes
totalling approximately $515,000 were added in April 1996. All of these notes
were subsequently converted into 263,454 shares of the Company's Series E
Preferred Stock.
In June 1996, the Company closed on its Series E Preferred Stock financing.
This financing raised $1,307,405 in new cash. In addition, the Company converted
all existing debt ($1,640,545), with the exception of its line of credit and a
$50,000 subordinated note which is not due until 1998, into Series E Preferred
Stock. The negotiation to convert the short term bridge loans resulted in the
issuance of 153,851 warrants to purchase Series E Preferred Stock, and the
recording of a $80,000 loss on extinguishment of debt as an extraordinary
expense in fiscal 1996. The funds from the Series E financing allowed the
Company to begin purchasing lobster and processing inventory as soon as lobster
prices were favorable during the current lobster harvest season.
The Company believes that its existing funds, as well as revenues from
operations, will be sufficient to sustain its existing operations for at least
the next 12 months. In order to fund its growth, however, the Company requires
additional financing and the net proceeds of the Offering will be used to
finance the Company's growth, principally through the purchase of lobster
inventory for processing and sale. The Company may need additional financing in
order to sustain its long-term growth. There can be no assurance that the
Company can obtain such financing. See "Risk Factors - Possible Need for
Additional Financing."
Net Operating Loss Carryforwards
As of June 30, 1996, for federal income tax purposes, the Company reported
an aggregate of approximately $8,500,000 of available net operating losses
carryforwards under Section 172 of the Internal Revenue Code, as amended (the
"Code"). Under Section 382 of the Code, however, the utilization of NOL
carryforwards is limited after an ownership change, as defined in Section 382,
to an annual amount equal to the market value of the loss corporation's
outstanding stock immediately before the date of the ownership change multiplied
by the highest federal long-term tax exempt rate in effect for any month in the
three calendar month period ending with the calendar month in which the
ownership change occurred.
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Prior issuances of equity securities by the Company, and the issuance of shares
of Common Stock in the Offering, have resulted in a change in control for
federal income tax purposes that will significantly limit the amount of the NOL
that can be used to offset future taxable income in any one year.
Accounting Pronouncements
The Financial Accounting Standards Board recently issued SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed of." This statement requires long-lived assets to be evaluated for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The effective date for SFAS
No. 121 is for fiscal years beginning after December 15, 1995. The Company will
adopt SFAS No. 121 in fiscal 1997 and does not expect its provisions to have a
material effect on the Company's results of operations.
The Financial Accounting Standards Board also recently issued SFAS No. 123,
"Accounting for Stock-Based Compensation." This statement introduces a
fair-value based method of accounting for stock-based compensation. It
encourages, but does not require, companies to recognize compensation expense
for grants of stock, stock options and other equity instruments to employees
based on the new fair value accounting rules. However, if the Company chooses
not to recognize compensation expense in accordance with the provisions of this
statement, pro forma disclosures are required in the notes to consolidated
financial statements. The Company will adopt the disclosure provisions of SFAS
No. 123 in fiscal 1997.
DESCRIPTION OF BUSINESS
General
The Company is a processor and distributor of North American lobsters and
lobster products. North American lobsters, HOMARUS AMERICANUS, live only in the
North Atlantic and are commonly known and referred to in this Prospectus as
"Maine" lobsters. The Company uses its proprietary "SeaLock(R)" cooking and
fast-freezing process to preserve lobster freshness and quality without
compromising taste, texture or appearance when compared to live Maine lobsters
and Maine lobster products.
Historically, Maine lobster sales and distribution have been limited by the
fact that lobster taste, texture and appearance suffer considerably if the
lobster is not kept alive until preparation. The Company believes the taste,
texture and appearance of its frozen Maine lobsters and lobster products are
comparable to those of live lobster cooking and far superior to those of
lobsters processed with conventional freezing methods. An independent taste test
conducted for the Company prior to commercial production in 1991 showed the
Company's SeaLock(R) Maine lobsters to be comparable to live Maine lobsters in
taste and texture and superior in appearance. The SeaLock(R) process enables
the Company to distribute high quality whole Maine lobsters and Maine lobster
products worldwide without the price and supply fluctuations, expense,
administrative burden and disease and mortality risks inherent in traditional
live delivery.
Due to working capital limitations, the Company has been unable to purchase
sufficient quantities of Maine lobster inventory to support larger-scale sales,
marketing and distribution. Working capital limitations also have impaired the
Company's ability to purchase lobster inventory consistently during lower-priced
"in season" months, sometimes forcing the Company to purchase inventory in
"out-of-season" months to satisfy customer orders. The Maine lobster harvest is
seasonal, occurring primarily from May through January. In out-of-season
months, wholesale Maine lobster prices can reach two or more times their
in-season levels, significantly reducing the Company's sales margins.
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The Company believes that sufficient financing will enable the Company to
purchase larger quantities of lobster inventory during lower-priced in-season
months and, using its SeaLock(R) process, maintain an inventory to provide
customers a consistent, year-round supply of Maine lobsters and lobster products
at consistent, competitive prices despite the seasonal nature of the industry.
The Company believes adequate financing and inventory also will enable the
Company to expand its customer base domestically and abroad. The Company's
strategy is to (1) increase penetration in and expand the domestic and
international food service and retail markets into which the Company distributes
its Maine lobster products, using lower-priced lobster inventory purchased
during in-season months, and (2) eventually increase its product base to include
other SeaLock(R)-processed crustaceans and crustacean products for sale through
the Company's established distribution channels.
The Company's proprietary SeaLock(R) process, key aspects of which the
Company licenses from two inventors, involves freezing cooked Maine lobsters at
extremely cold temperatures promptly after live delivery to the Company's
processing facilities in Vinalhaven, Maine and Lockeport, Nova Scotia. Unlike
conventional freezing methods, which involve freezing at temperatures of
approximately -20(degrees)F and can take as long as 24 hours, the SeaLock(R)
process freezes the Company's Maine lobster products with -300(degrees)F liquid
nitrogen and takes only 10-15 minutes. The speed of the SeaLock(R) process,
together with use of a sugar solution as a protective agent during freezing,
enables the Company's products to maintain considerably more of their original
flavor, texture, moisture and appearance than conventionally frozen products.
Also, the Company's Maine lobsters and lobster products prepared with the
SeaLock(R) process have quality shelf lives of at least 12 months, three times
that for typical conventionally frozen lobster products.
The Company's current product line consists of whole and half Maine
lobsters, "Down East(R)" stuffed whole Maine lobsters, and Maine lobster meat,
all prepared with the SeaLock(R) process. In addition, the Company has test
processed and shelf-life tested the SeaLock(R) process successfully on a variety
of other crustacean products, including Maine lobster tails and claws and whole
Dungeness and red crabs, which the Company is considering adding to its product
line. The Company provides an unconditional satisfaction guarantee for all of
its products. The Company is a three-time recipient of the Award of Excellence
of the Fine Beverage and Food Federation, a former industry group.
The Company distributes its Maine lobsters and lobster products in the
United States and internationally to restaurants, caterers and other food
vendors and through selected retail vendors. The Company currently has over 100
customers, including Amelia Island Plantation, Hyatt Hotels and Resorts, Price
Costco, Princess Cruise Lines, and Sysco Food Service. In fiscal 1996, the
Company generated approximately 95% of its revenues from customers that
purchased the Company's products in 1995. The Company also recently entered
into an agreement under which the QVC cable television shopping network will
offer the Company's "Down East(R)" stuffed Maine lobster product on the air in
fall 1996 during a two-week Maine segment.
Live North American crustacean products are scarce and costly abroad,
resulting in greater market acceptance of frozen crustacean products than in the
United States. The Company achieved repeat sales in Korea, Taiwan, Singapore,
Sweden and England in fiscal 1996. Although these sales constituted less than
10% of the Company's revenues for that period, the Company believes that it can
increase sales to customers in these countries and begin sales in several other
European and Asian countries, including Germany, France, Italy and Japan, in
fiscal 1997 and thereafter.
Industry
Based on harvest data compiled by the United States National Marine
Fisheries Service and the Canadian Department of Fisheries and Oceans, the
Company estimates the worldwide retail market for Maine lobsters and lobster
products at approximately $900 million. Harvest data for 1994 estimated catches
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of 66.5 million pounds of Maine lobsters in the United States and 87.5 million
in Canada, for a total of 154 million pounds. At an assumed average worldwide
retail price per pound of $5.75, the 1994 Maine lobster market aggregated
approximately $885.5 million. In addition, according to industry sources, fish
and seafood consumption is rising, with per capita consumption of fish and
seafood increasing 20% between 1980 and 1990, fish and shellfish accounting
for almost one out of every five entrees ordered in upscale restaurants, and
Maine lobster consumption increasing in Europe and Asia.
Maine lobster distribution occurs through two principal channels: food
service and retail. The food service channel includes food service distributors,
institutional caterers, multi-unit and independent restaurants, dining clubs,
resorts and cruise lines, which typically supply or offer whole live lobsters as
upscale menu items. Retail distribution consists primarily of supermarkets,
wholesale clubs and department stores, many of which offer a variety of lobster
products including whole live lobsters, frozen lobster tails and canned lobster
meat.
Historically, lobster sales and distribution have been limited by the fact
that lobster taste, consistency and appearance ordinarily diminish significantly
if the lobster is not kept alive until preparation. Consequently, the
availability, cost and quality of whole lobsters has depended upon dealers'
ability to establish and maintain distribution networks for live lobsters. Live
distribution ordinarily involves storage of live lobsters in holding tanks
pending shipment; shipment by truck or air in cool, moist containers; and
storage in holding tanks pending sale and preparation. This process is
expensive, administratively burdensome and disease- and mortality-prone. In
addition, because Maine lobsters live only off the shores of the North Atlantic,
live distribution networks tend to concentrate in the Northeastern United States
and to become more expensive and difficult to administer as they extend to other
markets. Also as a result of this network concentration, live lobster sales tend
to concentrate in the Northeast and to diminish considerably in other markets.
Some vendors have attempted to avoid the problems associated with live
lobster distribution by freezing whole lobsters and non-whole lobster products.
However, conventionally frozen lobsters suffer from severe quality limitations.
Traditional lobster freezing techniques historically have resulted in inferior
meat quality and texture due to damage caused during the freezing process, as
well as relatively short shelf lives, often less than four months. In addition,
manufacturers of frozen whole lobsters or lobster products sometimes prepare
their products from leftover, mortality-prone or other "remnant" lobsters, such
as surplus lobsters from live distribution networks. Use of remnant lobsters
diminishes the quality of these products.
Seasonal factors also affect the sale and distribution of whole Maine
lobsters. Lobster harvests are most plentiful during May through January, with
significantly diminished yield in the other months. Reduced availability during
the non-harvest months increases lobster prices dramatically and interferes with
consistent availability to food service vendors. These fluctuations in price and
availability compound vendors' already-burdensome task of maintaining
appropriate storage tanks and otherwise participating in live lobster
distribution network.
Other domestic and international markets exist for a variety of
crustaceans (other than Maine lobsters) often served as upscale menu items,
including Dungeness crabs, spiny lobsters, whole head-on shrimp, and blue, red,
stone and king crabs. Distribution of these crustaceans also occurs primarily
through the food service and retail channels and, in most cases, requires live
transportation for maximum quality. Like Maine lobsters, many of these
crustaceans have specific harvest seasons and are subject to corresponding price
and supply fluctuations. Consequently, distribution and sale of products related
to these crustaceans is subject to the same expense, inconsistency and
difficulty of live Maine lobster distribution.
32
<PAGE>
The SeaLock(R) Process
The Company employs a proprietary process, known as the Company's
"SeaLock(R)" process, to cook and fast-freeze live Maine lobsters promptly after
harvest. Unlike traditional freezing methods, which tend to damage crustacean
meat and cause it to become tough, stringy and disflavored, the SeaLock(R)
process uses a proprietary fast-freezing method which preserves meat moisture
and integrity and, consequently, flavor. The Company believes use of the
SeaLock(R) process thereby enables the Company to compete with traditional live
distribution networks without compromising taste, texture or appearance. The
Company's process eliminates price and supply fluctuations and the expense,
administrative burden and disease and mortality risks inherent in live delivery,
while preserving high quality the Company believes to be superior to that
available with conventional freezing. It also enables the Company to make high
quality Maine lobster products available in markets remote from Maine lobster
habitats and to consumers unwilling to undertake preparation of live animals.
The SeaLock(R) technology consists of a patented process and related trade
secrets licensed by the Company from the inventors of the patented process,
along with complementary trade secrets developed independently by the Company.
Although the patent expires in 1999, the Company believes that the know-how
licensed from the inventors and that developed independently by the Company will
continue to provide the Company a competitive advantage over any competitor
contemplating initial use of the patented process. The Company is not aware of
any competitor contemplating use of the patented process after expiration of the
patent, although the Company can offer no assurance that a competitor will not
attempt to do so or, if attempted, succeed in implementing a process
substantially equivalent to the Company's. See "-Proprietary Rights and
Patents."
Some vendors have attempted to avoid the problems associated with live
distribution by freezing crustacean products prior to delivery. Conventional
freezing, known as "blast" freezing, involves exposing products to a continuous
stream of chilled air, inducing gradual freezing over a period of as long as 24
hours. Although blast freezing enables distribution without live storage, the
slow freezing process can cause crustaceans' cell walls to rupture, releasing
moisture and minerals and causing the product to become dry, tough and stringy.
Chemical reactions involving the released minerals also can cause disflavoring.
These effects cause blast frozen products to have relatively short shelf lives,
typically less than 4 months. For these reasons, blast frozen crustacean
products have not achieved significant domestic success. Because live
distribution of lobster parts is impossible, blast frozen lobster parts (as
opposed to whole lobsters) have enjoyed greater success. In addition,
conventionally frozen Maine lobster products (including whole lobsters) have
experienced greater commercial acceptance abroad than in the United States,
since live lobsters, if available abroad at all, are prohibitively expensive.
The Company believes its SeaLock(R) process is superior to conventional
"blast" freezing for several reasons and results in superior products. The
SeaLock(R) freezing process is fast, requiring only 10-15 minutes as opposed to
up to 24 hours for conventional freezing. This speed is attributable to the
Company's use of a proprietary process which exposes cooked products to
temperatures below -300(degrees)F, as opposed to conventional freezing at
approximately -20(degrees)F. The speed of the SeaLock(R) freezing process
results in a finer frozen ice crystal matrix than that resulting from
conventional freezing, consequently causing less cell wall rupture. The
Company considers fast freezing critical to frozen crustacean product quality.
The overall SeaLock(R) process, including cooking, freezing and packaging,
requires only about 45 minutes. In addition, SeaLock(R) involves the use of
sugar as a protective agent to help products retain moisture during freezing.
Retained moisture and reduced cell wall damage allow the Company's SeaLock(R)
products to maintain considerably more of their original flavor, texture and
appearance than conventionally frozen products and to have longer shelf lives.
The Company's products have a quality shelf life of at least
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<PAGE>
12 months after purchase (assuming continuous storage in a conventional home or
institutional freezer), three times that for typical conventionally frozen
lobster products.
The Company believes its SeaLock(R) process has broad application across
crustacean species, including Dungeness crabs, spiny lobsters, whole head-on
shrimp, and blue, red, stone and king crabs, most of which represent future
product opportunities for the Company. When appropriate, the Company adapts the
SeaLock(R) process for particular products. For example, the Company believes
market opportunities may exist for frozen raw or blanched (as opposed to
fully-cooked) Maine lobster tails. The Company adapts the cooking portion of the
SeaLock(R) process accordingly, and may make similar adaptations for other
products. However, the Company employs the fast-freezing aspects of the
SeaLock(R) process for all of its products in order to preserve maximum flavor,
texture and appearance. See "-Strategy" and "-Products."
Strategy
Since commencing SeaLock(R) processing of whole Maine lobsters in June
1992, the Company has developed consistent, high quality Maine lobster products
offering an unconditional satisfaction guarantee under the Claw Island R brand
name. The Company's strategy is to (1) increase penetration in and expand the
domestic and international food service and retail markets into which the
Company distributes its Maine lobster products, using lower-priced lobster
inventory purchased during in-season months, and (2) eventually increase its
product base to include other SeaLock(R)-processed crustaceans and crustacean
products for sale through the Company's established distribution channels. To
date, working capital limitations have impaired the Company's ability to
purchase sufficient quantities of Maine lobster inventory to support
larger-scale sales, marketing and distribution and to take advantage of lower
Maine lobster wholesale prices prevailing during in-season months.
The Company believes its initial strategy of increasing market penetration
and size will position the Company to become the leading worldwide processor and
distributor of frozen whole Maine lobsters and Maine lobster products. The
Company intends to begin implementing this strategy by using approximately 60%
of the net proceeds of the Offering to purchase lobster inventory to supply
existing customers and for broader distribution into new domestic and
international markets. See "Use of Proceeds."
The Company intends to take advantage of the cyclical nature of Maine
lobster prices by mass- purchasing inventory during in-season months at prices
more favorable than those in out-of-season months, thereby enabling the Company
to provide customers a consistent, year-round supply of Maine lobsters and
lobster products at consistent, competitive prices while maintaining favorable
margins. The following chart shows average wholesale Maine lobster prices from
January 1993 to December 1995, demonstrating the seasonal price fluctuations
which give rise to this aspect of the Company's strategy:
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<PAGE>
State of Main Lobster Prices Per Pound(1)
[chart appears here; data points are as set forth below]
Lobster Cost History
<TABLE>
<CAPTION>
Month-Year Price Per Pound ($) Month-Year Price Per Pound ($)
---------- ------------------- ---------- -------------------
<S> <C> <C> <C> <C>
Jan-93 3.83 Jul-94 2.63
Feb-93 4.20 Aug-94 2.45
Mar-93 5.08 Sep-94 2.33
Apr-93 4.13 Oct-94 2.42
May-93 2.97 Nov-94 2.44
Jun-93 3.39 Dec-94 2.95
Jul-93 2.88 Jan-95 3.90
Aug-93 2.32 Feb-95 4.63
Sep-93 2.27 Mar-95 4.07
Oct-93 2.14 Apr-95 4.39
Nov-93 2.21 May-95 4.00
Dec-93 2.79 Jun-95 3.95
Jan-94 3.34 Jul-95 2.76
Feb-94 3.91 Aug-95 2.52
Mar-94 4.66 Sep-95 2.60
Apr-94 3.49 Oct-95 2.75
May-94 2.89 Nov-95 2.93
Jun-94 3.79 Dec-95 3.31
</TABLE>
- ---------------
(1) This chart shows prices paid directly to fishermen upon harvest, based upon
information compiled by the United States National Marine Fisheries Service
for the time periods indicated. The Company's actual inventory prices
exceed these prices due to dealer markups (typically averaging
approximately $.65 per pound) and, for purchases not supported by immediate
harvests, fees for pre-sale tanking or "pounding."
