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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 19, 1998
REGISTRATION NO. 333-______
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
WOODROAST SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
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<S> <C>
MINNESOTA 41-1563961
(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification number)
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10250 VALLEY VIEW ROAD, SUITE 145
EDEN PRAIRIE, MN 55344
(612) 944-5113
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
SHELDON F. JACOBS
PRESIDENT AND CHIEF EXECUTIVE OFFICER
WOODROAST SYSTEMS, INC.
10250 VALLEY VIEW ROAD, SUITE 145
EDEN PRAIRIE, MN 55344
(612) 944-5113
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
With copies to:
Russell F. Lederman, Esq.
Maslon Edelman Borman & Brand, LLP
3300 Norwest Center
Minneapolis, Minnesota 55402-4140
(612) 672-8200
APPROXIMATE DATE OF THE COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
From time to time after the effective date of this Registration Statement.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
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, other than securities offered only in connection with
dividend or interest reinvestment plans, 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. [ ]
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CALCULATION OF REGISTRATION FEE
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PROPOSED
PROPOSED MAXIMUM PROPOSED
AMOUNT OF DOLLAR AMOUNT AGGREGATE MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES TO BE TO BE OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED (1) REGISTERED PER SECURITY OFFERING PRICE FEE
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<S> <C> <C> <C> <C> <C>
Common Stock issuable upon
conversion of Class A 8%
Convertible Preferred Stock -- $1,457,000 (2) -- $1,457,000 $429.82
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Placement Agent Options 175,000 -- $ 0.00(3) $ 0 $ 0.00
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Common Stock issuable upon
exercise of Placement Agent Options 175,000 -- $0.922(4) $ 161,350 $ 47.60
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(1) In accordance with Rule 416, there also are being registered such
additional shares of Common Stock as may become issuable pursuant to the
terms of the antidilution provisions applicable upon exercise of the
Placement Agent Options.
(2) Represents the stated value of 117,500 shares of Preferred Stock
($1,175,000) plus the maximum amount of dividends ($282,000) that may be
payable upon conversion of the Preferred Stock.
(3) Represents the excess of the market price of the Common Stock, as reported
by The Nasdaq Stock Market on March 13, 1998 pursuant to Rule 457(c) and
Rule 457(o), over the $1.125 exercise price of the 175,000 Placement Agent
Options.
(4) Calculated pursuant to Rule 457(c) and Rule 457(o) under the Securities
Act of 1933 based upon the average of the high and low trading prices on
March 13, 1998, as reported on The Nasdaq Stock Market.
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.
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Information contained herein is subject to completion or amendment. A
registration statement relating to these 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.
SUBJECT TO COMPLETION; DATED MARCH 19, 1998
PROSPECTUS
WOODROAST SYSTEMS, INC.
COMMON STOCK AND
COMMON STOCK PURCHASE OPTIONS
This Prospectus relates to shares of common stock, par value $.005 per
share ("Common Stock"), of Woodroast Systems, Inc. (the "Company") issuable
upon conversion of 117,500 shares of the Company's Class A 8% Convertible
Preferred Stock, par value and stated value $10.00 per share (the "Preferred
Stock"), that may be offered for resale for the account of the holders of the
Preferred Stock. The Preferred Stock accrues dividends at the rate of 8% per
annum, payable in shares of Common Stock on the date the Preferred Stock is
converted into shares of Common Stock. The Preferred Stock and dividends
accrued thereon are convertible, at the election of the holder, into a number
of shares of Common Stock determined by dividing the aggregate stated value of
the Preferred Stock being converted plus the amount of accrued dividends by the
lesser of (i) 80% (the "Conversion Rate") of the average closing bid price for
the Common Stock, as reported by The Nasdaq Stock Market or the OTC Bulletin
Board for the five consecutive trading days ending on the trading day prior to
the conversion date and (ii) $1.125, subject to adjustment for stock splits,
stock dividends and other recapitalizations, mergers and other similar events.
The Conversion Rate is subject to reduction to 70% upon the passage of
specified time periods and the nonoccurrence of certain events. See "Recent
Developments -- Private Placement." The Preferred Stock was convertible
beginning February 19, 1998. Preferred Stock not converted by February 19, 2001
is automatically converted into Common Stock. The Company may redeem the
Preferred Stock, in whole as a class and not in part and if a registration
statement regarding the underlying Common Stock is current and effective, upon
20 days' prior written notice, at a price payable in cash equal to 120% of
the sum of (i) the stated value of the Preferred Stock being redeemed, plus
(ii) the dividends accrued through the redemption date.
This Prospectus also relates to 175,000 Common Stock Purchase Options
("Placement Agent Options" and, together with the Common Stock offered hereby,
the "Securities") and the shares of Common Stock issuable upon exercise of such
Options that may be offered for resale for the accounts of the holders of the
Placement Agent Options. The Placement Agent Options entitle the holder thereof
to purchase 175,000 shares of Common Stock for $1.125 per share, exercisable
until February 18, 2002.
All of the Securities offered hereby are being registered for the respective
accounts of the holders of the Preferred Stock and of the Placement Agent
Options (collectively, the "Selling Securityholders") set forth in this
Prospectus under the heading "Selling Securityholders." No period of time has
been fixed within which the Securities covered by this Prospectus may be offered
or sold. The Company will not receive any of the proceeds from the sale of the
Securities; however, it will receive an aggregate of $196,875 in gross proceeds
if the Placement Agent Options are fully exercised. See "Use of Proceeds" and
"Selling Securityholders."
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All costs, expenses and fees in connection with the registration of the
Securities offered by this Prospectus will be borne by the Company. Such
expenses are estimated at $22,000. Brokerage commissions and discounts, if any,
attributable to the sale of the Securities for the accounts of the Selling
Securityholders will be borne by them.
The Common Stock is listed on the Nasdaq SmallCap Market under the symbol
"WRSI." On March 13, 1998, the last sale price for the Common Stock as
reported on the Nasdaq SmallCap Market was $0.969.
The Securities offered hereby involve a high degree of risk. See "Risk
Factors" beginning on page 6 for a description of certain factors which should
be considered by investors before purchasing the securities offered hereby.
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.
The date of this Prospectus is _________, 1998.
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AVAILABLE INFORMATION
This Prospectus is part of a Registration Statement on Form S-3 (together
with all amendments and exhibits thereto, the "Registration Statement") which
the Company has filed with the Securities and Exchange Commission (the
"Commission") under the Securities Act of 1933, as amended (the "Securities
Act") relating to the securities offered hereby. This Prospectus does not
contain all of the information set forth in the Registration Statement, certain
parts of which are omitted in accordance with the rules and regulations of the
Commission. For further information, reference is made to the Registration
Statement. Statements made in this Prospectus as to the contents of any
contract, agreement or other document referred to herein are not necessarily
complete. With respect to each such contract, agreement or other document filed
as an exhibit to the Registration Statement, reference is made to the exhibit
for a more complete description of the matter involved, and each such statement
shall be deemed qualified in its entirety by such reference.
The Company is subject to the informational reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") and, in
accordance therewith, files reports, proxy and information statements and other
information with the Commission. Such reports, proxy and information statements
and other information as well as the Registration Statement and Exhibits of
which this Prospectus is a part filed by the Company may be inspected and
copied at the public reference facilities of the Commission, Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, DC 20549, as well as at
the following Regional Offices: 7 World Trade Center, 13th Floor, New York, New
York 10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of such material can be obtained from the Commission by mail at
prescribed rates. Requests should be directed to the Commission's Public
Reference Section, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, DC 20549. In addition, the Commission maintains a Web site that
contains reports, proxy and information regarding registrants, such as the
Company, that file electronically with the Commission. The address of this Web
site is: http://www.sec.gov. Material filed by the Company can also be
inspected at the offices of the National Association of Securities Dealers,
Inc., 1735 K Street N.W., Washington, D.C. 20006.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents heretofore filed by the Company with the Commission
(File No. 0-25926) pursuant to the Exchange Act are incorporated by reference in
this Prospectus:
(1) Annual Report on Form 10-KSB for the fiscal year ended December 29,
1996;
(2) Quarterly Reports on Form 10-QSB for the fiscal quarters ended March
30, 1997, June 29, 1997 and September 28, 1997;
(3) The Company's Proxy Statement dated April 18, 1997 for the 1997 Annual
Meeting of Shareholders held on May 20, 1997; and
(4) The description of the Company's Common Stock contained in the
Company's Form SB-2 Registration Statement dated March 25, 1994,
Registration No. 33-75152C.
All documents subsequently filed by the Company pursuant to Sections 13(a),
13(c), 14 and 15(d) of the Exchange Act, subsequent to the date of this
Prospectus and prior to the termination of the offering
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described herein, shall be deemed to be incorporated by reference in this
Prospectus from the respective dates those documents are filed. Any statement
contained in a document incorporated or deemed to be incorporated by reference
herein shall be deemed to be modified or superseded for purposes of this
Prospectus to the extent that a statement contained herein or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus.
The Company will provide without charge to each person to whom a copy of
this Prospectus has been delivered, on the written or oral request of such
person, a copy of any or all of the documents referred to above which have been,
or may be, incorporated in this Prospectus by reference, other than exhibits to
such documents. Requests for such copies should be directed to Woodroast
Systems, Inc., 10250 Valley View Road, Suite 145, Eden Prairie, MN 55344,
Attention: Ralph J. Guarino, President and Chief Operating Officer.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements, including the notes thereto,
appearing elsewhere or incorporated by reference in this Prospectus. This
Prospectus contains and incorporates by reference forward-looking statements
that involve risks and uncertainties. The Company's actual results may differ
significantly from the results discussed in the forward-looking statements.
Factors that might cause such differences include, but are not limited to, those
discussed under the heading "Risk Factors," which prospective investors should
carefully consider.
THE COMPANY
Woodroast Systems, Inc. is a Minnesota corporation (the "Company")
headquartered in Eden Prairie, Minnesota. The Company owns and operates
restaurants with unique cooking and decor styles and cigar bars under its
federally registered trademark "Shelly's Woodroast" and "Shelly's Back Room"
design. The Shelly's Woodroast restaurant concept includes a north woods lodge
design and "Original Woodroast Cooking(R)," a signature style of cuisine
featuring slow-roasted meat, fish and fowl prepared in patented,
computer-controlled wood-burning ovens. The Shelly's Back Room concept features,
in addition to fine food and beverage service, accommodations for cigar smokers,
club seating, retail cigar sales, and a state-of-the-art air purification
system called "kleen-aire(TM)."
The Company is in the process of attempting to sell its two restaurants,
located in Rockville, Maryland and St. Louis Park, Minnesota, in the context of
changing its business strategy to focus exclusively on Shelly's Back Room cigar
parlors. See "Business."
The Company was incorporated as a Minnesota corporation in January 1987. The
address and telephone number of its principal executive offices are 10250 Valley
View Road, Suite 145, Eden Prairie, Minnesota 55344, (612) 944-5113.
THE OFFERING
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<S> <C>
Securities Offered by
Selling Securityholders........................ An indeterminate number of shares of Common Stock
issuable upon conversion of 117,500 shares of Preferred
Stock, as well as 175,000 Common Stock Purchase
Options and the shares of Common Stock issuable upon
exercise of such Options (collectively, the
"Securities").
Offering Price.................................... All or part of the Securities offered hereby may be sold
from time to time in amounts and on terms to be
determined by the Selling Securityholders from time to
time.
Use of Proceeds................................... The Company will not receive any of the proceeds from
the sale of the Securities by the Selling
Securityholders, but will receive $196,875 in gross
proceeds if the Placement Agent Options are
exercised.
Selling Securityholders........................... The Shares being offered hereby are being offered for the
account of the Selling Securityholders specified under the
caption "Selling Securityholders."