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<PAGE>
The Company also intends to use a portion of the net proceeds of the
Offering to expand the Company's sales and marketing staff by three members to
create and support greater market penetration and expansion. See "Use of
Proceeds," "- Employees."
The Company plans to focus particularly on increasing its international
sales and marketing efforts. Because of difficulties with live distribution from
North American habitats, live North American crustacean products are scarce and
costly abroad, and frozen crustacean products have achieved greater market
acceptance than in the United States. Moreover, due to supply limitations,
international sales typically bear higher prices, yielding margins more
favorable than those for the Company's domestic sales. Because the Company
believes its Maine lobsters and lobster products to be superior to their
conventionally frozen counterparts in taste, texture and appearance, the Company
believes it can compete abroad successfully, with favorable margins. To date,
the Company has been unable to take thorough advantage of international
distribution potential due to the Company's lack of working capital to purchase
Maine lobster inventory. However, the Company believes adequate financing and
inventory will enable the Company to expand its international customer base. See
"- Marketing and Customers."
After expanding its market scope and penetration, the Company intends to
leverage its existing expertise and distribution systems by introducing other
frozen crustacean products into the Company's worldwide markets. The Company has
completed test production and shelf life tests successfully on a variety of
potential products, including Dungeness crabs, spiny lobsters, whole head-on
shrimp, and blue, red, stone and king crabs. The Company currently is evaluating
adding Maine lobster tails and claws, stuffed half Maine lobsters and Dungeness
and red crab products to its product line, and has no current plans to add any
other specific products. The Company may need to add new production facilities
near the natural habitats of new species the Company elects to produce, if any,
but believes it will be able to do so on a cost-effective basis. See "-
Facilities."
Throughout and as part of implementation of its strategies, the Company
plans to continue emphasizing brand identity and recognition, which the Company
believes build goodwill and enable consumer identification of the Company and
its products against competitive products and processes. See "-Proprietary
Rights and Patents."
Products
The Company currently markets three primary products under its Claw
Island R brand: cooked and frozen whole Maine lobsters, cooked and frozen half
Maine lobsters, and "Down East(R)" stuffed frozen Maine lobsters. The Company
also markets a Maine lobster meat product. All of the Company's products are
packaged with the Company's brand logo, and the Company uses point-of-sale
materials to achieve further brand recognition. The Company typically packages
lobsters by the case for food service vendors and provides individual packages
for retail sales by selected vendors. Each retail package includes a pictorial
insert demonstrating how to eat a whole Maine lobster. The Company's "Down
East R " lobster is stuffed with lobster meat and topped with cracker crumbs and
seasonings. The Company is considering expanding its Down East(R) line of
stuffed lobsters by varying stuffing ingredients, such as for regional appeal,
or including special sauces.
All of the Company's products are frozen using the Company's proprietary
SeaLock(R) process to lock in freshness and maintain quality and consistency.
Except for the Company's Down East(R) stuffed lobster product, which must be
baked to cook its stuffing, all of the Company's products are pre-cooked and
ready to eat after thawing and, if desired, heating. The Company uses only first
quality lobsters, which the Company ordinarily processes within 24 to 48 hours
after harvest.
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The Company's products have a minimum quality shelf life of 12 months from
consumer receipt (three times that for typical conventionally frozen lobster
products) and are protected by an unconditional satisfaction guarantee. Claims
against the Company's satisfaction guarantee have amounted to less than one-half
of one percent in the aggregate for the last four fiscal years.
The Company currently is test processing and shelf-life testing several
potential new products and varieties, including stuffed half lobsters and
premium lobster tails, claws and combinations, which the Company is considering
adding to its product line in the near term. The Company also has completed
SeaLock(R) test processing and extended shelf-life testing successfully on a
wide variety of whole crustaceans other than Maine lobsters, including Dungeness
crabs, spiny lobsters, whole head-on shrimp, and blue, red, stone and king
crabs. These crustaceans represent potential future products for the Company in
their whole forms, in other product forms, such as halved, backed and cleaned,
stuffed, or by parts, such as tails, claws and legs, depending in each case on
marketing factors.
The Company intends to use a portion of the net proceeds of the Offering to
conduct new product research and development, including concept and product
market research to identify which of the Company's potential frozen crustacean
products and forms are likely to have the greatest market appeal.
See "Use of Proceeds."
The Company has granted to a third party processor a sublicense under the
Company's licensed technology for processing crawfish and blue crabs. The
sublicense is exclusive as to crawfish, but non-exclusive as to blue crab, which
the Company still may produce. The Company does not intend to process or sell
crawfish in the foreseeable future. The Company has not sublicensed any other
processing rights under the Company's proprietary technologies or concerning any
other species of crustacean. See "-Proprietary Rights and Patent."
Marketing and Customers
The Company sells its Claw Island R brand products nationally to food
service vendors including food service distributors, institutional caterers,
multi-unit and independent restaurants, dining clubs, resorts, hotels and cruise
lines and to supermarkets, wholesale clubs and department stores for retail
sale. The Company believes customers in these market channels have been most
affected by the deficiencies of traditional live distribution, including
expense, inconsistent supply and price fluctuations. The Company currently has
over 100 customers, including Amelia Island Plantation, Hyatt Hotels and
Resorts, Price Costco, Princess Cruise Lines and Sysco Food Service. In fiscal
1996, the Company generated approximately 95% of its revenues from customers
that purchased the Company's products in 1995.
The Company has in the past derived, and may in the future derive, a
significant portion of its revenues from a relatively limited number of major
customers. In fiscal 1996, the Company had sales to three customers which each
accounted for over 10% of total revenues, Hyatt Regency Waikiki, Agripac and
Dominion Fund II, L.P. which accounted for 19%, 23%, and 26%, respectively.
Dominion, a principal stockholder of the Company, purchased from the Company
on a one-time basis, primarily for resale to Hyatt Regency Waikiki. In fiscal
1995, Hyatt Regency Waikiki accounted for 38% of total revenues and was the
only customer over 10%. Most of the Company's customers, including Hyatt Regency
Waikiki and Agripac, order from the Company on a purchase-order basis. The loss
of any of these customers, or a substantial portion of these accounts, unless
timely replaced by other customers or accounts of corresponding volume, would
have a material adverse effect on the Company. See "Certain Transactions" and
"Risk Factors - Dependence on Certain Customers."
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<PAGE>
The Company markets its products directly (through management) and through
two domestic food service brokers and approximately five international agents in
Europe and Asia. The Company's domestic brokers arrange sales by the Company on
a commission basis, while its international agents purchase the Company's
products themselves for distribution. The Company anticipates using a portion of
the proceeds of the Offering to hire three direct sales employees over the next
12 months. In addition, the Company anticipates adding approximately 10 domestic
and international food service brokers and agents. The Company believes these
sales employees, brokers and agents will facilitate increasing the Company's
market penetration through entering new geographic areas domestically and in
selected international markets and new market channels within existing and new
markets. The Company also believes that some food service vendors and retailers
which previously have declined to carry whole lobsters because of limitations on
and expenses associated with live distribution may agree to carry the Company's
products. The Company requires payment in United States currency on all
international sales and ships products internationally only against a
satisfactory letter of credit or prepayment. The Company does not believe it
bears any material foreign currency risks in connection with its international
sales as currently conducted.
See "Use of Proceeds," "-Employees" and "-Strategy."
The Company positions its sales representatives as "consultative" sellers,
who work with the Company's customers to explain the Company's products; show
how the Company's products will enhance menus, reduce product and labor costs,
and decrease preparation time; and assist with custom product designs. The
Company believes this sales approach is consistent with the Company's overall
position as a value-added food processor rather than a commodity supplier.
The Company also believes that restaurant shows in the United States,
Europe and the Far East provide an excellent opportunity to meet existing and
potential customers and allow product sampling; therefore, the Company intends
to attend selected shows during the remainder of 1996 and thereafter.
The Company's sales to date have been primarily in the United States,
although the Company is exploring select international markets, including the
Far East. Approximately 8% of the Company's sales in its fiscal 1996 were in
international markets, representing 12 countries. The Company's international
sales in fiscal 1995 and 1994 were 11% and 2% of its total sales, respectively.
The Company achieved reliable repeat sales in Korea, Singapore, Taiwan, Sweden
and England in fiscal 1996 and anticipates sales in Germany, France, Italy,
Japan and other countries in fiscal 1997 and thereafter. The Company attributes
the decline in international sales from fiscal 1995 to fiscal 1996 to a lack of
lobster inventory in fiscal 1996 resulting from a lack of cash. The Company
believes that had adequate working capital been available, the Company's
international sales in fiscal 1996 would have exceeded those in fiscal 1995.
The Company believes that selected international markets may be
particularly well-suited for the Company's lobster products due to increasing
lobster consumption and relative unavailability of live product. Maine lobster
consumption has risen dramatically in recent years in several European and Asian
countries, including Japan. Because live distribution of Maine lobsters to these
areas is particularly difficult and expensive due to their remoteness from the
Maine lobster habitat, consumers in these countries have shown greater
acceptance of conventionally frozen lobster products than in the United States.
The Company believes that in these countries, where the Company's principal
competition would be against conventionally frozen lobster products as opposed
to live distribution products, the Company's SeaLock(R) Maine lobster products
would compete successfully. See "-The SeaLock(R) Process."
The Company provides an unconditional satisfaction guarantee for all
products. Claims against the Company's satisfaction guarantee have amounted to
less than one-half of one percent.
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<PAGE>
The Company is a three-time recipient of the Award of Excellence of the
Fine Beverage and Food Federation, a former industry group. The Company promotes
this achievement by placing stickers announcing the award on packages and sales
materials.
The Company also recently entered into an agreement under which the QVC
cable television shopping network will offer the Company's Down East(R) stuffed
lobster product for sale to consumers on the air during a two-week Maine segment
in fall 1996. In addition to generating publicity, greater brand recognition and
limited high-margin revenues, this opportunity will enable the Company to
evaluate the mail order market channel preliminarily.
Manufacturing and Distribution
The Company has processing facilities on Vinalhaven Island, Maine and in
Lockeport, Nova Scotia. Each facility is adjacent to the North Atlantic habitat
of Maine lobsters. The Company currently uses only one facility at a time,
depending on whether primary lobster harvests are nearer Vinalhaven or
Lockeport, although the Company could use both facilities simultaneously to
accommodate higher demand.
Peak processing periods typically occur during early spring and late fall,
when Maine lobster supplies typically are most plentiful and prices are lowest.
The Company believes that its current facilities, after implementation of minor
efficiency improvements to which the Company intends to apply a portion of the
working capital portion of the net proceeds of the Offering, will have the
capacity to support sales of approximately $22-28 million per year. The Company
believes that it could add a third facility with production capacity equivalent
to that of each of the Company's other manufacturing facilities on a
cost-effective basis with capital expenditures of less than $500,000. See "Use
of Proceeds."
The Company purchases inventory from dealers and from independent
lobstermen who harvest lobsters off the coasts of the North Atlantic. The
lobsters are delivered live directly to the Company at its dock at Vinalhaven or
Lockeport. The lobsters are then brought into the plant, sorted by size, and
cooked and frozen using the Company's proprietary SeaLock(R) technology. The
lobsters are then tagged and boxed by the case for cold storage. See "-The
SeaLock(R) Process" and "-Proprietary Rights and Patent."
The Company ships packaged products by common carrier from the Company's
processing facilities either directly to customers or to public cold storage
warehouses used by the Company in Massachusetts, California, and Hawaii. The
Company then fills customer orders from inventory maintained at the public
warehouses. In addition, in certain instances, the Company ships lobsters to
certain warehouses designated by customers. To prevent spoilage, the Company
requires the common carriers and warehouses it uses to maintain temperature logs
and report to the Company if the temperature ever varies from the Company's
specified ranges.
Proprietary Rights and Patent
The Company uses its proprietary "SeaLock(R)" cooking and fast-freezing
technology to process its products. The SeaLock(R) technology consists of a
patented process and related trade secrets licensed by the Company, along with
complementary trade secrets developed independently by the Company. See "-The
SeaLock(R) Process."
The Company licenses the patent and certain trade secrets involved in its
SeaLock(R) cooking and freezing process under a Patent and Know-How License
Agreement with the inventors of the patented process (the "License"). The
patent, which expires in 1999, is United States Patent No. 4,336,274, described
as "Whole Blue Crab Freezing Process" (the "Patent"). The Patent covers portions
of the
39
<PAGE>
SeaLock(R) process relating to use of a sugar solution to maintain maximum water
content during cooking and chilling, as well as certain aspects of product
storage. The trade secrets covered by the License relate to the application of
the freezing agent to products during the freezing process. In addition, the
Company has developed certain complementary trade secrets relating to the use of
liquid nitrogen as a freezing agent.
The License grants the Company perpetual worldwide rights in the patented
process and related know-how, subject to termination by the Licensors upon an
uncured breach of the License by the Company. The Company's rights under the
License are exclusive until five years after the expiration of the Patent, or
June, 2004. Thereafter, the Company's rights become non-exclusive and its
royalty obligations cease, leaving the Company with a perpetual, fully-paid,
non-exclusive, worldwide license in the licensed technology. Although the
Company's rights under the License are exclusive until 2004, expiration of the
Patent in 1999 will cause the inventions claimed therein to enter the public
domain. In addition, the patent's inventors may elect to license their know-how
relating to the patented components of the SeaLock(R) process to parties other
than the Company, including the Company's competition, after the Company's
rights become non-exclusive in 2004. The Company will continue to maintain,
however, its proprietary nitrogen freezing process, which is not covered by the
patent or the License. The Company believes that the know-how licensed under the
License and that developed independently by the Company will continue to provide
the Company a competitive advantage over competitors after expiration of the
Patent in 1999, and that the trade secrets developed independently and owned by
the Company will continue to provide the Company a competitive advantage over
competitors after the Company's rights to the Patent's inventors' know-how
becomes non-exclusive in 2004. The Company is not aware of any competitor
contemplating use of the patented process after expiration of the Patent or
after the Company's rights in the Patent's inventors' know-how become
non-exclusive, although the Company can offer no assurance that a competitor
will not attempt to do so or, if attempted, succeed in implementing a process
substantially equivalent to the Company's.
The License covers subsequent inventions and patents developed by the
inventors which relate to the process. Under the terms of the License, the
rights to any invention or process developed by the Company are retained by the
Company, although the Company must pay royalties on any such new invention or
process which involves technology similar to the existing patented process. The
License requires royalty payments in the amount of 2% of net sales of whole
frozen lobster and payments varying from 1% to 4% of net sales for other
products, depending on the species of crustacean and location of the sale.
The License authorizes the Company to grant sublicenses for the Patent and
related know-how covered by the License. The Company has granted one such
sublicense for processing blue crabs and crawfish pursuant to the settlement of
litigation. The sublicense is exclusive as to crawfish until one year after
expiration of all applicable patents, but non-exclusive as to blue crab. The
Company has not granted any other sublicenses under the License and has no
current intention to do so.
While expanding and developing the markets for its products, the Company
has emphasized brand identity and recognition. The Company has registered the
names " Claw Island(R)," "SeaLock(R)," and "Down East (R)," with the United
States Patent and Trademark Office effective as of June and May 1993 and April
1994, respectively. United States trademark registrations expire 10 years after
issuance unless properly renewed. The Company also has applied for registration
of its name and brand mark in Japan.
To protect its proprietary process further, the Company enters into
confidentiality agreements with all employees as a condition of employment, and
generally with vendors and visitors to its plants. The agreements prohibit
disclosure of any confidential or proprietary information of the Company and
provide that patents, inventions, processes and other proprietary rights
developed by any employee and related to the Company's business shall belong to
the Company. The Company is not aware of any material violation
40
<PAGE>
of any such agreement or of any other inappropriate disclosure of the Company's
confidential or proprietary information.
The Company believes that its success depends in part on its ability to
protect its proprietary process through trade secret laws and non-disclosure and
confidentiality agreements with its employees and certain other persons who have
access to the SeaLock(R) processing technology and to a lesser extent on the
enforcement of the Patent. No assurance can be given that others will not
independently develop substantially equivalent technology to the Company's or
otherwise gain access to or disclose the Company's proprietary technology, or
that the Company will be able to protect its rights in such unpatented
proprietary technology adequately. There can be no assurance that the Patent
will provide the Company with significant competitive advantages, or that
challenges will not be instituted against the validity or enforceability of the
Patent or, if instituted, that such challenges will not be successful. The cost
of litigation to uphold the validity of a patent and enforce it against
infringement can be substantial. In addition, there can be no assurance that
others will not independently develop similar technologies or duplicate the
Company's process, or design around the patented aspects of the process. Neither
the Company nor the owners of the Patent hold any foreign patents regarding the
SeaLock(R) process. Furthermore, the Company has not obtained an opinion of
counsel regarding the degree of patent protection within the United States.
There can be no assurance that the Company can protect its proprietary rights
adequately. See "Risk Factors - Proprietary Rights."
Competition
The markets in which the Company sells its products are highly competitive.
The Company's whole lobster products are sold in competition with live lobsters,
frozen lobsters and other frozen seafood products. The Company also competes
with other upscale entrees, such as steak and certain other seafood items. In
the whole lobster market, the Company competes principally with the network of
live lobster dealers, which is fragmented. Some of the Company's future products
may compete with conventionally frozen crustacean products. Conventionally
frozen lobster products consist principally of lobster parts, such as tails and
claws, rather than whole lobsters. Some of the conventionally frozen crustacean
products are packaged under well known brands of companies with significantly
greater marketing capabilities and financial and other resources than the
Company. In the upscale entree market generally, the Company competes with a
broad spectrum of wholesale and retail vendors, many of which have substantially
greater resources than the Company. Several larger companies exist,
predominantly in Canada, which produce conventionally frozen lobster products.
Although the Company believes that it currently does not compete significantly
with these Canadian companies, because these companies' sales are predominantly
outside the United States, the Company may compete with such companies if and
when the Company expands its international sales, or if these companies choose
to market their products in the United States. These larger companies have
substantially greater financial and other resources than the Company. The
Company believes that it can compete in the sale of its products on the basis of
superior taste and texture, price (during most periods of the year and in most
locations), consistent quality, and convenience. The Company also intends to
compete on the basis of brand name awareness. There can be no assurance that
others will not develop similar technology which may compete with the Company's.
See "Risk Factors - Proprietary Rights" and "-Dependence on Key Products and
Technology; Market Acceptance."