Nasdaq SmallCap Market Symbol..................... WRSI
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RISK FACTORS
Each prospective investor should carefully consider the following factors,
among others, prior to purchasing the Securities offered hereby.
LACK OF PROFITABILITY; DEPENDENCE ON TWO RESTAURANTS AND TWO BACK ROOMS
The Company opened the St. Louis Park Restaurant in autumn of 1989 and the
Rockville Restaurant in November 1995. The Company opened its first stand-alone
Shelly's Back Room "The American Tavern" in Washington D.C. in June 1997 and its
second in Chicago, Illinois in January 1998. The Company has operated at a loss
since its inception and had net losses of ($1,167,433), ($1,702,566) and
($1,776,314) during the fiscal years ended December 31, 1995 and December 29,
1996 and the thirty-nine weeks ended September 28, 1997, respectively, and
working capital of $109,772 at September 28, 1997. The Company expects losses to
continue for the near future. The Company is currently attempting to sell the
St. Louis Park and Rockville Restaurants.
Future revenues and profits will depend upon various factors, including
market acceptance of the Shelly's Back Room concept and general economic
conditions. There can be no assurance of the Company's ability to attain
profitability. The Company's present sole sources of revenue are two Woodroast
restaurants, which restaurants the Company is attempting to sell, and two
Shelly's Back Rooms. The Company also faces all of the risks, expenses and
difficulties frequently encountered in connection with the operation and
development of a new and expanding business. Furthermore, to the extent that the
Company's expansion strategy is successful, the Company must manage the
transition to multiple site operations (both Company-owned and franchise
operations), higher volume operations, the control of overhead expenses and the
addition of necessary personnel.
NEED FOR ADDITIONAL FINANCING
The Company estimates that the proceeds from the offering of Preferred
Stock, which was completed in February 1998, will fund the Company's operations
through approximately March 1998. Management anticipates that it will require
additional financing to open future Back Rooms, and there can be no assurance
that such financing will be available when needed or on terms acceptable to the
Company. The Company is attempting to sell the Rockville and St. Louis Park
Restaurants by the end of the second quarter of 1998, but no assurances can be
made that the Company will be successful in doing so. If the Company is unable
to sell one or both restaurants by that time, the Company will be required to
seek additional funds through one or more additional offerings of equity
securities or debt financing in order to finance operations and develop and open
additional Back Rooms. There can be no assurance that any such additional funds
will be available at all or on terms acceptable to the Company or its
shareholders.
DEVELOPMENT OF SHELLY'S BACK ROOM CONCEPT; NEED FOR FINANCING
Future expansion of the Shelly's Back Room concept will depend upon several
factors, including market acceptance of the Back Room concept, general economic
conditions, the costs of developing and opening new facilities and the Company's
ability to obtain additional financing if necessary. The Company estimates that
the costs of developing additional Company-owned Back Rooms will range from
$900,000 to $1,400,000, depending upon construction costs and the level of
landlord contributions. The cost of developing, constructing and opening the
Washington, D.C. Shelly's Back Room was approximately $1,032,500, not including
approximately $107,000 for pre-opening costs, and was approximately $1,300,000
for the Chicago Shelly's Back Room, not including approximately $113,000 for
pre-opening costs. Although
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the Company has developed a standardized Back Room layout, there can be no
assurance that additional Back Rooms will be developed at a cost within the
Company's estimated range or that such Back Rooms, if developed, would be
profitable. Management anticipates that it will require additional financing to
open future Back Rooms, and there can be no assurance that such financing will
be available when needed or on terms acceptable to the Company.
DEPENDENCE ON CONSUMER ACCEPTANCE IN NEW MARKETS
The Company's success will be dependent upon consumer acceptance of the
Shelly's Back Room concepts in new markets. Until November 1995, the Company's
operating experience has been limited to the Minneapolis-St. Paul metropolitan
area. Although the Company believes that the Shelly's Back Room concept has been
accepted by the public in the Washington, D.C. and Chicago metropolitan markets,
no assurance can be given that such acceptance will continue or be received in
new markets.
COSTS AND RISKS ASSOCIATED WITH EXPANSION
The opening of additional Shelly's Back Rooms outside of the Minneapolis-St.
Paul metropolitan market will give rise to additional expenses associated with
managing restaurants located in multiple markets. Such expenses include:
advertising in more than one market; lease rates and construction costs which
may be higher in the new markets; travel costs; and other similar expenses.
Moreover, the Company's results of operations may be adversely affected by
economic conditions in those regions and other geographic areas in which the
Company may expand. In addition, the Company's successful growth and expansion
will depend on the ability of the Company's management to identify suitable
sites and to negotiate leases or purchases of such sites; timely and economic
development and construction of restaurants; the hiring of skilled management
and other personnel; the ability of the Company's management to apply
standardized policies and procedures to a larger number of restaurants; the
general ability to successfully manage growth (including monitoring restaurants,
controlling costs and maintaining effective quality controls); and the general
state of the economy. As such, there can be no assurance that the Company will
be able to successfully open new restaurants.
COMPETITION; CERTAIN FACTORS AFFECTING THE HOSPITALITY INDUSTRY
The hospitality industry is highly competitive with respect to price,
service, food quality (including taste, freshness, healthfulness and nutritional
value) and location, and, as a result, has a high failure rate. There are
numerous well-established competitors, including national, regional and local
restaurant and hospitality chains, possessing substantially greater financial,
marketing, personnel and other resources than the Company. There can be no
assurance that the Company will be able to respond to various competitive
factors affecting the hospitality industry. The hospitality industry is also
generally affected by changes in consumer preferences, national, regional and
local economic conditions, and demographic trends. The performance of individual
locations may also be affected by factors such as traffic patterns, demographic
considerations, and the type, number and location of competing establishments.
In addition, factors such as inflation, increased food, labor and employee
benefit costs, and the availability of experienced management and hourly
employees may also adversely affect the hospitality industry in general and the
Company's restaurants and Back Rooms in particular. Hospitality operating costs
are further affected by increases in the minimum hourly wage, unemployment tax
rates and similar matters over which the Company has no control.