Because the Company's principal competition for whole frozen lobsters and
other frozen lobster products is highly fragmented, and because the Company
believes its SeaLock(R) products to be superior to conventionally frozen lobster
products, the Company believes it is positioned to compete favorably in the
frozen lobster market, although there can be no assurance the Company will do
so. Measured by domestic
41
<PAGE>
sales, the Company believes it is the largest U.S. producer of cooked, frozen,
whole lobsters. Although the Company also anticipates competing internationally
based on product superiority and increasing brand recognition, the Company
believes competition in the European and Asian markets for frozen lobster
products may be somewhat more difficult than domestic competition due to the
established market presence of several frozen lobster product producers.
Potential Product Liability and Recall; Insurance
The sale of food products for human consumption involves the risk of injury
to consumers as a result of product contamination or spoilage. No assurance can
be given that some food products sold by the Company may not contain or develop
harmful substances. The Company's products also may become damaged or spoiled
during storage, handling or transportation. In the event that one or more lots
of the Company's products was to become spoiled or contaminated for any reason,
and a consumer was to become ill due to his or her consumption of the product,
the Company may be subject to product liability or other claims by the consumer
and/or regulatory agencies. The Company maintains product liability insurance
coverage of $1.0 million per incident and $2.0 million in the aggregate, which
the Company considers adequate against such claims and the Company believes is
consistent with industry practice. However, in the event damages were awarded
against the Company in excess of such insurance coverage, the Company would be
adversely affected. Further, in the event that a lot or shipment of the
Company's products were to become spoiled or contaminated for any reason, the
Company may be forced to recall and destroy the affected lots of product, at
possible significant costs, depending on the extent of any contamination. Such
an event could delay the production and shipment of products to the Company's
customers and could adversely affect the Company. The level of insurance
coverage obtained by the Company generally is determined by requirements of its
customers, who may be named as additional insureds under the insurance policy.
The Company provides an unconditional satisfaction guarantee for all of its
products. See "Description of Business - Marketing and Customers."
To help ensure product safety and freshness, each of the Company's
manufacturing facilities operates under a government-certified and audited,
self-monitoring, documented quality assurance program. These programs currently
are voluntary, although the Company anticipates implementation of mandatory
compliance requirements in the United States and Canada within the next 18
months.
The Company's quality assurance program in Maine is known as "HACCP"
("Hazard Analysis, Critical Control Points") certification and is implemented by
the National Marine Fisheries Service, under authority of the United States Food
and Drug Administration. The Company's Canadian program is known as "QMP"
("Quality Management Program") and is implemented by the Canadian Department of
Fisheries and Oceans. Each program is intended to document procedures to
identify hazards associated with raw materials and the critical process points
at which product risks occur relative to consumer health or fraud. The Company
employs monitoring procedures specifying inspection frequency and all corrective
actions taken. Both programs cover all aspects of processing, from receiving and
handling raw materials to labeling and shipping finished goods.
Each facility's program also specifies product recall procedures. Each
day's production has a specific lot number, with all product cases marked
correspondingly. The Company can track each lot from the Company's manufacturing
facility to the customer. This tracking system would enable the Company, if
required to conduct a recall, to limit the recall to affected lots, without
implicating unaffected lots. The Company has never had to conduct a product
recall. See "Risk Factors - Potential Product Liability and Recall; Insurance."
42
<PAGE>
In addition to providing additional safety assurance, the Company's HACCP
and QMP certifications facilitate product importing and exporting, providing the
Company a competitive advantage over non- certified competitors. Import and
export processes can be considerably slower and more burdensome for
non-certified exporters, against whom import and export officials often conduct
sampling and other inspections not required of certified exporters.
Government Regulation
The Company is subject to various laws and regulations relating to the
operation of its production facilities, the production, packaging, labeling and
marketing of its products, and pollution control, which are administered by
federal, state, and other governmental agencies. The Company's production
facilities in Maine are subject to regular inspection by the National Marine
Fisheries Service, under authority of the United States Food and Drug
Administration, the United States Environmental Protection Agency, the Maine
Department of Environmental Protection and the Maine Department of Marine
Resources. The Company's production in Canada is subject to regulation by the
Canadian Department of Fisheries and Oceans and the Nova Scotia Department of
Labor. Additionally, regulatory requirements come under periodic review and may
become more burdensome on the Company in the future. Although the Company
believes it has been in compliance to date, failure of the Company to comply
with existing or future regulations applicable to its operations could have a
material adverse effect on the Company's business and financial performance. See
"Risk Factors - Government Regulation."
Employees
The Company currently has five salaried employees and two year-round hourly
employees. The Company's two principal executive officers, Corporate Controller
and two hourly employees, are based at the Company's headquarters in Raleigh,
North Carolina. The other two salaried employees are an administrator and a
production supervisor at the Company's Vinalhaven, Maine processing facility.
During the Company's production periods, the Company hires 40-50 hourly
employees for processing product at the Company's processing facilities in
Vinalhaven, Maine and Lockeport, Nova Scotia. The Company believes that its
relationship with its employees is satisfactory.
The Company intends to use a portion of the net proceeds of the Offering to
hire three sales personnel. The Company believes that its existing sales
network, together with these additional personnel, will be sufficient to support
the level of sales anticipated by the Company to be achieved based on Maine
lobster inventory purchases in the Company's fiscal 1997. See "Use of Proceeds."
Facilities
The Company leases its corporate headquarters, which occupy approximately
3,500 square feet of an office building in Raleigh, North Carolina, at a rate of
approximately $1,900 per month. The Company leases its processing facility in
Maine from the Town of Vinalhaven, Maine. That facility is an existing fish
processing plant located on the waterfront, with approximately 8,000 square feet
of usable space at a rate of approximately $1,600 per month. The Maine lease
expires in October, 1998, with an option to renew for five additional years at
adjusted lease rates. The Company's Lockeport processing facility has
approximately 3,500 square feet of usable space at a rate of approximately $930
per month (based on an exchange rate of $1.345 Canadian to $1.00 U.S.). The
Company subleases its Lockeport facility under a month-to-month sublease. The
Company believes all leased facilities are in satisfactory condition,
adequate for the purposes for which they are leased, and adequately covered by
insurance.
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<PAGE>
The Company believes that it could add a third facility with production
capacity equivalent to that of each of the Company's other manufacturing
facilities on a cost-effective basis with capital expenditures of less than
$500,000. The Company also anticipates the possible need to establish new
production facilities in geographic proximity to the natural habitats of new
crustacean species the Company elects to produce, if any. However, the Company
believes that the incremental cost of establishing such facilities will be
cost-effective, and that each such new facility will be able to take full
advantage of the Company's established technology and distribution systems. The
Company does not have current plans to add any new facilities.
Legal Proceedings
The Company is not involved in any legal proceedings considered by
management to be material.
DIRECTORS AND EXECUTIVE OFFICERS
General
The following table sets forth the names, ages and positions with the
Company of the Company's directors, executive officers and key employees:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Kevin J. Migdal(1)(2)..................... 48 President, Chief Executive Officer, Treasurer and Director
Edgar R. Hardy............................ 49 Vice-President of Operations
Dennis J. Dougherty(1).................... 48 Secretary
Laynette J. Rustin........................ 28 Corporate Controller
David B. Jenkins(2)(3).................... 66 Director
William P. Rice(2)(3)..................... 52 Director
Stephen H. Warhover(2)(3)................. 52 Director
Randolph D. Werner(1)(2)(3)............... 47 Director
</TABLE>
- --------------------
(1) Member of the Executive Committee of the Board of Directors.
(2) Member of the Audit Committee of the Board of Directors.
(3) Member of the Compensation Committee of the Board of Directors.
The Company's Board of Directors currently consists of a single class,
elected annually at the Company's annual meeting of stockholders, each to hold
office until the next annual meeting of stockholders and thereafter until his
successor is chosen and qualified. The Company's Certificate of Incorporation,
as amended, provides for the size of the Company's Board of Directors to be
determined according to the Company's By-Laws. The Company's By-Laws fix a range
for the size of the Company's Board of Directors at between one and nine
members, as determined from time to time by the Board. The Company's Board
currently consists of five members and has no vacancies. The Company's Board has
formed Executive, Audit and Compensation Committees constituted as specified
above.
The Company has agreed that, for the three years after the effective date
of this Prospectus, the Representative will have the right to designate one
individual to be elected to the Company's Board of Directors. See
"Underwriting."
44
<PAGE>
Kevin J. Migdal joined the Company as a Director and its Chief Executive
Officer in June 1991. Mr. Migdal was appointed President of the Company in
January 1992 and Treasurer in June 1992. From 1984 to 1991, Mr. Migdal was Vice
President of Sales and Marketing at GoodMark Foods, Inc., a publicly-held snack
manufacturer. From 1974 to 1983, Mr. Migdal held sales and marketing positions
with General Mills, Inc. in its GoodMark Foods division.
Edgar R. Hardy joined the Company as Vice-President of Operations in
January 1992. Before joining the Company, Mr. Hardy was the Corporate Manager of
Research and Development with GoodMark Foods, Inc., a publicly-held snack
manufacturer, where he worked from 1976 to 1992. Prior to joining GoodMark, Mr.
Hardy, who holds B.S. and M.S. degrees in Food Science, held various food
industry positions in which he was responsible for product development, process
and quality controls, and research and development.
Dennis J. Dougherty served as a Director of the Company from 1990 until
December 1995 and has served as its Secretary since December 1995. He is the
founder and has served as General Partner of Intersouth Partners, a venture
capital firm and principal stockholder of the Company, since 1984. Mr. Dougherty
was a partner with Touche Ross & Co., from 1981 to 1984, and a small business
consultant with Deloitte, Haskins and Sells from 1976 to 1981. He currently
serves on the Board of Cardiovascular Diagnostics, Inc., a publicly-held medical
diagnostics device firm, and is a director of several privately held companies.
Laynette J. Rustin, a certified public account, joined the Company in
September 1994 as Corporate Controller. Prior to joining the Company, Ms. Rustin
spent three years in public accounting with Arthur Andersen LLP, where she
assisted small business and venture capital clients and was the leader of the
Company's audit team. She also assisted in a family-owned produce business for
several years. Ms. Rustin holds a B.S. in Business Administration and a Masters
in Accounting.
David B. Jenkins joined the Company as a Director in 1994. Mr. Jenkins is
the retired Chairman and Chief Executive Officer of Shaw's Supermarkets, Inc.
and most recently a director of J. Sainsbury International. He currently acts as
an independent consultant to the retail industry and serves on the Board of
Directors for Nabisco Holdings Corp., Chatham Village Foods, Foreside Co., and
Citizens Financial Group. Mr. Jenkins is also a past chairman of the Uniform
Code Council and past Vice Chairman of the Food Marketing Institute. Shaw's
Supermarkets, Inc., Nabisco Holdings Corp. and Citizens Financial Group are
publicly-held companies.
William P. Rice joined the Company as a founding Director in 1989 and is a
former Chairman of the Board. Since 1983 he has been the President and Chief
Executive Officer of Anchor Capital Advisors, Inc., which is registered as an
Investment Advisor under the Investment Advisers Act of 1940. Mr. Rice is a
trustee of Anchor Venture Trust II, a principal stockholder of the Company.
Since 1989 he has been President and Chief Executive Officer of
Anchor/Russell Capital Advisors, Inc., which is registered as an Investment
Advisor under the Investment Advisers Act of 1940. Mr. Rice also currently
serves as a director of several other privately held companies.
Stephen H. Warhover joined the Company as a Director in March, 1995. Since
1986, Mr. Warhover has been President and Chief Executive Officer of
Gorton's Seafoods, a division of Unilever NV. From 1980 to 1986 he was Vice
President and General Manager of the Betty Crocker and Snacks Division of
General Mills, Inc., from whom Unilever purchased Gorton's in 1995. Mr. Warhover
joined General Mills in 1968 and served in a variety of marketing positions in
the company's consumer foods area. He holds an A.B. degree from Dartmouth
College and an M.B.A. from Northwestern University Graduate School of
Management. Mr. Warhover serves on the Executive Committee of the Associated
Industries of Massachusetts, is on the
45
<PAGE>
Board of Visitors of Northeastern University College of Business Administration,
is a member of the Massachusetts Business Round Table, and is a Trustee of the
National Fisheries Institute's Scholarship Fund. Unilever NV and General Mills,
Inc. are publicly-held companies.
Randolph D. Werner joined the Company as a Director in 1994. Since 1989,
Mr. Werner has managed the Boston office of Dominion Ventures, Inc., a venture
capital firm. Dominion Ventures II, an affiliate of Dominion Ventures, Inc., is
a principal stockholder of the Company. Before joining Dominion, Mr. Werner
served as Vice-President of Boston Financial & Equity Corporation.
Directors' Compensation
The directors of the Company do not currently receive a fee for attending
meetings of the Board of Directors but are reimbursed by the Company for their
direct costs. The Company from time to time also has granted directors stock
options under the Company's Non-Qualified Stock Option Plan. See "Security
Ownership of Certain Beneficial Owners and Management" and "-Stock Option Plan."
Limitation on Officers' and Directors' Liabilities; Indemnification
The Company's Certificate of Incorporation and By-Laws contain provisions
exculpating the Company's directors from personal liability to the Company's
stockholders for certain actions taken or omitted by them and indemnifying the
Company's officers and directors against judgments, fines, amounts paid in
settlement and reasonable attorneys' fees incurred in the defense of certain
actions and proceedings to the extent permitted under Delaware law.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the Company has been advised
that in the opinion of the Commission, such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
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<PAGE>
Executive Compensation
The following table summarizes the compensation paid by the Company to its
executive officers for the years ended June 30, 1994, 1995 and 1996:
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term Compensation
----------------------------------------------------
Awards Payments
------------------------------ ---------------
Annual Compensation Other Annual Restricted Options/ LTIP All Other
Name and ------------------- Compensation Stock SARs Pay-outs Compensation
Principal Position Year Salary($) Bonus($) ($) Award(s)($) (#) ($) ($)
- ------------------ ---- ------------ ------------ ------------ ----------- ----- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Kevin J. Midgal 1996 $176,000 $0 $0 $0 361,602 $0 $0
President and 1995 $140,000 $0 $0 $0 61,000 $0 $0
Chief Executive 1994 $140,000 $0 $0 $0 0 $0 $0
Officer
Edgar R. Hardy 1996 $85,600 $0 $0 $0 192,854 $0 $0
Vice-President 1995 $85,600 $0 $0 $0 46,200 $0 $0
Operations 1994 $85,600 $0 $0 $0 0 $0 $0
</TABLE>
Option/SAR Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Number of Shares
of Common Stock Percent of Total
Underlying Options/SARs Exercise
Options/SARs Granted to Employees or Base Price Expiration
Name Granted in Fiscal Year ($/Sh) Date
---------------- -------------------- -------------- ----------
<S> <C> <C> <C> <C>
Kevin J. Migdal..................... 361,602 58.9% $1.30 2006
Edgar R. Hardy...................... 192,855 31.4% $1.30 2006
</TABLE>
Employment Agreements
The Company has entered into Employment Agreements with each of Kevin
Migdal and Edgar Hardy. Each Employment Agreement extends for a term of three
years, commencing June 30, 1996 and ending on June 30, 1999. Each agreement may
be terminated by either party, with or without reason, upon appropriate written
notice. Mr. Midgal's Employment Agreement specifies a base salary of $176,000
per year, with a 5% increase each year during its term. Mr. Migdal's Agreement
provides that the Board of Directors will review Mr. Migdal's base salary
annually and may, at its discretion, grant him an increase in excess of 5% based
on such factors as it deems appropriate. In addition, the Board may grant Mr.
Migdal additional benefits and/or additional items of compensation as it deems
appropriate. In the event that Mr. Migdal's Employment Agreement is terminated
by the Company prior to the expiration of the employment term, the Agreement
obligates the Company to pay Mr. Migdal severance pay in an amount equal to nine
months' base salary plus two weeks of base salary for each year of service with
the Company. In the event of such a termination, the Company also must pay Mr.
Migdal's COBRA premium either for a period of nine months or until Mr. Migdal is
no longer eligible for such benefits, whichever is earlier. Mr. Hardy's
Employment Agreement specifies a base salary of $85,600 per year, with a 5%
increase in his base salary each year during its term. Mr. Hardy's Agreement
provides that the Board of Directors
47
<PAGE>
will review Mr. Hardy's base salary annually and may, at its discretion, grant
him an increase in excess of 5% based on such factors as it deems appropriate.
In addition, the Board may grant Mr. Hardy additional benefits and/or additional
items of compensation as it deems appropriate. In the event that Mr. Hardy's
Employment Agreement is terminated by the Company prior to the expiration of the
employment term, the Agreement obligates the Company to pay Mr. Hardy severance
pay in an amount equal to nine months' base salary plus two weeks of base salary
for each year of service with the Company. In the event of such a termination,
the Company also must pay Mr. Hardy's COBRA premium either for a period of nine
months or until Mr. Hardy is no longer eligible for such benefits, whichever is
earlier. See "-Executive Compensation."
Key Man Insurance
The Company has obtained "key man" insurance policies for which it is the
beneficiary in the amounts of $500,000 for Kevin Migdal, its President, Chief
Executive Officer and Treasurer, and $500,000 for Edgar Hardy, its Vice
President Operations.
Stock Option Plan
The Company adopted a Non-Qualified Stock Option Plan in July 1992 (the
"Plan"). The Plan authorizes the Company to grant options to purchase shares of
Common Stock to eligible employees, officers, directors, and consultants as an
incentive to such persons to continue their relationships with the Company and
to give such persons a greater interest in the Company's success. The purchase
price of shares covered by the options may not be less than 85% of the shares'
fair market value at the time of grant. Options granted pursuant to the Plan may
not be exercised before one year after the date of grant. The stock option
agreements entered into between the Company and its grantees may specify
additional vesting requirements.
Pursuant to the Plan, the Company from time to time has entered into such
option agreements with certain of the Company's officers, directors and
employees. At June 30, 1996, and after giving effect to the 5.2:1 reverse stock
split contemplated to occur simultaneously with the completion of the Offering,
options under the Plan to purchase an aggregate of 650,743 shares of Common
Stock were outstanding having a weighted average exercise price of approximately
$2.03 per share, and no shares of Common Stock were available for additional
options under the Plan. See "Description of Securities," "-Executive
Compensation," and "Principal Stockholders."