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LONG-TERM, NON-CANCELABLE LEASES
The Company leases the land under its restaurants and Back Rooms pursuant to
long-term, non-cancelable leases. Any additional Back Rooms developed by the
Company may be subject to similar long-term leases. If an existing or future
location does not perform at a profitable level, and the decision is made to
close that location, the Company will nonetheless be committed to perform its
obligations under the applicable lease.
EFFECTS OF DELISTING FROM NASDAQ SMALLCAP MARKET; LACK OF LIQUIDITY OF LOW
PRICED STOCKS
The Company has failed to maintain the minimum bid price criteria of $1.00
per share during most of December 1997 and sporadically during 1998 to date for
its Common Stock to trade on the Nasdaq SmallCap Market. Accordingly, its
securities may be delisted from the Nasdaq SmallCap Market. Additional factors
giving rise to such delisting could include, but not be limited to, a reduction
of the Company's net tangible assets to below $2,000,000, a reduction to one
active market maker or a reduction in the market value of the public float in
the Company's securities to less than $1,000,000. In such event, trading, if
any, in the Common Stock would thereafter be conducted in the over-the-counter
markets in the so-called "pink sheets" or the National Association of Securities
Dealer's "Electronic Bulletin Board." Consequently, the liquidity of the
Company's Common Stock would likely be impaired, not only in the number of
shares which could be bought and sold, but also through delays in the timing of
the transactions, reduction in security analysts' and the news media's coverage,
if any, of the Company and lower prices for the Company's securities than might
otherwise prevail. If the Company's Common Stock were to be delisted from the
Nasdaq SmallCap Market, it would become subject to Rule 15g-9 under the Exchange
Act (the "Penny Stock Rules"), which imposes additional sales practice
requirements on broker-dealers which sell such common stock to persons other
than established customers and certain institutional investors. For transactions
covered by the Penny Stock Rules, a broker-dealer must make a special
suitability determination for the purchaser and have received the purchaser's
written consent to the transaction prior to sale. Consequently, the Penny Stock
Rules may adversely affect the ability of broker-dealers to sell the Company's
Common Stock and may adversely affect the ability of the Company's shareholders
to sell any of their shares of Common Stock in the secondary market.
GOVERNMENT REGULATION
The restaurant business is subject to various federal, state and local
government regulations, including those relating to the sale of food and
alcoholic beverages. While the Company to date has not experienced an inability
to obtain or maintain any necessary governmental licenses, permits or approvals,
the failure to maintain food and liquor licenses could have a material adverse
effect on the Company's operating results. In addition, restaurant operating
costs are affected by increases in the minimum hourly wage, unemployment tax
rates, sales taxes and similar costs over which the Company has no control.
Since many of the Company's restaurant personnel are paid at rates based on the
federal minimum wage, increases in the minimum wage will result in an increase
in the Company's labor costs. The Company also may be subject in certain states
to "dram shop" statutes which generally provide a person injured by an
intoxicated person the right to recover damages from an establishment that
served alcoholic beverages to an intoxicated person.
DEPENDENCE ON KEY PERSONNEL; NEED FOR ADDITIONAL MANAGEMENT
The Company is highly dependent upon the personal efforts and abilities of
Sheldon F. Jacobs, its Chairman and Chief Executive Officer, and Ralph J.
Guarino, its President, Chief Operating Officer and
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Chief Financial Officer. The loss of the services of Mr. Jacobs or Mr. Guarino
could have a substantial adverse effect on the Company's ability to achieve its
objectives. The Company has not obtained key-man life insurance on Mr. Jacobs'
life. The Company will need to hire other corporate level and management
employees to help implement and operate its expansion plans. The failure to
obtain, or delays in obtaining, such employees could have a material adverse
affect on the Company.
DEPENDENCE ON POPULARITY OF CIGAR SMOKING
The success of Shelly's Back Rooms will depend, in part, on the continued
popularity of cigar smoking. While Shelly's Back Rooms also offer a full service
bar and a limited menu, they are designed to cater to the increasing number of
cigar smokers. A decline in the popularity of cigar smoking may have an adverse
impact on the success of Shelly's Back Rooms and the Company. There can be no
assurance that the popularity of cigar smoking will continue to increase or that
a level of popularity sufficient to support the Back Room concept will be
sustained.
ABSENCE OF DIVIDENDS
The Company has not paid any dividends on its capital stock since its
incorporation and does not intend to pay any cash dividends in the foreseeable
future.
CONTROL BY EXISTING MANAGEMENT
Sheldon F. Jacobs, the Company's Chief Executive Officer, owns approximately
27% of the issued and outstanding shares of the Common Stock of the Company.
Accordingly, Mr. Jacobs may have substantial influence with respect to the
Company's affairs, including without limitation, the sale of equity or debt
securities of the Company, the appointment of officers, and the determination of
officers' salaries.
UNDESIGNATED STOCK
The Company's authorized capital consists of 33,000,000 shares of capital
stock. The Board of Directors, without any action by the Company's stockholders,
is authorized to designate and issue shares in such classes or series (including
classes or series of preferred stock) as it deems appropriate and to establish
the rights, preferences and privileges of such shares, including dividends,
liquidation and voting rights. The Company currently has 4,242,397 shares of
Common Stock outstanding and 117,500 shares of Preferred Stock outstanding. No
other class of common stock or preferred stock, is currently designated and
there is no current plan to designate or issue any such securities. The rights
of holders of preferred stock and other classes of common stock that may be
issued may be superior to the rights granted to the holders of the Common Stock.
Further, the ability of the Board of Directors to designate and issue such
undesignated shares could impede or deter an unsolicited tender offer or
takeover proposal regarding the Company and the issuance of additional shares
having preferential rights could adversely affect the voting power and other
rights of holders of Common Stock.
LIMITATIONS ON DIRECTOR LIABILITY
The Company's Amended and Restated Articles of Incorporation provide, as
permitted by governing Minnesota law, that a director of the Company shall not
be personally liable to the Company or its shareholders for monetary damages for
breach of fiduciary duty as a director, with certain exceptions. These
provisions may discourage shareholders from bringing suit against a director for
breach of fiduciary duty and may reduce the likelihood of derivative litigation
brought by shareholders on behalf of the Company
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against a director. In addition, the Company's Bylaws provide for mandatory
indemnification of directors and officers to the fullest extent permitted by
Minnesota law.
MINNESOTA ANTI-TAKEOVER LAW
The Company is subject to Minnesota statutes regulating business
combinations and restricting voting rights of certain persons acquiring shares
of the Company, which may hinder or delay a change in control of the Company.
See "Plan of Distribution."
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of the Securities by
the Selling Securityholders; however, it will receive an aggregate of $196,875
in gross proceeds if the Placement Agent Options are fully exercised. The
Company cannot estimate the number of Placement Agent Options that may be
exercised. The Company believes that the exercise of the Placement Agent Options
primarily will be dependent on the market price of a share of Common Stock at
the time of exercise and its relation to the exercise price. See "Selling
Securityholders."
The Company intends to use the net proceeds from the exercise of any of the
Placement Agent Options for working capital and general corporate purposes.
Pending application of the proceeds, the Company intends to place the funds in
interest-bearing investments such as bank accounts, certificates of deposit,
money market funds and United States government obligations.
RECENT DEVELOPMENTS
PRIVATE PLACEMENT
On February 19, 1998, the Company completed a private placement ("Private
Placement") from which the Company received gross proceeds of $1,117,500 through
the sale of 117,500 shares of Preferred Stock to accredited investors. Perrin,
Holden & Davenport Capital Corp. (the "Placement Agent"), a member of the
National Association of Securities Dealers, Inc. (the "NASD"), acted as
exclusive placement agent for the Company and received a commission of $117,500,
or 10% of the offering price of the Preferred Stock. The Company also issued to
the Placement Agent and its designees Placement Agent Options, which entitle the
holders thereof to purchase 175,000 shares of Common Stock for $1.125 per share
(the average of the closing bid prices of the Common Stock for the five trading
days immediately preceding the closing date of the Private Placement)
exercisable until February 19, 2002. Total costs of the Private Placement,
including the Placement Agent's commission and costs to register the Securities,
are estimated at $141,000.
The Preferred Stock, including accumulated dividends, is convertible
into a number of shares of Common Stock determined by dividing the aggregate
stated value of the Preferred Stock being converted plus the amount of accrued
dividends by a price (the "Conversion Price") equal to the lesser of (i) 80%
(the "Conversion Rate") of the average closing bid price for the Common Stock,
as reported by the Nasdaq SmallCap Market or the OTC Bulletin Board for the
five consecutive trading days ending on the trading day prior to the conversion
date and (ii) $1.125. The Conversion Price shall be reduced in certain
circumstances, as discussed directly below, and effective November 19, 1998,
the Conversion Rate shall be reduced by five percentage points. The Conversion
Rate is subject to adjustment for stock splits, stock dividends and other
recapitalizations, mergers
10
<PAGE> 13
and other similar events. The Preferred Stock is convertible beginning February
19, 1998. All outstanding shares of Preferred Stock will automatically be
converted into Common Stock on February 19, 2001.
If the Registration Statement of which this Prospectus forms a part has
not been declared effective by the Commission under the Securities Act and
cleared by the NASD by June 19, 1998 (the "Target Date"), then, on the Target
Date and on each monthly anniversary of the Target Date thereafter until the
earlier of the date the Registration Statement is so declared effective and
cleared ("Effective Date") or the fourth monthly anniversary of the Target
Date, the Conversion Rate will be as follows:
<TABLE>
<CAPTION>
Conversion Rate Effective Date
--------------- --------------
<S> <C>
79% Target Date
78% First monthly anniversary of Target Date
77% Second monthly anniversary of Target Date
76% Third monthly anniversary of Target Date
75% Fourth monthly anniversary of Target Date
</TABLE>
The Company has agreed to register for resale by the Selling Securityholders
(i) the shares of Common Stock issuable upon conversion of the Preferred Stock,
(ii) the Placement Agent Options and (iii) the shares of Common Stock issuable
upon exercise of the Placement Agent Options under the Securities Act pursuant
to the Registration Statement of which this Prospectus is a part.
BUSINESS
GENERAL
The Company owns and operates Shelly's Woodroast restaurants in St. Louis
Park, Minnesota, a suburb of Minneapolis (the "St. Louis Park Restaurant"), and
Rockville, Maryland, a suburb of Washington, D.C. (the "Rockville Restaurant")
(collectively, the "Restaurants"). The Company also operates stand-alone
Shelly's Back Rooms in Washington, D.C. (the "Washington Back Room") and in
Chicago, Illinois (the "Chicago Back Room"). The Company has been operating the
St. Louis Park Restaurant since 1989, the Rockville Restaurant since November
1995, the Washington Back Room since June 1997 and the Chicago Back Room since
January 1998.
The Company is in the process of attempting the sell the Rockville and St.
Louis Park Restaurants in the context of changing its business strategy to focus
exclusively on Back Room cigar parlors rather than on full-fledged restaurants.
DIVESTING OF RESTAURANT OPERATIONS
The Company has decided to divest its non-Back Room-related restaurant
operations in order to pursue exclusively its Shelly's Back Room concept, The
American Tavern. Management's primary reasons to pursue the Back Room concept is
that it has a simpler operational structure, requires lower capital investment
and would also more easily allow franchising. The Company has entered into a
letter of intent for the sale of the Rockville Restaurant, but no assurances can
be given that the sale will be consummated.