The Company anticipates adopting a new stock option plan with non-qualified
and incentive stock option components prior to completion of the Offering,
pursuant to which the Company will be able to grant non-qualified options or
options intended to be "incentive stock options" ("ISO") under Section 422A of
the Internal Revenue Code. The Company anticipates the non-qualified component
of the plan will be substantially similar to the Company's current non-qualified
plan. Under the ISO portion, option exercise prices will be no less than the
fair market value of the underlying Common Stock on the date of grant (110% of
fair market value for 10% or greater stockholders). Options under the ISO
portion will not be exercisable later than 10 years from the date of grant (five
years for 10% or greater stockholders). Such options will not be transferable
other than by will or the laws of descent and distribution, and during the
optionee's lifetime will be exercisable only by the optionee. Generally, options
granted under the ISO portion will be required to be exercised (if at all)
within three months after termination of the optionee's employment (for reasons
other than disability or death), within one year after the optionee's death or
disability, or within 10 years after the date of grant.
48
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of June 30, 1996, certain information
with respect to the beneficial ownership of the outstanding shares of Common
Stock and such ownership as adjusted to reflect the sale of the Common Stock
pursuant to the Offering by (i) any shareholder known by the Company to be the
beneficial owner of more than five percent of the outstanding shares, (ii) the
Company's directors, (iii) the named executive officers, and (iv) all directors
and executive officers of the Company as a group. Except as otherwise indicated,
the persons or entities listed below have sole voting and investment power with
respect to all shares of Common Stock owned by them and have an address at the
executive offices of the Company.
<TABLE>
<CAPTION>
Percentage of Shares
Beneficially Owned(1)
-----------------------------------------------------
Shares
Beneficially Before the After the
Name and Address Owned(1) Offering Offering
------------ ---------- ---------
<S> <C> <C> <C>
Kevin J. Migdal..................................... 396,013(2)(12) 20.25% 12.55%
Edgar R. Hardy...................................... 208,039(3)(12) 11.67% 6.98%
Dennis J. Dougherty................................. 293,915(4) 18.07% 10.40%
David B. Jenkins.................................... 40,953(5) 2.57% 1.47%
William P. Rice..................................... 239,753(6) 14.72% 8.47%
Randolph D. Werner.................................. 539,682(7) 31.18% 18.41%
Stephen H. Warhover................................. 18,842(8) 1.19% .68%
Anchor Venture Trust II............................. 239,753(9) 14.72% 8.47%
One Post Office Square, Suite 3850
Boston, Massachusetts 02109
Dominion Fund II, L.P............................... 539,682(10) 31.18% 18.41%
Dominion Ventures
60 State Street, 21st Floor
Boston, Massachusetts 02109
Alan Harp Trust..................................... 181,329 11.46% 6.52%
c/o L. Bruce McDaniel, Trustee
4942 Windy Hill Drive
Raleigh, North Carolina 27658
Intersouth Partners II, L.P......................... 293,915(11) 18.07% 10.40%
1000 Park Forty Plaza, Suite 290
Research Triangle Park, North Carolina 27709
All executive officers and directors ............... 1,737,196 72.00% 48.08%
as a group (7 persons) (2)(3)(4)(5)(6)(7)(8)
</TABLE>
- --------------------
(1) The shares of Common Stock and voting rights owned by each person or by all
directors and executive officers as a group, and the shares included in the
total number of shares of Common Stock outstanding used to determine the
percentage of shares of Common Stock owned by each person and such group,
have been adjusted in accordance with Rule 13d-3 under the Securities
Exchange Act of 1934, as amended, to reflect the ownership
49
<PAGE>
of shares issuable upon exercise of outstanding options, warrants or other
common stock equivalents which are exercisable within 60 days. As provided
in such Rule, such shares issuable to any holder are deemed outstanding for
the purpose of calculating such holder's beneficial ownership but not any
other holder's beneficial ownership.
(2) Includes options exercisable at $13.00 per share to acquire 11,706 shares
of Common Stock and options exercisable at $1.30 per share to acquire
361,602 shares of Common Stock.
(3) Includes warrants exercisable at $17.68 per share to acquire 573 shares of
Common Stock, options exercisable at $13.00 per share to acquire 6,404
shares of Common Stock, and options exercisable at $1.30 per share to
acquire 192,855 shares of Common Stock.
(4) Consists of shares of Common Stock owned by Intersouth Partners II, L.P.,
of which Mr. Dougherty is an affiliate.
(5) Includes warrants exercisable at $17.52 per share to acquire 2,881 shares
of Common Stock, warrants exercisable at $2.60 per share to acquire 3,847
shares of Commons Stock, options exercisable at $13.00 per share to acquire
1,481 shares of Common Stock, and options exercisable at $1.30 per share to
acquire 2,962 shares of Common Stock.
(6) Includes warrants exercisable at $25.74 per share to acquire 1,822 shares
of Common Stock, warrants exercisable at $17.68 per share to acquire 8,215
shares of Common Stock, warrants exercisable at 2.60 per share to acquire
19,231 shares of Common Stock, options exercisable at $13.00 per share to
acquire 741 shares of Common Stock, and options exercisable at $1.30 per
share to acquire 1,481 shares of Common Stock. Also includes shares of
Common Stock and exercisable warrants owned by Anchor Venture Trust II, of
which Mr. Rice is an affiliate. See footnote 9.
(7) Consists of shares of Common Stock and exercisable warrants owned by
Dominion Fund II, L.P., of which Mr. Werner is an affiliate. See footnote
10.
(8) Includes warrants exercisable at $17.68 per share to acquire 1,415 shares
of Common Stock, warrants exercisable at $2.60 per share to acquire 1,924
shares of Common Stock, and options exercisable at $1.30 per share to
acquire 2,962 shares of Common Stock.
(9) Includes warrants exercisable at $15.55 per share to acquire 626 shares of
Common Stock and warrants exercisable at $43.52 to acquire 14,805 shares of
Common Stock. Also includes shares of Common Stock owned by William P.
Price, an affiliate of Anchor Venture Trust II and a director of the
Company. See footnote 6.
(10) Includes warrants exercisable at $28.91 per share to acquire 15,609 shares
of Common Stock, warrants exercisable at $43.52 per share to acquire 9,039
shares of Common Stock, warrants exercisable at $26.00 per share to acquire
30,462 shares of Common Stock, warrants exercisable at $17.68 per share to
acquire 27,290 shares of Common Stock, warrants exercisable at $13.00 per
share to acquire 20,177 shares of Common Stock, warrants exercisable at
$2.60 per share to acquire 46,154 shares of Common Stock.
(11) Includes warrants exercisable at $15.55 per share to acquire 5,625 shares
of Common Stock, warrants exercisable at $43.52 per share to acquire 5,802
shares of Common Stock, warrants exercisable at $25.74 per share to acquire
2,049 shares of Common Stock, warrants exercisable at $17.68 per share to
acquire 3,933 shares of Common Stock, and warrants exercisable at $2.60 per
share to acquire 26,924 shares of Common Stock.
(12) These stockholders have granted to the Underwriters an option to purchase
shares of Common Stock to cover over-allotments, if any. Such shares will
not be sold unless the Underwriters exercise the Underwriters' Over-
Allotment Option. If such over-allotment option is exercised in full, the
Company, Mr. Migdal and Mr. Hardy will sell 120,000, 40,000 and 20,000,
respectively, additional shares of Common Stock.
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<PAGE>
CERTAIN TRANSACTIONS
The following is a discussion of certain transactions entered into by the
Company with directors, officers, principal securityholders and affiliates
thereof, during the last two years. The Company believes that the terms of these
transactions were no less favorable to the Company than would have been obtained
from non-affiliated third parties for similar transactions at the time of
entering into such transactions.
Following its formation in early 1989 and continuing through mid-1994, the
Company has issued various equity and debt securities through private placements
to finance its operations. The Company's principal securityholders include
Anchor Venture Trust II ("Anchor"), Dominion Fund II, L.P. ("Dominion"),
Intersouth Partners II, L.P. ("Intersouth"), and the Alan Harp Trust ("Harp
Trust"). William Rice, a director of the Company, is an affiliate of Anchor.
Randolph Werner, a director of the Company, is an affiliate of Dominion. Dennis
Dougherty, Secretary of the Company, is an affiliate of Intersouth. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Security Ownership of Certain Beneficial Owners and
Management."
In September 1994, the Company obtained loans (the "1994 Inventory Loans")
in an aggregate principal amount of $350,000 from the following parties:
Dominion ($150,000), Intersouth ($100,000), and William Rice ($100,000).
Subsequently, these loans were converted into equity securities in connection
with the Company's Series D Preferred Stock financing described below.
In December 1994, the Company sold units of its securities at a price of
$17.68 per unit, with each unit comprised of .19 share of the Company's Series D
Preferred Stock and one warrant to purchase .08 shares of Series D Preferred
Stock at $17.68 per share. An aggregate of 261,342 units were sold, including to
the following parties: Dominion (195,888 units), Intersouth (32,552 units), and
William Rice (32,552 units). In connection with this financing, the Company
entered into agreements with the purchasers of the units, pursuant to which the
purchasers were granted certain registration rights and certain pre-emptive
rights. Also in connection with this financing, the Company entered into a
stockholders agreement with Anchor, Dominion, Intersouth, Kevin Migdal and Edgar
Hardy providing for the election of directors and certain other matters, which
terminates upon the consummation of the Offering. A portion of the units were
purchased by conversion of the 1994 Inventory Loans. See "Description of
Securities."
In March 1995, the Company granted options to certain management of the
Company to purchase shares of Common Stock at $13.00 per share, including to the
following persons: Kevin Migdal (11,731 shares), Edgar Hardy (8,885 shares),
David Jenkins (2,962 shares), and William Rice (1,481 shares). See Securities
Ownership Certain Beneficial Owners and Management."
In June 1995, the Company obtained loans (the "1995 Inventory Loans") from
certain existing investors and management in an aggregate principal amount of
$515,000, including from the following parties: Dominion ($295,000), Intersouth
($25,000), Edgar Hardy ($10,000), David Jenkins ($50,000), Kevin Migdal
($10,000), and William Rice ($100,000). Under the initial terms of the 1995
Inventory Loans, the loans accrued interest at 14% per annum and were payable in
60 days, subject to certain prepayment provisions. As of June 30, 1995, the
outstanding principal amount of the 1995 Inventory Loans was $342,500. In July
1995, the terms of the 1995 Inventory Loans were amended, except for the loan
from Mr. Migdal, which subsequently was repaid. Following this amendment, 1995
Inventory Loans were outstanding in an aggregate principal amount of $457,500,
including to the following parties: Dominion ($212,500), Intersouth ($25,000),
Kevin Migdal ($10,000), Edgar Hardy ($10,000), David Jenkins ($50,000), William
Rice ($100,000), and Stephen Warhover ($25,000). Under the amended terms of the
1995 Inventory Loans, the loans accrued interest at 14% per annum and were
payable on October 31, 1995, with interest increasing to 16% after maturity. In
connection with the amendment of the 1995 Inventory Loans, the Company issued to
the lenders as additional consideration warrants to purchase an aggregate
51
<PAGE>
of 15,379 shares of Common Stock at $17.68 per share, including to the following
parties: Dominion (7,333 shares), Intersouth (857 shares), Edgar Hardy (344
shares), David Jenkins (1,713 shares), William Rice (3,426 shares), and Stephen
Warhover (849 shares). Under the terms of the amended 1995 Inventory Loans, the
lenders were entitled to receive additional warrants if the loans were not paid
at maturity. Because the loans were not repaid at maturity, on November 1, 1995
the interest rate increased to 16% per annum and the Company issued to the
lenders additional warrants to purchase an aggregate of 10,251 shares of Common
Stock at $17.68 per share, including to the following parties: Dominion (4,888
shares); Intersouth (571 shares); Edgar Hardy (229 shares); David Jenkins (1,142
shares); William Rice (2,284 shares), and Stephen Warhover (566 shares) (such
warrants, together with the warrants issued in July 1995 in connection with the
1995 Inventory Loans, being referred to as the "Inventory Loan Warrants"). All
of the remaining 1995 Inventory Loans subsequently were converted into capital
stock in connection with the Company's Series E Preferred Stock financing
described below, except for the loan from Mr. Hardy which was repaid. However,
the Inventory Loan Warrants remain outstanding. In connection with the 1995
Inventory Loans, the Company entered into an agreement with the lenders,
pursuant to which the lenders were granted certain registration rights with
respect to the Inventory Loan Warrants. See "Description of Securities."
In December 1995, the Company entered into a Master Purchase Agreement with
Dominion, whereby Dominion agreed to accept certain purchase orders submitted by
customers to the Company, up to $1.3 million, and Dominion agreed to purchase a
corresponding amount of product inventory from the Company to fill such purchase
orders. Under such Master Purchase Agreement, Dominion purchased $874,333 of
inventory and the Company issued to Dominion warrants to purchase 20,177 shares
of Common Stock at a purchase price of $13.00 per share (the "Purchase Agreement
Warrants"). Pursuant to the terms of the Purchase Agreement Warrants, the
Company granted to Dominion certain registration rights with respect to such
warrants. Pursuant to the terms of such Master Purchase Agreement,
contemporaneously with the Company's Series E Preferred Stock financing
described below, the Company also issued to Dominion 15,385 shares of Series E
Preferred Stock as additional consideration. See "Description of Securities."
During the period between February and April 1996, the Company obtained
loans (the "1996 Bridge Loans") in an aggregate principal amount of
approximately $685,000, including from the following parties: Dominion
($405,000), Intersouth ($70,000), David Jenkins ($10,000), William Rice
($50,000) and Stephen Warhover ($5,000). Subsequently, the 1996 Bridge Loans
were converted into capital stock of the Company in connection with the
Company's Series E financing. As consideration for such conversion of 1996
Bridge Loans in an aggregate principal amount of $400,000, the Company issued
warrants to the lenders to purchase an aggregate of 153,851 shares of Series E
Preferred Stock at a price of $2.60 per share, including to the following
parties: Dominion (46,154 shares), Intersouth (26,924 shares), David Jenkins
(3,847 shares), William Rice (19,231 shares), and Stephen Warhover (1,924
shares). In connection with such transaction, the Company granted to the
investors certain registration rights with respect to the Series E warrants. See
"Description of Securities."
In March 1996, the Company granted options to certain management of the
Company to purchase shares of Common Stock at $1.30 per share, including to the
following persons: Kevin Migdal (361,602 shares); Edgar Hardy (192,855 shares);
David Jenkins (2,962 shares); William Rice (1,481 shares); and Stephen Warhover
(2,962 shares). See "Security Ownership of Certain Beneficial Owners and
Management."
In March 1996, the Company commenced its Series E Preferred Stock financing
at $2.60 per share, which resulted in the issuance in June 1996 of an aggregate
of approximately 1.1 million shares of its Series E Preferred Stock. Of those
shares, 502,864 shares were purchased for cash, and 630,988 shares were issued
upon the conversion of indebtedness of the Company, including 1996 Inventory
Loans and 1996 Bridge Loans. Participants in this financing included: Anchor
(29,970 shares), Dominion (285,965 shares),
52
<PAGE>
Intersouth (175,155 shares), Harp Trust (172,324 shares), David Jenkins (29,782
shares), William Rice (118,741 shares), and Stephen Warhover (12,541 shares). In
connection with the Series E Preferred Stock transaction, the Company granted to
the Series E investors certain registration rights and certain pre-emptive
rights with respect to the Series E Preferred Stock. See "Description of
Securities."
All of the shares of the Company's Series C, Series D and Series E
Preferred Stock described above will be converted into Common Stock
contemporaneously with the closing of the Offering, into the same number of
shares as reflected above. Also, all warrants exercisable for shares of
Preferred Stock will become warrants to purchase Common Stock for the same
number of shares and at the same exercise prices reflected above.
DESCRIPTION OF SECURITIES
Background
In ___________, 1996 the Board of Directors and stockholders of the Company
approved certain amendments to the Company's Certificate of Incorporation, which
will become effective contemporaneously with the completion of the Offering.
These amendments, together with certain other terms of the Company's Certificate
of Incorporation, as so amended, will have the effect of recapitalizing the
Company contemporaneously with the completion of the Offering. Pursuant to the
Company's Certificate of Incorporation, as so amended, all issued and
outstanding shares of the Company's Preferred Stock (consisting of Series C,
D and E Preferred Stock) will be converted automatically into shares of Common
Stock (at conversion rates determined according to the Company's Certificate of
Incorporation, as so amended) contemporaneously with and as a result of
completion of the Offering. In addition, the amendments will effect a 5.2-for-1
Common Stock reverse split contemporaneously with the completion of the
Offering, pursuant to which all issued and outstanding Common Stock will be
reclassified and changed, with the result that every 5.2 shares of Common Stock
will be combined into and become one share of Common Stock.
Common Stock
The Company is authorized to issue _______________ shares of Common Stock,
par value $.01 per share. As of June 30, 1996, 249,368 shares of Common Stock
were issued and outstanding, held of record by eight stockholders. After
completion of the Offering and the occurrence of the reclassification and
reverse stock split, 2,782,233 shares of Common Stock will be outstanding
(2,902,233 if the Underwriters' Over-Allotment Option is exercised in full).
Holders of Common Stock are entitled to dividends as and when declared by the
Board of Directors from funds legally available therefor and, upon liquidation,
dissolution or winding up of the Company, to share ratably in all assets
remaining after payment of all liabilities, subject to the prior rights of the
holders of outstanding shares of preferred stock, if any. Holders of Common
Stock do not have preemptive rights and are entitled to one vote for each share
of Common Stock held of record by them. The Common Stock is not redeemable and
does not have any conversion rights. All of the outstanding Common Stock is
fully paid and non-assessable.
Preferred Stock
The Company has _______________ authorized shares of preferred stock. As of
June 30, 1996, there were issued and outstanding 1,648,395 shares of Series C
Preferred Stock, held of record by 54 stockholders; 365,880 shares of Series D
Preferred Stock, held of record by four stockholders; and 5,975,902 shares of
Series E Preferred Stock, held of record by 37 stockholders. Contemporaneously
with the completion of the Offering, all of the issued and outstanding shares of
preferred stock of each series
53
<PAGE>
will convert automatically into an aggregate total of 1,534,274 shares of Common
Stock (the "Preferred Stock Conversion").
Upon completion of the Offering and the Preferred Stock Conversion, none of
the Company's ____________ authorized shares of preferred stock will be
outstanding. Thereafter, the Board of Directors of the Company will have
authority to issue such shares of preferred stock and to fix the rights,
preferences, privileges and restrictions thereof without having to obtain the
consent or approval of any person or class of security holders. These rights or
privileges could materially adversely affect the voting power of the holders of
the Common Stock. The ability to issue such preferred stock provides desirable
flexibility in connection with possible acquisitions and other corporate
purposes. However, potential acquirors of the Company may find it more difficult
or be discouraged from attempting to effect an acquisition transaction with the
Company, thereby possibly depriving holders of the Securities of certain
opportunities to sell or otherwise dispose of such Securities at a premium
pursuant to such transactions. Furthermore, such preferred stock may have other
rights, including economic rights, senior to the Common Stock, and as a result,
the issuance of such stock could have a material adverse effect on the market
value of such Common Stock. The Company has no current plans to issue shares of
preferred stock.
Redeemable Warrants
The Redeemable Warrants will be issued pursuant to an agreement (the
"Warrant Agreement") between the Company and __________________________ (the
"Warrant Agent"). Upon completion of the Offering, the Company will have an
aggregate of _______________ Redeemable Warrants outstanding. The following
discussion of certain terms and provisions of the Redeemable Warrants is
qualified in its entirety by reference to the detailed provisions of the Warrant
Agreement, the form of which has been filed as an exhibit to the Registration
Statement of which this Prospectus is a part.
Each Redeemable Warrant entitles the holder to purchase one share of Common
Stock at a price of $___________________ [120% of the initial public offering
price of the Common Stock] per share (the "Exercise Price") commencing
___________________, 1997 [13 months after the date of this Prospectus] and
ending ____________________, 2001 [5 years after the date of this prospectus]
(the "Expiration Date"), and is redeemable by the Company at a redemption price
of $.10 at any time after ___________________, 1998 [18 months after the date of
this Prospectus] on not less than 30 days' prior written notice, provided that
the closing sale price of the Common Stock on the principal exchange on which
the Common Stock is traded (if then listed on a national securities exchange) or
the average closing bid quotation for such shares in the over-the-counter market
(if then traded in the over-the-counter market), for a period of 20 consecutive
trading days ending within 10 days prior to the date of the notice of redemption
delivered by the Company, has been at least $_______________ per share [150% of
the initial public offering price of the Common Stock]. The Redeemable Warrants
will be entitled to the benefit of adjustments in the Exercise Price and in the
number of shares of Common Stock and/or other securities delivery upon the
exercise thereof in the event of certain stock dividends, stock splits,
reclassifications, reorganizations, consolidations or mergers and upon certain
issuances of shares of Common Stock, or securities convertible into or
exercisable for shares of Common Stock, at a price per share below the exercise
price of the Common Stock. The Company may at any time decrease the exercise
price of the Redeemable Warrants for a period of not less than _____ days on not
less than _____ days written notice to the holders of the Redeemable Warrants
and the Representative.
On or after the Expiration Date, the Redeemable Warrants will become wholly
void and of no value. The Company may at any time extend the Expiration Date of
all outstanding Redeemable Warrants for such increased period of time as it may
determine. The Redeemable Warrants may be exercised at the office of the Warrant
Agent. If any Redeemable Warrants are called for redemption, such Redeemable
Warrants
54
<PAGE>
must be exercised prior to the close of business on the last day before the date
of such redemption, or the right to purchase the applicable shares of Common
Stock is forfeited.
No holder, as such, of Redeemable Warrants shall be entitled to vote or
receive dividends or be deemed the holder of shares of Common Stock for any
purpose whatsoever until such Redeemable Warrants have been duly exercised and
the Exercise Price has been paid in full.
The Redeemable Warrants provide that the Company shall not be obligated to
issue shares of Common Stock upon exercise of the Redeemable Warrants unless
there is a current prospectus relating to the Common Stock issuable upon the
exercise of the Redeemable Warrants under an effective registration statement
filed with the Commission, and unless such Common Stock is qualified for sale or
exempt from qualification under applicable state securities laws of the
jurisdictions in which the various holders of the Redeemable Warrants reside. In
accordance with the Securities Act, a prospectus ceases to be current nine
months after the date of such prospectus if the information therein (including
financial statements) is more than 16 months old or if there have been other
fundamental changes in the matters discussed in the prospectus. Although the
Company has agreed to use its best efforts to meet such regulatory requirements
in the jurisdictions in which the Securities are sold in the Offering, there can
be no assurance that the Company can continue to meet these requirements. The
Securities are not expected to be qualified for sale or exempt under the
securities laws of all states. Although the Redeemable Warrants will not
knowingly be sold to purchasers in jurisdictions in which the Redeemable
Warrants are not registered or otherwise qualified for sale, purchasers may buy
Redeemable Warrants in the secondary market or may move to jurisdictions in
which the shares of Common Stock issuable upon exercise of the Redeemable
Warrants are not so registered or qualified. In this event, the Company would be
unable legally to issue the shares of Common Stock to those persons desiring to
exercise their Redeemable Warrants unless and until the shares of Common Stock
could be qualified for sale in jurisdictions in which such purchasers reside, or
an exemption from such qualification exists in such jurisdiction. No assurance
can be given that the Company will be able to effect any required registration
or qualification. The value of the Redeemable Warrants could be adversely
affected if a then current prospectus covering the Common Stock issuable upon
the exercise of the Redeemable Warrants is not available pursuant to an
effective registration statement or if such Common Stock is not qualified or
exempt from qualification in the jurisdictions in which the holders of the
Redeemable Warrants reside. Under the terms of the agreement under which the
Redeemable Warrants will be issued, the Company is not permitted to redeem such
warrants unless a current prospectus is available at the time of notice of
redemption and at all times to and including the date of redemption. See "Risk
Factors - Potential Adverse Effect of Redemption of Redeemable Warrants;
Possible Expiration Without Value; Effect of Redeemable Warrants and
Representative's Warrants on Value of Common Stock."
Other Warrants and Options
Upon completion of the Offering, the Company will have outstanding warrants
and options exercisable for an aggregate of 1,025,912 shares of Common Stock at
a weighted average exercise price of $7.68 per share.
Registration Rights
The holders of shares of the Company's Series C Preferred Stock have
"piggyback" rights to include such shares in any registration statement filed by
the Company in respect of the initial public offering of any class or securities
of the Company, additional "piggyback" rights commencing 12 months thereafter,
and "demand" rights to require a single registration by majority action, in each
case subject to certain underwriters' cut-back provisions. The holders of
various outstanding warrants to purchase 155,379 shares
55
<PAGE>
of Common Stock have the same registration rights with respect to their
respective warrants and the underlying shares of Common Stock.
The holders of shares of the Company's Series D Preferred Stock and the
holders of shares of the Company's Series E Preferred Stock have "piggyback"
rights to include such shares in any registration statement filed by the Company
and "demand" rights to require up to two registrations by action of the holders
of not less than 25% of such shares having an aggregate offering price of not
less than $2,000,000, in each case subject to certain underwriters' cut-back
provisions. The holders of various outstanding warrants to purchase 219,790
shares of Common Stock have the same registration rights with respect to the
shares underlying their respective warrants.
The Company has agreed to grant certain registration rights to the holders
of the Representative's Warrants. See "Underwriting."
Participation Rights
The holders of shares of the Company's Series C, D and E Preferred Stock
have pre-emptive rights to participate in each equity security issuance by the
Company, in each case to the extent of each such holder's pro rata share of
ownership of the Company's Common Stock on a fully-diluted basis. See "Certain
Transactions."
In connection with the settlement of certain prior litigation, the Company
entered into a Trust Agreement dated October 20, 1992 pursuant to which the
Company granted the Alan Harp 1992 Trust pre- emptive rights to participate in
each equity security issuance by the Company (subject to certain limited
exceptions), in each case to the extent of the pro rata portion certain shares
of the Company's Common Stock issued in connection with such litigation bear to
the Company's entire outstanding capitalization on a fully-diluted basis. See
"Certain Transactions."
Dividends
To date, the Company has not paid any dividends. The Company does not
anticipate paying any dividends in the foreseeable future. The company intends
to retain any future earnings to finance the growth and development of its
business. Any future determination as to the payment of dividends will be at the
discretion of the Board of Directors and will depend on the Company's operating
results, financial condition, capital requirements and such other factors as the
Board of Directors may deem relevant. In addition, following completion of the
Offering, the Company's Board of Directors will have authority, without
obtaining stockholder approval, to issue shares of preferred stock and to fix
the rights, preferences, privileges and restrictions, including voting rights,
of the preferred stock. Accordingly, the terms of such preferred stock could
provide for preferential dividend rights or otherwise restrict the ability of
the Company to pay dividends to the holders of the Common Stock. See "Dividend
Policy" and "Risk Factors - No Dividends."
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<PAGE>
Delaware Law and Certain Certificate of Incorporation and By-Law Provisions
Following completion of the Offering, the Company's Board of Directors will
have authority, without obtaining stockholder approval, to issue shares of
preferred stock having rights, preferences, privileges and restrictions,
including voting rights, that could materially adversely affect the voting power
of holders of the Common Stock. The ability to issue such preferred stock
provides desirable flexibility in connection with possible acquisitions and
other corporate purposes. However, potential acquirors of the Company may find
it more difficult or be discouraged from attempting to effect an acquisition
transaction with the Company, thereby possibly depriving holders of the
Securities of certain opportunities to sell or otherwise dispose of such
Securities at a premium pursuant to such transactions. Furthermore, such
preferred stock may have other rights, including economic rights, senior to the
Common Stock, and as a result, the issuance of such stock could have a material
adverse effect on the market value of such Common Stock.
The Company has no current plans to issue shares of preferred stock.
The Company may in the future adopt other measures that may have the effect
of delaying, deferring or preventing a change in control of the Company. Certain
of such measures may be adopted without any further vote or action by the
stockholders. The Company has no current plans to adopt any such measures.
Delaware Anti-Takeover Law
Upon completion of the Offering, the Company will be subject to the
provisions of Section 203 of the Delaware General Corporation Law (the
"Anti-Takeover Law") regulating corporate takeovers. The Anti- Takeover Law
prevents certain Delaware corporations from engaging, under certain
circumstances, in a "business combination" (which includes a merger or sale of
more than 10% of the corporation's assets) with any "interested stockholder" (a
stockholder who acquired 15% or more of the corporation's outstanding voting
stock without the prior approval of the corporation's board of directors) for
three years following the date that such stockholder became an "interested
stockholder." A Delaware corporation may "opt out" of the Anti-Takeover Law with
an express provision in its original certificate of incorporation or any express
provision in its certificate of incorporation or bylaws resulting from a
stockholders' amendment approved by at least a majority of the outstanding
voting shares. The Company has not "opted out" of the provisions of the
Anti-Takeover Law.
Transfer Agent, Registrar and Warrant Agent
The Transfer Agent and Registrar for the Common Stock and the Warrant Agent
for the Redeemable Warrants is ________________________________________________.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have 2,782,233 shares of
Common Stock outstanding (2,902,233 shares if the Underwriters' Over-Allotment
Option is exercised in full), assuming an initial public offering price of
Common Stock of $5.50 per share, no exercise of outstanding warrants or options
and excluding the shares of Common Stock issuable upon the exercise of the
Redeemable Warrants and the Representative's Warrants. The 1,200,000 shares of
Common Stock and 1,200,000 Redeemable Warrants sold in the Offering (1,380,000
shares of Common Stock and Redeemable Warrants if the Underwriters'
Over-Allotment Option is exercised in full) and the 1,200,000 shares of Common
Stock issuable upon exercise of the Redeemable Warrants (1,380,000 shares if the
Underwriters' Over-Allotment Option is exercised in full) will be freely
tradable without restriction or future registration under the
57
<PAGE>
Securities Act except for Securities purchased by "affiliates" of the Company as
that term is defined in Rule 144 promulgated under the Securities Act ("Rule
144"), which Securities will be subject to the resale limitations of Rule 144.
The remaining 1,582,233 shares outstanding are deemed "restricted securities"
under Rule 144 in that they were originally issued and sold by the Company in
private transactions in reliance upon exemptions from the Securities Act.
In general, under Rule 144, as currently in effect, a person (or persons
whose shares are aggregated with those of others), including an affiliate, whose
restricted securities have been fully paid and held for at least two years from
the later of the date such restricted securities were acquired from the Company
and (if applicable) the date they were acquired from an affiliate, is entitled
to sell within any three-month period a number of shares that does not exceed
the greater of 1% of the number of the then outstanding shares of the Common
Stock (27,822 shares based on the number of shares to be outstanding after the
Offering, assuming the Underwriters' Over-Allotment Option is not exercised) or
the average weekly trading volume in the public market during the four calendar
weeks preceding such sale or the date on which notice of the sale is filed with
the Commission. Sales under Rule 144 are also subject to certain requirements as
to the manner and notice of sale and the availability of public information
concerning the Company. In addition, a person who is not deemed to have been an
affiliate of the Company at any time during the three months preceding a sale,
and whose restricted securities have been fully paid and held for at least three
years, would be entitled to sell such shares under Rule 144(k) without regard to
the requirements described above.
Of the 1,582,233 restricted securities outstanding, 382,737 shares are
currently eligible for resale in compliance with Rule 144. Of these shares,
___________ shares are subject to lock-up agreements. In addition, 1,025,912
shares of Common Stock issuable upon the exercise of warrants and options
outstanding on the date of this Prospectus (excluding the shares of Common Stock
issuable upon exercise of the Redeemable Warrants) will, upon the exercise of
all such warrants and options, be eligible for sale from time to time under Rule
144 upon the expiration of a minimum two-year holding period under Rule 144 from
the date such shares are acquired.
Rule 144A permits unlimited resales of restricted securities under certain
circumstances to Qualified Institutional Buyers, which are generally defined as
institutions with over $100 million invested in securities. Rule 144A allows
holders of restricted securities to sell their shares to such institutional
buyers without regard to any volume or other restrictions.
The Company has granted registration rights to certain of its
securityholders. See "Description of Securities - Registration Rights."
Prior to the Offering, there has not been any public market for the
Securities. No prediction can be made as to the effect, if any, that market
sales of shares or the availability of shares for sale will have on future
prices prevailing from time to time. Nevertheless, sales of substantial amounts
of Common Stock in the public market could adversely affect the prevailing
market prices and impair the Company's ability to raise capital through sales of
its equity securities.
58
<PAGE>
UNDERWRITING
The Underwriters named below (the "Underwriters"), for whom First Allied
Securities, Inc. is acting as Representative, have severally agreed, subject to
the terms and conditions of the Underwriting Agreement (the "Underwriting
Agreement"), to purchase from the Company and the Company has agreed to sell to
the Underwriters on a firm commitment basis the respective number of shares of
Common Stock and Redeemable Warrants set forth opposite their names:
<TABLE>
<CAPTION>
Number of Number of
Shares of Redeemable
Underwriter Common Stock Warrants
------------ ----------
<S> <C> <C>
First Allied Securities, Inc.
___ ___
Total 1,200,000 1,200,000
========= =========
</TABLE>
The Underwriters are committed to purchase all of the Securities offered
hereby if any of such Securities are purchased. The Underwriting Agreement
provides that the obligations of the several Underwriters are subject to
conditions precedent specified therein.
The Company has been advised by the Representative that the Underwriters
propose to initially offer the Securities to the public at the public offering
prices set forth on the cover page of this Prospectus and to certain dealers at
such prices less concessions of not in excess of $______ per share of Common
Stock. Such dealers may reallow a concession not in excess of $______ per share
of Common Stock. After the commencement of this offering, the public offering
prices, concessions and reallowances may be changed by the Representative.
The Representative has advised the Company that it does not anticipate
sales to discretionary accounts by the Underwriters to exceed five percent of
the total number of Securities offered hereby.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act. The Company has
also agreed to pay to the Underwriter an expense allowance on a non-accountable
basis equal to 2.75% of the gross proceeds derived from the sale of the Common
Stock and Redeemable Warrants underwritten, of which $_______ has been paid to
date.
The Company and certain selling stockholders have granted to the
Underwriters an option, exercisable within 45 days after the date of this
Prospectus, to purchase up to an additional 120,000 shares and 60,000 shares of
Common Stock, respectively, and the Company has granted to the Underwriters a
similar option with respect an additional 180,000 Redeemable Warrants at the
initial public offering price per share of Common Stock and per Redeemable
Warrant, respectively, offered hereby, less underwriting discounts and the
expense allowance. Such option may be exercised only for the purpose of covering
over-allotments, if any, incurred in the sale of the Securities offered hereby.
To the extent such option is exercised in whole or in part, each Underwriter
will have a firm commitment, subject to certain conditions, to purchase the
number of the additional shares of Common Stock and Redeemable Warrants
proportionate to its initial commitment.
All of the Company's officers and directors have agreed not to, directly or
indirectly, offer to sell, transfer, hypothecate or otherwise encumber any of
their securities for 13 months following the date of this Prospectus without the
prior written consent of the Company and the Representative.
59
<PAGE>
The Company has agreed that, for three years after the effective date of
this Prospectus, the Representative will have the right to designate one
individual to be elected to the Company's Board of Directors. Such individual
may be a director, officer, employee or affiliate of the Representative. In the
event that the Representative elects not to designate a person to serve on the
Company's Board of Directors, the Representative may designate an observer to
attend meetings of the Company's Board of Directors.
The Company has also agreed to execute a financial advisory and consulting
agreement with the Representative pursuant to which the Company is required to
pay the Representative a fee of $2,000 a month for a period of 24 months, which
must be prepaid in full upon completion of the Offering.
In connection with the Offering, the Company has agreed to sell to the
Representative, for nominal consideration, the Representative's Warrants to
purchase from the Company 120,000 shares of Common stock and up to 120,000
Redeemable Warrants. The Representative's Warrants are initially exercisable for
shares of Common Stock at a price of $______ [120% of the initial public
offering price per share of Common Stock] per share of Common Stock, and are
initially exercisable for Redeemable Warrants at a price of $______ [120% of the
initial public offering price per Redeemable Warrant] per Redeemable Warrant for
a period of four years commencing one year from the date of this Prospectus and
are restricted from sale, transfer, assignment or hypothecation for a period of
12 months from the date hereof, except to officers and principals of the
Representative. The Representative's Warrants also provide for adjustment in the
number of shares of Common Stock and Redeemable Warrants issuable upon the
exercise thereof as a result of certain subdivisions and combinations of the
Common Stock. The Representative's Warrants grant to the holders thereof certain
rights of registration for the securities issuable upon exercise of the
Representative's Warrants.
Upon the exercise of any Redeemable Warrants more than one year after the
date of this Prospectus, which exercise was solicited by the Representative, and
to the extent not inconsistent with the guidelines of the NASD and the Rules and
Regulations of the Commission, the Company has agreed to pay the Representative
a commission which shall not exceed 5% of the aggregate exercise price of such
Redeemable Warrants. However, no compensation will be paid to the Representative
in connection with the exercise of the Redeemable Warrants if (a) the market
price of the Common Stock is lower than the exercise price, (b) the Redeemable
Warrants were held in a discretionary account, (c) the Redeemable Warrants are
exercised in a transaction not solicited by the Representative, or (d) the
Redeemable Warrants subject to the Representative's Warrants are exercised.