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<PAGE> 14
NEW SHELLY'S BACK ROOMS IN WASHINGTON, D.C. AND CHICAGO, ILLINOIS
The first stand-alone Shelly's Back Room opened in Washington, D.C. in June
1997, followed by the Chicago Back Room which opened in January 1998. The
Shelly's Back Room concept, the pioneering prototype of which is attached to the
Rockville Restaurant, represents a significant evolution in the development of
"cigar bars" and "cigar rooms." Unlike many existing facilities, Shelly's Back
Room is open to the public; there are no exclusive memberships and high fees.
The only requirements for admittance are a love of good cigars, good food, good
drink and good company.
The Back Room offers casual comfortable seating, a full-service bar, food
service and a state-of-the-art air purification system which circulates 100%
fresh air -- no filtering and recycling -- to ensure maximum guest comfort. An
important signature item of Shelly's Back Room is the development, like the
proprietary Birch Bay Beer of Shelly's Woodroast restaurants, of an exclusive
premium cigar already created with the oversight of Shelly himself and available
exclusively in Back Rooms. However, availability of such cigars is subject to
change in the future as in the case of any product imported from a foreign
country.
A smaller but important element of the Back Room concept is the retail
humidor and counter offering a canny selection of some of the world's finest
cigars for purchase. Mr. Jacobs will use his personal knowledge and connections
to ensure that the Back Room humidors offer the most complete and current
selections available, featuring, of course, the private Back Room label which
Mr. Jacobs has developed. In addition to cigars, the Back Rooms will offer a
selection of premium logo merchandise including ashtrays, lighters, selected
clothing items, pocket knives, cutters and glassware.
As previously mentioned, the specialized air purification system will be a
critical component of the Back Room concept. Designed in recognition that no
filtration and recycling system can adequately handle the unique and intensive
needs of a dedicated cigar smoking emporium, the Shelly's Back Room system will
utilize 100% fresh air.
Shelly's Back Room has been designed with the intention of being efficiently
reproduced on a national basis. Target sites will be high walking-traffic
storefront units with convenient parking in major cities and upscale suburban
strip malls and shopping centers, comparable, for example, to sites targeted by
retailers like Starbucks Coffee.
A full, independent Back Room facility is designed to require approximately
2,500 to 3,500 square feet of space. However, in special applications such as
casinos, hotels or resorts, which would have their own food service operations,
the kitchen can be eliminated, reducing space needs to as little as 800 square
feet.
The market position of the Back Room concept can best be described as
accessibly upscale. The very nature of the product offering dictates a refined
sophisticated ambiance with commensurate service and pricing. However, the broad
appeal of cigars and the relative affordability of premium brands compared to
other forms of luxury consumption, encourages a rational market position capable
of appealing to a variety of clientele. Such a position is also far more
conducive to more rapid and widespread duplication as the concept grows in
popularity and exposure. Indeed, the Back Room concept is not dissimilar to a
coffeehouse concept such as Starbucks, offering a convenient location for the
enjoyment of premium versions of popular consumables in a relaxed setting.
However, the average ticket for a premium cigar and cognac can be substantially
greater than that for a premium coffee beverage and dessert.
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<PAGE> 15
EXPANSION PLANS
The Chicago Back Room opened in January 1998. The Company is in the process
of identifying new Back Room locations and is visiting and evaluating potential
sites in Minneapolis, Philadelphia and Boston. While the Company has signed
letters of intent for sites in Minneapolis and Philadelphia, there are presently
no binding agreements to develop new Back Rooms. The timing of the development
and opening of additional Back Rooms will depend upon several factors, including
the success of the Shelly's Back Room concept, the costs of developing and
opening new facilities, the Company's success in franchising and the Company's
ability to obtain additional financing.
THE SHELLY'S WOODROAST CONCEPT
The Shelly's Woodroast restaurant concept is an integrated concept,
involving a distinctive cooking style, menu offerings, beverage selections and
facility design. The inspiration of the concept is the fresh, relaxed atmosphere
of the north woods, from the great fieldstone and timber lodges to the aroma of
meat, fish and fowl roasting over a hardwood fire. The Company believes that the
Shelly's Woodroast concept has several characteristics that define and
distinguish it from its competitors, particularly full-service, chain-affiliated
restaurants, including: the marks "Woodroast," "The Original Shelly's Woodroast"
and "Original Woodroast Cooking," and the patented Woodroast oven, proprietary
spice blends and marinades; unique food offerings patterned after the hearty
fare of the north woods, which include, in addition to Woodroast entrees, a
selection of fresh sausages prepared under contract using proprietary recipes,
freshwater fish and homemade stew, all served in large portions, creating a high
perception of value; a selection of distinctive draft beers from American
micro-breweries, highlighted by three of the Company's own Birch Bay beers
brewed from proprietary recipes exclusively for the Company; and the north woods
lodge design of the facility itself with its fieldstone fireplace, exposed whole
timber beams, and rough-cut red pine siding.
ORIGINAL WOODROAST COOKING
Original Woodroast Cooking is a proprietary style of cooking with origins in
America's north woods country -- where Canada meets the United States. As the
name suggests, it is a cooking method in which meats, fish and fowl are slowly
roasted in wood burning ovens. Each offering is also marinated in a proprietary
blend of herb and spices for 48 hours or longer before the cooking begins. Some
of the spice blends and sauces include: seven herb blend, five pepper blend,
Shelly's fire spice, Woodroast sauce, and mustard sauce.
MENU
The meat, fish and fowl, which are the centerpiece of the menu, are simple
and moderately priced. It is the preparation which makes them unique. Featured
dinner items include roast duck and game hen, turkey drumsticks, salmon, trout
and walleye, beef brisket, spare ribs and roast pork. Pricing is generally
moderate, between $8 and $18, and portions are large. Several side dishes are
included with the entrees, such as herb roasted potatoes, marinated vegetable
salad and homemade popovers.
An unusual feature of the Shelly's Woodroast menu are the fresh sausages
made from the personal recipes of Sheldon F. Jacobs, the Company's principal
shareholder. For lunches and lighter dinners, a variety of sandwich versions of
the entree selections are offered, as well as Campfire Stew, Corn Cob Chowder,
Lodge Soup (a hearty vegetable beef) and sandwiches. The Company also offers
several specialty salads.