Unless granted an exemption by the Commission from Rule 10b-6 under the
Securities Exchange Act of 1934, as amended, or unless otherwise permitted under
Rule 10b-6A, the Representative and its affiliates will be prohibited from
engaging in any market-making activities with regard to the Company's securities
for a period of two business days or nine business days, whichever is applicable
(or such other applicable periods as Rule 10b-6 may provide) prior to any
solicitation of the exercise of the Redeemable Warrants until the later of the
termination of such solicitation activity or the termination (by waiver or
otherwise) of any right the Representative may have to receive a fee. As a
result, the Representative and its affiliates may be unable to continue to
provide a market for the Company's securities during certain periods while the
Redeemable Warrants are exercisable. If the Representative or any of its
affiliates has engaged in any of the activities prohibited by Rule 10b-6 during
the periods described above, the Representative undertakes to waive
unconditionally its right to receive a commission on the exercise of such
Redeemable Warrants.
Prior to this offering, there has been no public market for the Securities.
Consequently, the terms and initial public offering prices of the Securities and
the exercise price, redemption price and other terms of the Redeemable Warrants
have been determined by negotiations between the Company and the Representative
and are not necessarily related to the Company's asset value, net worth or other
established criteria of value. The factors considered in such negotiations
included the history of and prospects for the industry in which the Company
competes, an assessment of the Company's management, the prospects of the
Company, its capital structure and certain other factors as were deemed
relevant.
60
<PAGE>
LEGAL MATTERS
Certain legal matters in connection with the Offering will be passed upon
for the Company by Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan,
L.L.P., 2500 First Union Capitol Center, Raleigh, North Carolina 27602. Orrick,
Herrington & Sutcliffe, 666 Fifth Avenue, New York, New York 10166, has acted as
counsel to the Underwriters in connection with the Offering.
EXPERTS
The financial statements included in this Prospectus have been audited by
Arthur Andersen LLP, independent public accountants, to the extent and for the
periods set forth in their report appearing elsewhere herein, and are included
in reliance upon such report given upon the authority of said firm as experts in
auditing and accounting.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
SB-2 (of which this Prospectus is a part) under the Securities Act of 1933, as
amended, with respect to the Common Stock and Redeemable Warrants offered
hereby. This Prospectus does not contain all the information set forth in the
Registration Statement and the exhibits and schedules thereto. For further
information pertaining to the Company and the Common Stock and Redeemable
Warrants offered in the Offering, reference is made to such Registration
Statement and the exhibits and schedules thereto, which may be inspected without
charge at the office of the Commission at 450 Fifth Street, N.W., Washington, DC
20549 or at its regional offices, Citicorp Center, 500 West Madison Street,
Chicago, Illinois 60621 and Seven World Trade Center, New York, New York 10048.
Copies of such documents may be obtained from the Public Reference Section of
the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed
rates. In addition, the Commission maintains a Web site that contains reports,
proxy and information statements and other information regarding issuers that
file electronically with the Commission (http://www.sec.gov). The Company will
be an electronic filer.
61
<PAGE>
Index to Financial Statements
<TABLE>
<C> <C>
Report of Independent Public Accountants........................................................................F-2
Financial Statements:
Balance Sheets.............................................................................................F-3
Statements of Operations...................................................................................F-4
Statement of Stockholders' Equity..........................................................................F-5
Statements of Cash Flows...................................................................................F-6
Notes to Financial Statements..............................................................................F-7
</TABLE>
F-0
<PAGE>
[CLAW ISLAND LOGO APPEARS HERE]
Financial Statements as of June 30, 1995 and 1996
Together with Report of Independent Public Accountants
F-1
<PAGE>
After giving effect to the reverse stock split discussed in Note 2, we would be
in a position to render the following audit report.
ARTHUR ANDERSEN LLP
[Signature of Arthur Andersen LLP
appears here]
Raleigh, North Carolina,
August 9, 1996.
Report of Independent Public Accountants
To Claw Island Foods Inc.:
We have audited the accompanying balance sheets of Claw Island Foods Inc. (a
Delaware corporation) as of June 30, 1995 and 1996, and the related statements
of operations, stockholders' equity, and cash flows for the years then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Claw Island Foods Inc. as of
June 30, 1995 and 1996, and the results of its operations and its cash flows for
the years then ended in conformity with generally accepted accounting
principles.
F-2
<PAGE>
Claw Island Foods Inc.
Balance Sheets
<TABLE>
<CAPTION>
Pro forma
June 30 June 30, 1996
------------ (unaudited)
Assets 1995 1996 (Note 2)
-------------- ------------ ------------
<S> <C> <C> <C>
Current assets:
Cash $ 39,031 $1,271,161 $1,271,161
Accounts receivable, net 363,383 68,236 68,236
Inventories 749,956 381,213 381,213
Other current assets 55,795 33,578 33,578
------------- ------------- -----------
Total current assets 1,208,165 1,754,188 1,754,188
Furniture, equipment and leasehold improvements, net 471,576 482,240 482,240
Deferred costs and other assets, net 172,555 99,143 99,143
------------- ------------- -----------
$1,852,296 $2,335,571 $2,335,571
============= =========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Line of credit $ 426,164 $ 36,049 $ 36,049
Short term debt to related parties 342,500 0 0
Accounts payable 142,414 151,547 151,547
Other accrued liabilities 71,219 74,687 74,687
Current portion of capital lease obligations 0 34,773 34,773
------------- ------------- ----------
Total current liabilities 982,297 297,056 297,056
Subordinated debt 462,500 50,000 50,000
Capital lease obligations, net of current portion 67,437 83,332 83,332
------------- ------------- ----------
Total liabilities 1,512,234 430,388 430,388
------------- ------------- ----------
Commitments (Notes 8 and 11)
Stockholders' equity:
Convertible preferred stock, $.01 par value (Note 6)-
Series C shares, 350,983 shares authorized, 330,723 shares
in 1995, 334,778 shares in 1996 and no shares in pro forma 1996
issued and outstanding 3,307 3,348 0
Series D shares, 70,362 shares authorized, 50,259 shares in 1995 and 1996
and no shares in pro forma 1996 issued and outstanding 503 503 0
Series E shares, 1,442,308 shares authorized, no shares in 1995, 1,149,237
shares in 1996 and no shares in pro forma 1996 issued and outstanding 0 11,493 0
Common stock, par value $.01 per share, 2,788,462 shares authorized, 47,959
shares in 1995 and 1996 and 1,582,233 shares in pro forma 1996 issued
and outstanding 480 480 15,824
Additional paid-in capital 7,631,754 10,647,434 10,647,434
Accumulated deficit (7,295,982) (8,758,075) (8,758,075)
------------- ------------- ----------
Total stockholders' equity 340,062 1,905,183 1,905,183
------------- ------------- ----------
$1,852,296 $2,335,571 $2,335,571
============= ============= ==========
</TABLE>
The accompanying notes to financial statements
are an integral part of these balance sheets.
F-3
<PAGE>
Claw Island Foods Inc.
Statements of Operations
<TABLE>
<CAPTION>
Year Ended June 30
------------------
1995 1996
---------------- ---------------
<S> <C> <C>
Net sales $ 3,679,616 $ 3,320,113
Cost of sales 3,055,477 2,802,514
---------------- ---------------
Gross margin 624,139 517,599
Selling, general and administrative costs 1,555,958 1,500,455
Royalties 73,592 66,384
Other plant costs 114,348 167,853
---------------- ---------------
Loss from operations (1,119,759) (1,217,093)
Interest expense 174,815 173,705
Other income, net (18,215) (8,705)
Net loss before extraordinary loss (1,276,359) (1,382,093)
Extraordinary loss upon extinguishment of debt 0 (80,000)
Net loss $(1,276,359) $ (1,462,093)
=============== ===============
Pro forma primary loss per share:
Net loss before extraordinary loss $ (0.61) $ (0.65)
Extraordinary loss upon extinguishment of debt $ (0.00) $ (0.04)
---------------- ---------------
Net loss $ (0.61) $ (0.69)
---------------- ---------------
Pro forma weighted average shares outstanding 2,090,736 2,127,311
=============== ===============
</TABLE>
The accompanying notes to financial statements
are an integral part of these statements.
F-4
<PAGE>
Claw Island Foods Inc.
Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional
--------------- ------------ Paid-in Accumulated Stockholders'
Shares Amount Shares Amount Capital Deficit Equity
------- ------ ------ ------ ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1994 ..................... 314,149 3,142 45,223 $ 452 $ 6,689,840 $ (6,019,623) $ 673,811
Exercise of common stock options ....... 0 0 2,736 28 1,394 0 1,422
Sale of Series C shares ................ 2,851 29 0 0 78,226 0 78,255
Conversion of demand notes to
Series D preferred shares............. 21,911 219 0 0 387,153 0 387,372
Sale of Series D preferred shares,
net of expenses of $25,618 ........... 28,348 283 0 0 475,278 0 475,561
Issuance of additional Series C
preferred shares pursuant to
antidilution provisions 13,723 137 0 0 (137) 0 0
Net loss ............................... 0 0 0 0 0 (1,276,359) (1,276,359)
------- ------ ------ ------ ----------- ----------- -------------
Balance, June 30, 1995 ..................... 380,982 3,810 47,959 480 7,631,754 (7,295,982) 340,062
Conversion of demand notes to
Series E preferred shares and warrants 451,575 4,516 0 0 1,249,569 0 1,254,085
Conversion of subordinated debt to
Series E preferred shares ........... 173,835 1,738 0 0 450,223 0 451,961
Issuance of Series E shares pursuant to
Dominion purchase agreement........... 15,385 154 0 0 39,846 0 40,000
Issuance of shares in payment of
royalty costs ........................ 5,578 56 0 0 14,444 0 14,500
Sale of Series E preferred shares,
net of expenses of $40,735 ........... 502,864 5,029 0 0 1,261,639 0 1,266,668
Issuance of additional Series C
preferred shares pursuant to
antidilution provisions............... 4,078 41 0 0 (41) 0 0
Net loss ............................... 0 0 0 0 0 (1,462,093) (1,462,093)
------- ------ ------ ------ ----------- ----------- -------------
Balance, June 30, 1996 ..................... 1,534,274 $15,344 47,959 $ 480 $ 10,647,434 $ (8,758,075) $ 1,905,183
------- ------ ------ ------ ----------- ----------- -------------
The accompanying notes to financial statements are an integral part of these statements.
</TABLE>
F-5
<PAGE>
Claw Island Foods Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended June 30
------------------
1995 1996
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,276,359) $(1,462,093)
Adjustments to reconcile net loss to net cash used in operating activities-
Extraordinary Loss upon extinguishment of debt 0 80,000
Issuance of Series E preferred stock for payment of expenses (Note 10) 0 40,000
Depreciation and amortization 198,388 224,033
Changes in assets and liabilities:
Accounts receivable (84,342) 295,147
Inventories (241,688) 368,743
Other current assets (48,465) 22,217
Accounts payable (37,991) 9,133
Other accrued liabilities 21,579 109,036
Deferred costs and other assets (172,127) (36,133)
-------------- ---------------
Net cash used in operating activities (1,641,005) (349,917)
-------------- ---------------
Cash flows from investing activities - Purchase of furniture, equipment and
leasehold improvements (130,030) (46,591)
Cash flows from financing activities:
Proceeds from issuance of preferred stock 553,816 1,266,668
Proceeds from issuance of common stock 1,422 0
Increase (decrease) in line of credit 426,164 (390,115)
Proceeds from issuance of convertible notes 350,000 0
Principal payments under capital leases 0 (27,893)
Payment of Dominion term loan (90,742) 0
Proceeds from short term debt to related parties 515,000 874,978
Payment of short term debt to related parties (172,500) (95,000)
-------------- ---------------
Net cash provided by financing activities 1,583,160 1,628,638
-------------- ---------------
Net increase (decrease) in cash (187,875) 1,232,130
Cash, beginning of year 226,906 39,031
=============== ===============
Cash, end of year $ 39,031 $ 1,271,161
=============== ===============
Supplemental disclosure of cash flow information - Cash paid for interest $ 115,686 $ 122,405
Supplemental disclosure of noncash investing and financing activities:
Capital leases of equipment 95,318 102,719
Related-party debt and accrued interest converted to preferred stock 387,372 1,626,046
=============== ===============
</TABLE>
The accompanying notes to financial statements
are an integral part of these statements.
F-6
<PAGE>
Claw Island Foods Inc.
Notes to Financial Statements
1. Nature of Operations and History
Claw Island Foods Inc. (the Company) is a value added processor and distributor
of Maine lobsters. The Company processes lobsters and lobster products using its
proprietary cooking and freezing process. The Company distributes its products
in the United States and internationally through food service distributors,
restaurants, caterers, and other food service vendors and through supermarkets,
department stores and other retailers.
The Company was incorporated on February 17, 1989, in Delaware. In June 1989,
the Company secured the exclusive licensing rights to a U.S. patented process
which allows the freezing of whole crustaceans. The patent expires in 1999. The
Company began operations in October 1989, and through April 1992 focused its
efforts on blue crabs. In May 1992, the Company refocused its production and
marketing efforts on whole Maine lobster, and its current product line consists
primarily of whole frozen Maine lobsters and stuffed Maine lobsters. Prior to
1995, the Company's lobster processing had all taken place at a processing
facility in Vinalhaven, Maine. In 1995, the Company successfully completed a
test phase of operations at a second processing facility located in Lockeport,
Nova Scotia. The Lockeport plant commenced full operations in fiscal 1996. The
Company purchases live lobsters from various fishermen and distributors at docks
located near the processing facilities in Maine and Nova Scotia.
The Company's financial statements for the year ended June 30, 1996, have been
prepared on a going concern basis which contemplates the realization of assets
and the settlement of liabilities and commitments in the normal course of
business. The Company incurred a net loss of $1,462,093 in 1996 and has an
accumulated deficit of $8,758,075 at June 30, 1996. The Company successfully
completed the Series E preferred stock offering in June 1996, which consisted of
approximately $1,300,000 of cash proceeds and the conversion of approximately
$1,600,000 of short and long term debt. Management believes that it has
sufficient working capital to maintain its existing operations through fiscal
1997. However, the Company may need additional financing in order to be able to
sustain its anticipated growth over the long term. Management believes the
Company will be successful in raising the additional capital , as necessary.
However, no assurances can be given that the Company will be successful in
raising additional capital or such financing will be on terms favorable or
acceptable to the Company and that the Company will be able to achieve
profitable operations over the long term.
See Note 11 regarding the Company's proposed initial public offering.
F-7
<PAGE>
2. Summary of Significant Accounting Policies:
Accounts Receivable and Concentration of Credit Risks
Accounts receivable was net of a reserve of $10,000 at June 30, 1995, and
$15,000 at June 30, 1996, for doubtful accounts. At June 30, 1996, there are two
customers who together constitute 81% of the total balance, one of which is a
customer in Canada. The Company controls credit risk through credit approvals,
credit limits and monitoring procedures. The Company performs in-depth credit
evaluations for all new customers. The Company generally does not require
collateral for its accounts receivable.
Inventories
Inventories are stated at the lower of cost or market under the first-in,
first-out (FIFO) valuation methodology. Inventory consists primarily of packaged
lobster ready for sale, which includes the cost of raw materials as well as
labor and overhead to process and package the lobster.
Furniture, Equipment and Leasehold Improvements, net
Furniture and equipment are stated at cost. Depreciation is calculated on a
straight-line basis over the estimated useful life of the asset or over the
remaining lease term for leasehold improvements, generally three to ten years.
Components of furniture, equipment and leasehold improvements, net, at June 30,
1995 and 1996, follows:
<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Equipment and machinery $569,001 $680,030
Furniture and fixtures 35,072 48,432
Leasehold improvements 120,307 121,068
Less - Accumulated depreciation (252,804) (367,291)
-------- --------
$471,576 $482,239
======== ========
</TABLE>
Deferred Costs and Other Assets, net
Deferred costs and other assets, net, at June 30, 1995 and 1996, consist of the
following:
<TABLE>
<CAPTION>
1995 1996
--------- --------
<S> <C> <C>
Patents, net $ 26,733 $18,647
Due from employees 16,489 16,489
Deferred financing costs, net 13,728 6,884
Deferred offering costs 0 44,309
Deferred plant startup costs 99,409 0
Other deposits and copyrights 16,196 12,814
--------- --------
$172,555 $99,143
========= ========
</TABLE>
F-8
<PAGE>
Patents, deferred financing and start-up costs are being amortized on a
straight-line basis over their useful lives of one to eight years. Deferred
offering costs, will be charged to equity upon
consummation of the offering or charged to operations in the coming fiscal year
in the event the offering is unsuccessful (Note 11). Accumulated amortization
related to all deferred costs and patents total $76,501 at June 30, 1995, and
$183,746 at June 30, 1996. Amortization expense was $40,666 in 1995 and $134,579
in 1996.
Revenue Recognition and Dependence on Certain Customers
Revenue is recognized upon shipment of product to customers. One customer
accounted for 38% of total revenues in 1995. This same customer accounted for
19% of total revenue in 1996. Two other customers accounted for 26% and 23%,
respectively, of total revenue in 1996. The customer representing 26% of 1996
revenues is a shareholder of the Company who made a one time purchase from the
Company for resale primarily to an existing customer. See Note 10 for further
discussion of this transaction. Sales to international customers represented 11%
of total revenues in 1995 and 8% in 1996.
Reclassification
Certain fiscal 1995 amounts have been reclassified to conform with the
presentation of fiscal 1996 amounts.
Other Plant Costs
Due to the seasonality of the lobster catching industry, the processing
facilities are in production for generally seven months during the year.
However, the Company still incurs certain fixed overhead expenses related to
manufacturing (rent for plant, utilities, etc.). Accordingly, such costs are
accounted for as period expenses.
Pro forma Balance Sheet (Unaudited)
As discussed in Note 6, the preferred stock automatically converts to shares of
common stock upon the closing of an initial public offering, as defined. The
unaudited pro forma balance sheet reflects the conversion of preferred stock
into shares of common stock as if the proposed initial public offering had
closed. See Note 11.
Reverse Stock Split
On August 5, 1996, the Board of Directors authorized a 5.2-for-1 reverse stock
split of the Company's preferred and common stock effective contemporaneously
with the effective date of the Company's registration statement in connection
with the proposed initial public offering (Note 11) for all shareholders of
record as of such date. All references in the financial statements to number
of shares and per share amounts have been retroactively restated to reflect
the decreased number of common and preferred shares outstanding as a result
of this reverse stock split.
Pro forma Net Loss Per Share (Unaudited)
The pro forma weighted average net loss per share of common stock is computed
based on the pro forma weighted average number of shares of common stock
outstanding including dilutive common stock equivalents. In accordance with
Staff Accounting Bulletin Number 83 of the Securities and Exchange Commission,
issuance of Series E convertible preferred stock, options and warrants at prices
below the expected initial public offering price during the twelve month period
preceding the planned offering have been treated as common stock equivalents as
if they had been issued at the Company's inception. Other common stock
equivalents, which were anti-dilutive, were not included in the computation of
loss per share. The pro forma loss per share, assuming full dilution, is
considered to be the same as primary loss per share since the effect of common
stock equivalents would be antidilutive.
F-9
<PAGE>
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 the reported amounts
of revenues and expenses. Actual results may differ from these estimates.
Recent Accounting Pronouncements
The Financial Accounting Standards Board recently issued Statement of Financial
Accounting Standards No. 121 (SFAS No. 121), "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed of." This statement
requires long-lived assets to be evaluated for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. The effective date for SFAS No. 121 is for fiscal years
beginning after December 15, 1995. The Company will adopt SFAS No. 121 in fiscal
1997 and does not expect its provisions to have a material effect on the
Company's results of operations.
The Financial Accounting Standards Board also recently issued SFAS No. 123,
"Accounting for Stock-Based Compensation." This statement introduces a
fair-value based method of accounting for stock-based compensation. It
encourages, but does not require, companies to recognize compensation expense
for grants of stock, stock options and other equity instruments to employees
based on the new fair value accounting rules. However, if the Company chooses
not to recognize compensation expense in accordance with the provisions of this
statement, pro forma disclosures are required in the notes to consolidated
financial statements. The Company will adopt the disclosure provisions of SFAS
No. 123 in fiscal 1997.
3. Lines of Credit:
The Company has a $2,000,000 line of credit from a lending institution which
matures in October 1996 and is subject to an annual renewal. The line of credit
facility, if used, is payable upon demand and bears interest at the bank's base
lending rate plus 3% (12% at June 30, 1995, and 11.25% at June 30, 1996). The
line of credit is secured by substantially all of the assets of the Company and
without the consent of the lender, the assets of the Company are not available
to secure future indebtedness. The amounts available under the facility vary
directly with eligible accounts receivable and inventories. At June 30, 1996,
the line had a balance of $36,049 and amounts available to the Company under the
borrowing base calculation were approximately $108,300.
4. Subordinated Debt:
In 1993, the Company issued five-year subordinated notes totaling $462,500 with
interest at 12%. In addition, the Company issued warrants to the note holders to
purchase 8,426 shares of common stock at $25.38 to $25.74 per share, exercisable
through the year 1998. The notes accrue interest for the first six months and
interest is payable quarterly in arrears thereafter. Principal and unpaid
interest is due at the end of the five-year period in November 1998.
In June 1996, $412,500 of the subordinated debt plus accrued interest of $39,461
was converted into Series E preferred stock, leaving an outstanding balance of
$50,000 at June 30, 1996.
F-10
<PAGE>
5. Short-term Debt to Related Parties:
Short-term debt to related parties at June 30, 1995 and 1996, consists of:
1995 1996
-------- -------
$515,000 loan in June 1995 from certain
existing shareholders, interest at 14%
and due in August 1995, subsequently
amended to interest at 16% and due date
of October 1995 $342,500 $0
======== =======
During 1996, the Company obtained various working capital advances from certain
existing stockholders totaling $874,978. These advances and the $342,500 balance
from the 1995 loan, plus accrued interest were satisfied in full through the
issuance of Series E preferred stock in 1996. In order to induce certain
stockholders holding $400,000 of working capital loans to convert to preferred
stock, the Company issued 153,851 warrants to purchase Series E preferred stock
at $2.60 per share. The estimated fair value of these warrants of $80,000
resulted in an extraordinary loss upon the extinguishment of debt.
In 1995, the Company repaid certain other loans from existing stockholders
consisting of $90,740 of loans which were paid in cash, and $350,000, plus
accrued interest, which were paid through the issuance of Series D preferred
stock during 1995.
Certain working capital loans and advances were secured by a subordinated lien
on substantially all the assets of the Company. In addition, warrants to
purchase common stock and preferred stock of the Company were issued to certain
debtholders in connection with these financing transactions. See Note 6 for
further discussion of warrants.
6. Convertible Preferred Stock:
In 1996, the Company issued Series E convertible preferred stock. Concurrent
with this issuance, certain rights and terms of Series C and D shares were
amended. The terms of the Series C, Series D(as amended) and Series E
convertible preferred stock include, among other things, the following, which
are defined in more detail in the agreements:
- The shares are entitled to noncumulative dividends when and if
declared by the Board of Directors.
- The preferred stock is entitled to a liquidation preference. The
Series E has a first preference, Series D a second preference, and
Series C a third preference to any liquidation distribution prior to
payment to common stockholders. The liquidation preference at June 30,
1996 consists of:
Series E $2,987,951
Series D 888,562
Series C 8,703,526
F-11
<PAGE>
- Each share issued and outstanding has the right to vote, as defined in
the agreements. The number of votes is equal at any time to the number
of shares of common stock into which the shares would be convertible.
In addition, the approval of a majority of the outstanding shares of
preferred stock is required for certain corporate actions affecting
such shares.
- At June 30, 1996, each share of preferred stock is convertible into
one share of common stock at any time at the option of its holder or
automatically upon any public offering of the Company's securities
resulting in net proceeds of not less than $10,000,000 (subsequently
amended to be an offering with net proceeds of $5,000,000). At June
30, 1996, the Series C convertible preferred stock was convertible
into 334,778 shares of common stock, the Series D convertible
preferred stock was convertible into 50,259 shares of common stock and
the Series E convertible preferred stock was convertible into
1,149,237 shares of common stock.
- The convertible preferred stock has certain registration rights and is
subject to certain "lock up" requirements in the event the
registration rights are exercised.
Warrants to purchase convertible preferred stock issued and outstanding at June
30, 1996, consists of:
Fiscal Years Number Exercise Price Exercise
Series Issued of Warrants per Share Term
------- ------------ ----------- -------------- ---------
C 1994 34,389 $17.68-$26.00 5-10 years
C 1995 3,203 $25.64-$26.00 10 years
D 1995 20,106 $17.68 10 years
E 1996 153,851 $ 2.60 10 years
The above warrants and related exercise prices are subject to certain
antidilution adjustments, which became fixed at the date of the Series E
Closing. The recorded value of warrants issued is included in paid in capital of
stockholders' equity in the accompanying balance sheet.
The accompanying financial statements reflect additional shares of Series C
Preferred stock representing such shares due the Series C Preferred stockholders
pursuant to certain antidilution provisions. Substantially all antidilution
provisions were subsequently amended and fixed at the date of the Series E
closing.
The Company has total preferred stock authorized of 1,865,385 shares, including
undesignated shares, and has reserved preferred stock at June 30, 1996, as
follows:
Warrants for Series C Preferred shares 33,984
Warrants for Series D Preferred shares 20,104
Warrants for Series E Preferred shares 153,847
Undesignated Preferred shares 15,385
============
Total shares of preferred stock reserved 223,320
============
F-12
<PAGE>
7. Common Stock and Stock Option Plan:
In July 1992, the Company entered into employee stock agreements with certain
employees for options to acquire 31,766 shares of common stock at $0.52 per
share.
In June 1993, the Company entered into stock option agreements with four of its
officers, one of whom is a Director, granting options to purchase 34,616 shares
of common stock at $13.00 per share. Such options were to vest upon meeting
certain criteria, as defined. In 1995, these agreements were amended to reduce
the options granted to 12,048 options to purchase shares of common stock and to
eliminate the criteria, as defined.
In March 1995, the Board of Directors approved additional options for certain
employees and directors. These stock agreements grant options to purchase 28,671
shares of common stock at $13.00 per share.
In March 1996, the Board of Directors approved additional options for certain
employees and directors. These stock agreements grant options to purchase
610,078 shares of common stock with an exercise price greater than or equal to
the fair value of such shares at the grant date and provide for immediate
vesting.
Outstanding Exercise Price
Options Range
------------- ---------------
Balance at June 30, 1994 37,351 $ .52-13.00
Granted 28,670 13.00
Exercised (2,736) .52
Forfeited (22,566) 13.00
------------- ---------------
Balance at June 30, 1995 40,719 .52-13.00
Granted 614,309 1.30-13.00
Exercised 0 0
Forfeited (4,285) 13.00
------------- ---------------
Balance at June 30, 1996 650,743 $ .52-13.00
============= ===============
At June 30, 1996, options to purchase 629,379 shares of common stock of the
Company were fully vested.
The Company has reserved approximately 2,704,651 shares of common stock at June
30, 1996. Total warrants to purchase 147,301 shares of common stock at $13.00 to
$43.84 per share exercisable through 2006 were issued and outstanding at June
30, 1996.
8. Commitments:
License Agreement
In June 1989, the Company secured exclusive licensing rights to its patented
process. The agreement included royalties in the amount of 2% of net frozen
lobster sales, which are payable quarterly. Royalties for other crustacean
products vary from 1% to 4% of net sales. The license becomes non-exclusive
beginning in 2004. The related patent expires in 1999.
F-13
<PAGE>
Leases
The Company leases certain property and equipment under noncancelable operating
leases with terms in excess of one year. Rental expense for operating leases
totaled $85,490 for the year ended June 30, 1995, and $68,953 for the year ended
June 30, 1996.
The processing facility at Lockeport is subleased from its original lessee under
a month to month cancelable lease.
In addition, in 1995 and 1996, the Company entered into capital leases for
various equipment. Such equipment has a total net book value of $71,916 at June
30, 1995, and $150,628 at June 30, 1996, and is included in the furniture,
equipment and leasehold improvements caption in the accompanying June 30, 1996,
balance sheet.
At June 30, 1996, future minimum annual rentals under noncancelable lease
arrangements were as follows:
Capital Operating
Fiscal Year Leases Leases
- ---------------------------------------------- ----------- ------------
1997 $ 45,808 $ 53,081
1998 45,808 48,788
1999 26,992 34,619
2000 19,911 23,032
2001 4,351 0
-----------
142,870 $159,520
===========
Less - Imputed interest at 7% to 20.2% (24,765)
-----------
Present value of capital lease obligations $118,105
===========
Sales Commitment
In the fourth quarter of 1996, the Company received a purchase order from an
existing major customer, for approximately $1,258,000 of sales to occur through
fiscal 1997.
F-14
<PAGE>
9. Income Taxes:
The Company accounts for income taxes under Statement of Financial Accounting
Standards No. 109 (SFAS No. 109). The primary objective of SFAS No. 109 is to
recognize deferred tax assets and liabilities for the expected future tax
consequences of existing differences between the financial reporting and tax
reporting basis of assets and liabilities, and of operating loss and amortized
tax credit carryforwards for tax purposes. The Company's primary timing
difference relates to depreciation and the uniform capitalization rules for
inventory.
Under SFAS No. 109, a deferred tax asset arises for the amount of tax benefits
available in future periods from the tax net operating loss carryforwards and
tax credits. In addition, a deferred tax asset or liability is established for
the amount of tax benefits or liabilities from the assumed effect of temporary
differences. A valuation allowance is established to adjust the deferred asset
to its estimated net realizable value. The following table shows the deferred
tax asset and its related valuation allowance and deferred tax liabilities as
recorded by the Company (in thousands):
Deferred tax asset related to net operating loss carryforwards for
income tax reporting purposes $3,326
Tax asset related to temporary differences 72
-------
Total deferred tax asset 3,398
Less - Valuation allowance (3,398)
-------
Net deferred tax asset $ 0
=======
Under SFAS No. 109, the criteria for recording a deferred tax asset is "more
likely than not" that such an asset will be realized. Due to the uncertainty
about the Company's ability to generate future taxable income and certain
limitations on the utilization of these loss carryforwards, a valuation
allowance has been recorded to offset the full amount of the Company's deferred
tax asset.
As of June 30, 1996, the Company has available approximately $8,500,000 of net
operating loss carryforwards for federal income tax reporting purposes. Under
Section 382 of the Code (Section 382), however, the utilization of net operating
loss carryforwards is limited after an ownership change, as defined in Section
382, to an annual amount equal to the market value of the loss corporation's
outstanding stock immediately before the date of the ownership change multiplied
by the highest federal long-term tax exempt rate in effect for any month in the
three calendar month period ending with the calendar month in which the
ownership change occurred. Prior issuances of equity securities by the Company
may be deemed to be, and the issuance of shares of common stock in future
offerings may result in a change in control for federal income tax purposes that
could significantly limit the amount of the net operating loss carryforwards
that could be used to offset future taxable income in any one year. There can be
no assurances that the Internal Revenue Service will not limit potentially all
of the net operating loss carryforwards. The net operating loss carryforwards
begin to expire in 2004.
F-15
<PAGE>
10. Related-party Transactions:
In December 1995, a stockholder paid the Company $874,333 for certain inventory
and the assignment of specific purchase orders for the same amount from
significant customers of the Company. The stockholder took title to the
inventory and assumed the full risk of fulfilling the purchase orders and
collecting from the customers. The stockholder shipped substantially all the
inventory in fulfillment of the purchase orders, as requested by the customers,
through June 30, 1996. As all risk of ownership was transferred to the
stockholder, the Company recognized revenue upon the sale to the stockholder. In
consideration for this transaction, the Company issued a warrant entitling the
stockholder to purchase 20,177 shares of common stock at $13.00 per share,
exercisable for ten years, and paid the stockholder $40,000 through the issuance
of 15,385 shares of Series E preferred stock.
11. Proposed Initial Public Offering:
In August 1996, the Company entered into an agreement with an underwriter to
manage an initial public offering for the sale of equity securities of the
Company on a firm commitment basis. See the prospectus for further detail.
F-16
<PAGE>
No dealer, salesperson or other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus and, if given or made, such information or representations must not
be relied upon as having been authorized by the Company, the Representative or
any Underwriter. Neither the delivery of this Prospectus nor any sale made
hereunder shall, under any circumstances, create any implication that there has
been no change in the affairs of the Company since the date hereof or that the
information contained herein is correct as of any date subsequent to the date
hereof. This Prospectus does not constitute an offer to sell or a solicitation
of an offer to buy any securities offered hereby by anyone in any jurisdiction
in which such offer or solicitation is not authorized or in which the person
making such offer or solicitation is not qualified to do so or to anyone to whom
it is unlawful to make such offer or solicitation.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Prospectus Summary...............................................................................................3
Risk Factors.....................................................................................................9
The Company.....................................................................................................19
Use of Proceeds.................................................................................................20
Dividend Policy.................................................................................................21
Capitalization..................................................................................................21
Dilution........................................................................................................22
Selected Financial Data ........................................................................................23
Management's Discussion and Analysis of
Financial Condition and Results of Operations.................................................................24
Description of Business.........................................................................................30
Directors and Executive Officers................................................................................44
Principal Stockholders..........................................................................................49
Certain Transactions............................................................................................51
Description of Securities.......................................................................................53
Shares Eligible for Future Sale.................................................................................57
Underwriting....................................................................................................59
Legal Matters...................................................................................................61
Experts.........................................................................................................61
Additional Information..........................................................................................61
Index to Financial Statements..................................................................................F-0
</TABLE>
Until ___________________________ [25 days after the date of this
Prospectus], all dealers effecting transactions in the registered securities,
whether or not participating in this distribution, may be required to deliver a
Prospectus. This delivery requirement is in addition to the obligation of
dealers to deliver a Prospectus when acting as underwriters and with respect to
their unsold allotments or subscriptions.
[CIF logo appears here]
CLAW ISLAND FOODS INC.
1,200,000 SHARES OF COMMON
STOCK AND
1,200,000 REDEEMABLE
WARRANTS
-----------------
PROSPECTUS
-----------------
FIRST ALLIED SECURITIES, INC.
____________, 1996
[FAS logo appears here]
<PAGE>
PART II
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Certificate of Incorporation and By-Laws contain provisions
exculpating the Company's directors from personal liability to the Company's
stockholders for certain actions taken or omitted by them and indemnifying the
Company's officers and directors against judgments, fines, amounts paid in
settlement and reasonable attorneys' fees incurred in the defense of certain
actions and proceedings to the extent permitted under Delaware law.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors or officers pursuant to the foregoing, or
otherwise, the Company has been informed that in the opinion of the Securities
and Exchange Commission, such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Expenses of the Company in connection with the issuance and distribution of
the Securities being registered, other than underwriting discounts and
commissions, are estimated as follows:
<TABLE>
<S> <C>
SEC Registration Fee.........................................................................$ 6,930
Nasdaq Fee...................................................................................$ 9,620
Boston Stock Exchange Fee....................................................................$ 15,000
NASD, Inc. Fee...............................................................................$ 2,510
Attorneys' Fees and Expenses.................................................................$185,000
Accountants' Fees and Expenses...............................................................$100,000
Printing and Engraving.......................................................................$ 40,000
Blue Sky Expenses............................................................................$ 40,000
Transfer and Warrant Agent's Fees and Expenses...............................................$ 5,000
Miscellaneous...............................................................................$ 107,740
Total..................................................................................$ 496,800
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
During the three years preceding the filing of this Registration Statement,
the Company issued the following securities in transactions that were not
registered under the Securities Act (the numbers of shares, as well as the
purchase and exercise prices, are adjusted to give effect to the 5.2-for-1
Common Stock reverse split):
(1) At an initial closing in October 1993 and a subsequent closing in
January 1994, the Company issued approximately 9.5 units of securities of the
Company at a price of $50,000 per unit, for an aggregate offering price of
approximately $475,000. Each unit consisted of 1,822 shares of the Company's
Series C Preferred Stock and warrants to purchase 1,822 shares of Series C
Preferred Stock at a purchase price of $52.00 per share. These Series C units
were sold to 16 investors, including one existing securityholder of the Company.
Josephthal Lyon & Ross ("Josephthal"), an affiliate of the Representative,
served as Placement Agent in this private placement transaction, and received a
10% commission of approximately $47,500. As additional compensation, Josephthal
received certain warrants to purchase Common Stock and Series C Preferred Stock.
Contemporaneously, with this Series C transaction, all of the Company's Series
II-1
<PAGE>
1, 2, 3 and 4 Preferred Stock were reclassified into Series C Preferred Stock,
and certain notes issued by the Company in May 1993 to existing securityholders
were converted into 28.8 such Series C units.
(2) In December 1993, the Company issued 4.625 units of its securities at a
price of $100,000 per unit, for an aggregate offering price of $462,500. Each
unit consisted of a $100,000 subordinated note and warrants to purchase 1,822
shares of Common Stock at a purchase price of $27.46 per share (the "1993
Subordinated Notes"). The units were sold to nine investors, comprised of
existing securityholders of the Company and certain new investors.