13
<PAGE> 16
FACILITIES
The design of the Restaurants is reminiscent of the great
turn-of-the-century hunting lodges of the north woods. The St. Louis Park
Restaurant's main dining room features a 20-foot-high ceiling with handcrafted
log-scissor trusses resting atop a one-ton log beam. A birch log bar completes
the northern lodge atmosphere. Other natural elements at the restaurant include
exposed beam ceilings in the bar, leather covered booths, barstools covered with
Holstein hide and a massive fieldstone fireplace. The bars in the Restaurants
feature furniture made of natural elements (tables supported by rough-hewn birch
logs) and display cases replete with antique fishing lures, decoys and other
items which bring to mind a sense of the north woods.
The execution of the north woods concept is far more extensive than
typically present even in a "theme" restaurant. The cost to develop the St.
Louis Park Restaurant in 1989, which has 138 seats, was approximately
$1,750,000. The cost to develop the Rockville Restaurant, which was opened in
November 1995 and has approximately 258 indoor dining seats, was approximately
$3,500,000.
The Rockville Restaurant contains the first Shelly's Back Room. Nestled in a
private corner adjoining the bar, this special room was designed as a retreat
for cigar smokers desiring to follow a lunch or dinner in the restaurant with
cigars from their personal humidors. Shelly's Back Room boasts exquisitely
hand-crafted, floor-to-ceiling humidors, one which is designed for common use
and another which houses 72 private lockers for use by special patrons. Coupling
a state-of-the-art air purification system with relaxed club seating and the
rich woods used throughout the room, Shelly's Back Room is a popular haven for
the restaurant's cigar-smoking guests.
OPERATIONS
Staffing -- At March 16, 1998, the Company had 210 employees, including 55
at the St. Louis Park Restaurant, 81 at the Rockville Restaurant, 34 at the
Washington Back Room, 35 at the Chicago Back Room and five at the Company's
executive offices. The staff of the St. Louis Park Restaurant consists of a
general manager, service manager, bar manager, kitchen manager and assistant
kitchen manager, and approximately 50 hourly employees, 40 of whom are employed
part-time. The staff of the Rockville Restaurant consists of a general manager,
service manager, bar manager, kitchen manager and assistant kitchen manager, and
approximately 76 hourly employees, 55 of whom are employed part-time. The staff
of the Washington Back Room consists of a general manager and assistant general
manager, and approximately 32 hourly employees, 25 of whom are employed
part-time. The staff of the Chicago Back Room consists of a general manager and
assistant general manager, and approximately 33 hourly employees, 30 of whom are
employed part-time. The Company believes that its relationship with its
employees is good.
Employee Training and Supervision -- The Company believes strongly in the
concept of teamwork and the importance of a well trained and motivated staff.
Each Restaurant is closely supervised by its general manager, who is directly
responsible for the restaurant's success. Each staff member is given a Staff
Member Guideline Manual, which provides background information on the Company
and outlines basic policies and procedures applicable to all personnel. Each
staff member is also given either a Service Manual or Kitchen Manual as
appropriate. These manuals provide job descriptions for each position in the
restaurant and detailed guidelines and background information for the execution
of the duties associated with employment in either the preparation or service of
food and beverages. Employees are tested on an occasional basis to measure their
knowledge of the products served and the policies of the Company.
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<PAGE> 17
New employees receive a training manual and training packet, which outlines
the training agenda for their employment and provides basic background
information on the names and prices of food and beverage items, as well as other
terminology which they need to know. New employees are trained by designated
staff members with considerable experience and proven performance.
Restaurant Reporting -- The Company prepares a monthly balance sheet and
income statement, which provides overall performance information for each of the
Restaurants. The Company also utilizes a point-of-sale system which allows daily
and weekly reports to be generated regarding cash control, sales and theoretical
food costs. On a monthly basis, the Company counts its food and beverage
inventories.
Sales and guest counts are forecasted in advance for each week of the month.
Actual sales and guest counts are then compared to forecasted levels. Sales and
guest counts are also compared to the annual budget and the prior year's
performance. Labor hours are tracked weekly by day and position. Actual hours
are compared to budgeted levels to identify variance.
COMPETITION
The restaurant business is highly competitive and is affected by changes in
taste and eating habits of the public, local and national economic conditions
affecting spending habits, and population and traffic patterns. The principal
competitive factors in the restaurant industry are believed to be the quality
and price of the food. Restaurant location, name recognition, efficiency of
service, advertising, and attractiveness of facilities are also important.
Shelly's Woodroast restaurants compete on a general basis with a large variety
of national and regional restaurant operations, as well as locally owned
restaurants, diners, and other establishments that offer moderately priced food
to the public.
PATENTS AND TRADEMARKS
The Company holds the rights to U.S. Patent Number 4,924,071, which covers
the Woodroast oven invented by Mr. Jacobs. In addition, the Company owns U.S.
registrations of the marks "Woodroast," "Original Woodroast Cooking," "The
Original Shelly's Woodroast" and "Birch Bay Brewing Company" and of the design
mark "Shelly's Back Room." The mark "Original Woodroast Cooking" has also been
registered in the United Kingdom and France, and the mark "Birch Bay Brewing
Company" has been registered in Canada. The Company has aggressively defended
its trademarks against infringement by competitors on a national basis. Birch
Bay Brewing Company is a mark used by the Company for certain of its own
beverages and is not a separate legal entity.
REGULATION
Restaurants are subject to licensing and regulation by state and local
health, sanitation, safety, fire, and other authorities and are also subject to
state and local licensing and regulation of the sale of alcoholic beverages,
food, cigarettes, games, and the like. Difficulties or failure in obtaining
required licenses and approvals will result in delays in, or cancellation of,
the opening of restaurants. The food and liquor licenses are also subject to
suspension or non-renewal if the granting authority determines that the conduct
of the holder does not meet the standards for initial grant or renewal.