(3) In March 1994, the Company issued 156,866 units of its securities at a
price of $27.46 per unit, for an aggregate offering price of approximately
$828,000. Each unit consisted of .19 share of the Company's Series C Preferred
Stock and one warrant to purchase one share of Series C Preferred Stock at
$27.46 per share. These units were sold to five investors, including one
existing securityholder.
(4) In December 1994, the Company issued 261,342 units of securities at a
price of $17.68 per unit to four existing securityholders of the Company. Each
unit consisted of .19 share of Series D Preferred Stock and one warrant to
purchase .08 shares of Series D Preferred Stock at $17.68 per share. Of these
261,342 units, 147,409 units were purchased for cash (approximately $500,000)
and 113,933 units were purchased by the conversion of certain loans obtained by
the Company in September 1994 from existing securityholders (approximately
$387,000).
(5) In March 1995, the Company granted options to certain management and
employees of the Company (eight persons) to purchase an aggregate of 28,670
shares of Common Stock at an exercise price of $13.00 per share.
(6) In June 1995, the Company obtained loans (the "1995 Inventory Loans")
in an aggregate principal amount of $515,000 from seven existing securityholders
and management of the Company. Following amendments to certain of the loans in
July 1995 and a loan from a director of $25,000, 1995 Inventory Loans were
outstanding in an aggregate principal amount of $457,500. Subsequently, all
previously unpaid 1995 Inventory Loans were converted into equity securities in
connection with the Company's Series E Preferred Stock financing described
below. In connection with these loans, the Company issued to the lenders as
additional consideration warrants to purchase an aggregate of 25,630 shares of
Common Stock at $17.68 per share.
(7) In July 1995, the Company granted options to three employees of the
Company to purchase an aggregate of 3,654 shares of Common Stock at $13.00 per
share.
(8) In December 1995, the Company entered into an arrangement with an
existing securityholder of the Company, whereby the securityholder agreed to
accept and fill certain purchase orders submitted by customers of the Company
and to purchase a corresponding amount of inventory from the Company. In
connection with this transaction, the Company issued to such securityholder
warrants to purchase 20,177 shares of Common Stock at $13.00 per share and,
contemporaneously with the Company's Series E Preferred Stock financing
described below, 15,385 shares of Series E Preferred Stock.
(9) In December 1995, the Company granted options to two employees of the
Company to purchase an aggregate of 577 shares of Common Stock at $13.00 per
share.
(10) During the period between February and April 1996, the Company
obtained loans (the "1996 Bridge Loans") from eight existing securityholders and
directors of the Company in an aggregate principal amount of approximately
$685,000. Subsequently, the 1996 Bridge Loans were converted into capital stock
II-2
<PAGE>
of the Company in connection with the Series E financing. As consideration for
conversion of 1996 Bridge Loans in an aggregate principal amount of $400,000,
the Company issued warrants to the lenders to purchase an aggregate of 153,851
shares of Series E Preferred Stock at a purchase price of $2.60 per share.
(11) In March 1996, the Company granted options to certain management and
directors of the Company (six persons) to purchase an aggregate of 610,076
shares of Common Stock at $1.30 per share.
(12) In March 1996, the Company commenced its Series E Preferred Stock
financing at $2.60 per share which resulted in the issuance in June 1996 of an
aggregate of 1,149,237 shares of Series E Preferred Stock to 37 existing
securityholders and two new investors. The Company issued 502,864 shares for
cash, for an aggregate offering price of approximately $1.3 million, and 630,988
shares for the conversion of certain indebtedness of the Company of
approximately $1.6 million, including the conversion of 1993 Subordinated Notes,
1996 Inventory Loans and 1996 Bridge Loans.
All of the shares of the Company's Series C, Series D and Series E
Preferred Stock described above will be converted into Common Stock
contemporaneously with the closing of the Offering, into the same number of
shares as reflected above. Also, all warrants exercisable for shares of
Preferred Stock will become warrants to purchase Common Stock for the same
number of shares and at the same exercise prices reflected above.
Exemption from the registration requirements of the Securities Act for the
issuances of securities described above is claimed under, among others, Section
4(2) of the Securities Act (and Rules 505 and 506 thereunder) and Section 4(6).
Such exemptions are claimed on the basis, among others, that all of the
investors in the foregoing transactions were "accredited investors" as defined
under Rule 501 of Regulation D under the Securities Act. In addition, in the
case of transactions involving the exchange or conversion of securities,
exemption is claimed under Section 3(a)(9) of the Securities Act, if applicable.
Except as otherwise indicated, there were no underwriting discounts or
commissions in connection with the foregoing transactions. See "The Company -
Recent Financings," "Management's Discussion and Analysis of Financial Condition
and Results of Operation," and "Certain Transactions."
II-3
<PAGE>
ITEM 27. EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
---------- --------
<S> <C>
1* Proposed form of Underwriting Agreement
3.1* Amended and Restated Certificate of Incorporation of the Company
3.2* By-Laws of the Company
4.1* Reference is made to Exhibit 3.1
4.2* Reference is made to Exhibit 3.2
4.3* Form of Representative's Warrant Agreement
5* Opinion regarding legality
10.1* Loan and Security Agreement dated as of October 19, 1994 between the Company and
Foothill Capital Corporation
10.2* Placement Agent Agreement dated July 15, 1993, between the Company and Josephthal
Lyon & Ross Incorporated
10.3* Placement Agent Warrant Agreement dated as of October 19, 1993, between the Company
and Josephthal Lyon & Ross Incorporated
10.4* Subscription and Registration Rights Agreement dated October 19, 1993 among the
Company and the purchasers named therein
10.5* Subordinated Demand Note and Warrant Purchase Agreement dated June 12, 1992 among
the Company and the purchasers named therein
10.6* Unit Purchase Agreement dated as of December 17, 1993 among the Company and the
purchasers named therein
10.7* Patent and Know-How License Agreement dated April 25, 1989 among the Company,
Kenneth B. Ross and Carl R. Jones
10.8* Distribution Agreement dated April 25, 1989 between the Company and Carl R. Jones
10.9* Distribution Agreement dated April 25, 1989 between the Company and Kenneth B. Ross
</TABLE>
- --------
* To be filed by amendment.
II-4
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
---------- --------
<S> <C>
10.10* Indemnity Agreement dated ______________ between the Company, Kenneth B. Ross,
Carl R. Jones, Seafoods Products of Baltimore, Inc., Seafoods Products of
Texas, Inc., Carl's Crab'n Incorporated, and Ross' Crab House
10.11* Settlement Agreement and Release dated as of July 9, 1991
among the Company, Coastal Seafoods Company, Inc., Walter F.
Lubkin, Jr., et al., as amended by Amendment dated as of
October 30, 1991
10.12* Agreement and Memorandum of Understanding dated as of November 28, 1988 between
Alan B. Harp, Richard O. von Werssowetz, and William P. Rice
10.13* Assignment Agreement dated as of February 17, 1989 between the Company and Richard
O. von Werssowetz
10.14* Employment Agreement dated as of February 17, 1989 between the Company and Richard
O. von Werssowetz
10.15* Common Stock Repurchase Agreement dated as of February 17, 1989 between the
Company and Richard O. von Werssowetz
10.16* Lease dated July 7, 1995 between the Company and The BOC Group, Inc. (nitrogen
freezing tunnel)
10.17* Lease dated September 8, 1989 between the Company and Liquid Air Corporation
(nitrogen freezing tunnel)
10.18* Settlement Agreement dated as of October 20, 1992 among Sea Fresh Foods, Inc., Alan
B. Harp, the Company, Walter F. Lubkin, Jr., William P. Rice,
Richard O. von Werssowetz, Carl R. Jones, and Kenneth B. Ross
10.19* Trust Agreement dated as of October 20, 1992 between Alan Harp and the Company
10.20* Series C Convertible Preferred Stock Purchase Agreement dated March 11, 1994 among
the Company and the purchasers named therein
10.21* Registration Rights Agreement dated March 11, 1994 among the Company and the
purchasers named therein
10.22* Rights Agreement dated March 11, 1994 among the Company and the purchasers named
therein
10.23* Stockholders' Agreement dated March 11, 1994 among the Company and the purchasers
named therein
</TABLE>
- --------
* To be filed by amendment.
II-5
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
---------- --------
<S> <C>
10.24* Employment Agreement dated as of June 30, 1996 between Kevin J. Migdal and the
Company
10.25* Employment Agreement dated as of June 30, 1996 between Edgar R. Hardy and the
Company
10.26* Series D Convertible Preferred Stock Purchase Agreement dated as of December 5, 1994
among the Company and the purchasers named therein
10.27* First Amended and Restated Registration Rights Agreement dated December 5, 1994
among the Company and the purchasers named therein
10.28* Rights Agreement dated December 5, 1994 among the Company and the purchasers named
therein
10.29* Master Purchase Agreement dated December 7, 1995 between the Company and Dominion
Fund II, L.P.
10.30* Series E Preferred Stock Purchase Agreement dated as of June
24, 1996 among the Company and the purchasers named therein,
as amended by First Amendment to Series E Preferred Stock
Purchase Agreement dated June 28, 1996
10.31* Second Amended and Restated Registration Rights Agreement dated as of June 24, 1996
among the Company and the purchasers named therein
11 Statement regarding computation of earnings per share (loss
per share)
23.1 Consent of Arthur Andersen LLP
23.2* Consent of Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan, L.L.P.
</TABLE>
- --------
* To be filed by amendment.
II-6
<PAGE>
ITEM 28. UNDERTAKINGS
The Company hereby undertakes:
(a) That it will:
(1) File, during any period in which it offers or sells Securities, a
post-effective amendment to this Registration Statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events which
individually or together, represent a fundamental change in the
information in the registration statement; and
(iii) Include any additional or changed material information
on the plan of distribution.
(2) For determining liability under the Securities Act, treat such
post-effective amendment as a new registration statement of the Securities
offered, and the offering of the Securities at that time to be the initial
BONA FIDE offering.
(3) File a post-effective amendment to remove from registration any
of the Securities that remain unsold at the end of the offering.
(b) That it will provide to the Representative at the closing specified in
the Underwriting Agreement certificates in such denominations and registered in
such names as required by the Representative to permit prompt delivery to each
purchaser.
(c) In the event that a claim for indemnification against liabilities under
the Securities Act (other than the payment by the Company of expenses incurred
or paid by a director, officer or controlling person of the Company in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the Securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(d) That it will:
(1) For determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Company under Rules 424(b)(1), or (4) or 497(h)
under the Securities Act as part of this Registration Statement as of the
time the Commission declared it effective.
(2) For determining any liability under the Securities Act, treat
each post-effective amendment that contains a form of prospectus as a new
registration statement for the Securities offered in the registration
statement, and that offering of the Securities at the time as the initial
BONA FIDE offering of those Securities.
II-7
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Company certifies that it has reasonable grounds to believe that it meets all of
the requirements for filing on Form SB-2 and has authorized this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Raleigh, State of North Carolina, on August 9, 1996.
CLAW ISLAND FOODS INC.
By: /s/ Kevin J. Midgal
-----------------------------------
Kevin J. Migdal
President, Chief Executive Officer and Treasurer
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates stated.
<TABLE>
<CAPTION>
Signature Title Date
---------- ----- ----
<S> <C> <C>
/s/ Kevin J. Migdal
_______________________________________ President, Chief Executive Officer, August 9, 1996
Kevin J. Migdal Treasurer, Principal Financial and
Accounting Officer, and Director
/s/ David B. Jenkins
_______________________________________ Director August 9, 1996
David B. Jenkins
/s/ William P. Rice
_______________________________________ Director August 9, 1996
William P. Rice
/s/ Stephen H. Warhover
______________________________________ Director August 9, 1996
Stephen H. Warhover
/s/ Randolph D. Werner
_______________________________________ Director August 9, 1996
Randolph D. Werner
</TABLE>
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Sequential
Number Exhibit Page No.
---------- --------- -----------
<S> <C> <C>
1* Proposed form of Underwriting Agreement
3.1* Amended and Restated Certificate of Incorporation
of the Company
3.2* By-Laws of the Company
4.1* Reference is made to Exhibit 3.1
4.2* Reference is made to Exhibit 3.2
4.3* Form of Representative's Warrant Agreement
5* Opinion regarding legality
10.1* Loan and Security Agreement dated as of
October 19, 1994 between the Company
and Foothill Capital Corporation
10.2* Placement Agent Agreement dated July 15, 1993,
between the Company and Josephthal Lyon & Ross
Incorporated
10.3* Placement Agent Warrant Agreement dated as of
October 19, 1993, between the Company and
Josephthal Lyon & Ross Incorporated
10.4* Subscription and Registration Rights Agreement
dated October 19, 1993 among the Company and
the purchasers named therein
10.5* Subordinated Demand Note and Warrant Purchase
Agreement dated June 12, 1992 among the Company
and the purchasers named therein
10.6* Unit Purchase Agreement dated as of December
17,1993 among the Company and the purchasers
named therein
</TABLE>
- --------
* To be filed by amendment.
<PAGE>
<TABLE>
<CAPTION>
Exhibit Sequential
Number Exhibit Page No.
---------- --------- -----------
<S> <C> <C>
10.7* Patent and Know-How License Agreement dated
April 25, 1989 among the Company, Kenneth B.
Ross and Carl R. Jones
10.8* Distribution Agreement dated April 25, 1989
between the Company and Carl R. Jones
10.9* Distribution Agreement dated April 25, 1989
between the Company and Kenneth B. Ross
10.10* Indemnity Agreement dated ___________ between
the Company, Kenneth B. Ross, Carl R. Jones,
Seafoods Products of Baltimore, Inc.,
Seafoods Products of Texas, Inc., Carl's
Crab'n Incorporated, and Ross' Crab House
10.11* Settlement Agreement and Release dated as of July 9, 1991
among the Company, Coastal Seafoods Company, Inc., Walter F.
Lubkin, Jr., et al., as amended by Amendment dated as of
October 30, 1991
10.12* Agreement and Memorandum of Understanding dated
as of November 28, 1988 between Alan B. Harp,
Richard O. Von Werssowetz, and William P. Rice
10.13* Assignment Agreement dated as of February 17,
1989 between the Company and Richard O.
von Werssowetz
10.14* Employment Agreement dated as of February 17,
1989 between the Company and Richard
O. von Werssowetz
10.15* Common Stock Repurchase Agreement dated as of
February 17, 1989 between the Company and
Richard O. von Werssowetz
10.16* Lease dated July 7, 1995 between the Company and
The BOC Group, Inc. (nitrogen freezing tunnel)
10.17* Lease dated September 8, 1989 between the Company
and Liquid Air Corporation (nitrogen freezing tunnel)
</TABLE>
- --------
* To be filed by amendment.
<PAGE>
<TABLE>
<CAPTION>
Exhibit Sequential
Number Exhibit Page No.
---------- --------- -----------
<S> <C> <C>
10.18* Settlement Agreement dated as of October 20,
1992 among Sea Fresh Foods, Inc., Alan B. Harp,
the Company, Walter F. Lubkin, Jr., William P.
Rice, Richard O. von Werssowetz, Carl R. Jones,
and Kenneth B. Ross
10.19* Trust Agreement dated as of October 20, 1992
between Alan Harp and the Company
10.20* Series C Convertible Preferred Stock Purchase
Agreement Dated March 11, 1994 among the
Company and the purchasers named therein
10.21* Registration Rights Agreement dated March 11,
1994 among the Company and the purchasers named
herein
10.22* Rights Agreement dated March 11, 1994 among
the Company and the purchasers named therein
10.23* Stockholders' Agreement dated March 11, 1994
among the Company and the purchasers named
therein
10.24* Employment Agreement dated as of June 30, 1996
between Kevin J. Migdal and the Company
10.25* Employment Agreement dated as of June 30, 1996
between Edgar R. Hardy and the Company
10.26* Series D Convertible Preferred Stock Purchase Agreement dated
as of December 5, 1994 among the Company and the purchasers
named therein
10.27* First Amended and Restated Registration
Rights Agreement dated December 5, 1994 among
the Company and the purchasers named therein
10.28* Rights Agreement dated December 5, 1994 among
the Company and the purchasers named therein
10.29* Master Purchase Agreement dated December 7,
1995 between the Company and Dominion
Fund II, L.P.
</TABLE>
- --------
* To be filed by amendment.
<PAGE>
<TABLE>
<CAPTION>
Exhibit Sequential
Number Exhibit Page No.
---------- --------- -----------
<S> <C> <C>
10.30* Series E Preferred Stock Purchase Agreement dated as of June
24, 1996 among the Company and the purchasers named therein,
as amended by First Amendment to Series E Preferred Stock
Purchase Agreement dated June 28, 1996
10.31* Second Amended and Restated Registration
Rights Agreement dated as of June 24, 1996
among the Company and the purchasers named
therein
11 Statement regarding computation of earnings
per share (loss per share)
23.1 Consent of Arthur Andersen LLP
23.2* Consent of Smith, Anderson, Blount, Dorsett,
Mitchell & Jernigan, L.L.P.
</TABLE>
- --------
* To be filed by amendment.
<PAGE>
Exhibit 11
Claw Island Foods Inc.
Statement of Computation of Loss Per Share
Pro forma (1)
-----------------------
1995 1996
------ ------
Net Loss $(1,276,359) $(1,462,093)
========== =========
Weighted Average Number
of Common Shares
Issued and Outstanding 45,904 47,955
Common Stock Equivalents
Weighted Average number of
preferred shares converted
to common:
Series C 323,498 332,892
Series D 25,129 50,258
Cheap Stock securities
Series E preferred shares 1,149,212 1,149,212
Options for common stock 610,074 610,074
Warrants for Series E
convertible preferred shares 153,846 153,846
--------- ---------
Weighted Average Common Stock
Equivalents 2,307,662 2,344,238
Less treasury shares assumed to be
repurchased (216,927) (216,927)
--------- ---------
Weighted average shares outstanding 2,090,736 2,127,311
========= =========
Loss per share $(0.61) $(0.69)
========= =========
(1) The pro forma numbers of shares reflect a 5.2-for-1 reverse stock split.
<PAGE>
Exhibit 23.1
ARTHUR ANDERSEN LLP
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the use of our reports
(and to all references to our firm) included in or made part of the Registration
Statement on Form SB-2 and related prospectus of Claw Island Foods Inc. dated
August 9, 1996.
ARTHUR ANDERSEN LLP
(Signature of Arthur
Andersen LLP appears here)
Raleigh, North Carolina
August 9, 1996.
<PAGE>