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<PAGE> 18
MANAGEMENT
The following table sets forth certain information with respect to the
Company's directors and executive officers.
<TABLE>
<CAPTION>
Name Age Positions with the Company
- ----------------------------------------- --- --------------------------
<S> <C> <C>
Sheldon F. Jacobs.................. 53 Chairman and Chief Executive Officer
Ralph J. Guarino................... 51 Chief Operating Officer and Director
Richard A. Orenstein............... 44 Director
Merle J. Shapiro................... 55 Director
</TABLE>
Sheldon F. Jacobs has been the Chief Executive Officer and Chairman of the
Board of the Company since its formation in 1987 and was also its President and
Chief Financial Officer until 1996. From 1980 to 1987, Mr. Jacobs worked toward
the development of the Shelly's Woodroast concept, from engineering and
patenting the design of the Woodroast ovens to introducing the Original
Woodroast Cooking to existing restaurants and testing consumer response.
Ralph J. Guarino joined the Company in November 1996 as its President, Chief
Operating Officer and Chief Financial Officer. Mr. Guarino brings over 25 years
of restaurant operations experience to the Company. From July 1992 until that
time Mr. Guarino served as Senior Vice President, Chief Operating Officer and
member of the Board of Directors for The Italian Oven, Inc., a 100-unit chain of
full-service, moderately-priced Italian family restaurants based in Latrobe,
Pennsylvania. He became President in February 1993. During his four-year tenure
at that company, he oversaw The Italian Oven, Inc.'s initial public offering of
common stock, the opening of 18 additional company-owned units and 71 franchised
units, as well as the sale of over 250 franchises. The Italian Oven, Inc. filed
a voluntary petition for reorganization under Chapter 11 of the United States
Bankruptcy Code on October 21, 1996. He served as Senior Vice President, Chief
Financial Officer and member of the Board of Directors for Boston Chicken, Inc.,
a restaurant and prepared food chain based in Boston, Massachusetts, from 1990
until 1992.
Richard A. Orenstein became a director of the Company in February 1998. He
is presently a private investor managing his own investments. From 1994 to 1996,
Mr. Orenstein was a senior consultant for AmeriData Consulting Inc., St. Paul,
Minnesota, a computer hardware and software sales and service company. From 1992
to 1994, Mr. Orenstein was an independent self-employed consultant in the
computer industry, providing technological and resource solutions for a wide
variety of clients.
Merle J. Shapiro joined the board of directors in February 1998. He has been
the President and Chief Operating Officer of Merle Corporation since 1991. The
Merle Corporation provides consulting services and is a provider of furniture,
fixtures, window treatments and carpeting to commercial and residential clients.
As of January 1, 1998, the Company entered into a three-year employment
agreement with Mr. Jacobs pursuant to which Mr. Jacobs will continue to serve as
the Company's Chief Executive Officer. Under the terms of his employment
agreement, Mr. Jacobs may not disclose confidential information concerning the
Company and has agreed not to compete with the Company for a period of one year
after any termination of employment. The Company may terminate Mr. Jacobs'
employment for "good cause," or upon "disability," as defined in the agreement,
or int he event of death. Mr. Jacobs may terminate his employment for "good
reason" upon 10 days' written notice to the Company. If either Mr. Jacobs
terminates
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<PAGE> 19
his employment for "good reason," as defined in the agreement, or is terminated
by the Company without "good cause," Mr. Jacobs is entitled to receive his base
salary for one year following such termination.
CERTAIN TRANSACTIONS
On December 12, 1997, the Company borrowed $250,000 from Sheldon F. Jacobs,
a principal shareholder, director and executive officer. The note was due on
December 12, 1998, provided for interest at an annual rate of two percent over
prime, and has been repaid in full. On January 27, 1998, the Company borrowed
$150,000 from Mr. Jacobs pursuant to a note which bears interest at an annual
rate of two percent over prime and is due on January 27, 1999.
SELLING SECURITYHOLDERS
The tables set forth below provide certain information with respect to the
beneficial ownership of the Company's Common Stock by the Selling
Securityholders as of March 13, 1998, and as adjusted to give effect to the
sale of all of the securities offered hereby. See "Plan of Distribution." Except
as otherwise indicated, the number of shares of Common Stock reflected in the
tables has been determined in accordance with Rule 13d-3 promulgated under the
Exchange Act. Under this rule, each Selling Shareholder is deemed to
beneficially own the number of shares of Common Stock issuable upon conversion
of the Preferred Stock and upon exercise of the Placement Agent Options since
such Preferred Stock and Options are presently convertible or exercisable,
respectively. Unless otherwise indicated, each of the Selling Securityholders
possesses sole voting and investment power with respect to the securities shown
and none of the Selling Securityholders has had a material relationship with the
Company or any of its predecessors or affiliates within the past three years.
<TABLE>
<CAPTION>
Number of Shares Beneficial Ownership After
Beneficial to be Acquired the Offering
Ownership upon Conversion Number of ---------------------------
Prior to of Preferred Shares to Number Percentage
Name Conversion (1) Stock (2) be Sold of Shares of Class
- --------------------------------- ------------ ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Brass Capital, LLC........... - 34,722 34,722 - -
Gmach Beth Joel.............. - 138,889 138,889 - -
Gross Foundation, Inc........ - 69,444 69,444 - -
Industricorp & Co............ - 208,333 208,333 - -
Kador Investment Company,
Ltd....................... - 104,167 104,167 - -
Lawrence Abrams Profit
Sharing................... - 69,444 69,444 - -
Sara Liebowitz............... - 104,167 104,167 - -
New Millenium Ltd............ - 138,889 138,889 - -
Orlac Finance Ltd............ - 416,667 416,667 - -
The International Investment
Group Equities Fund N.V. - 347,222 347,222 - -
</TABLE>
(1) Does not include shares of Common Stock issuable upon conversion of the
Preferred Stock.
(2) Shares of Common Stock issuable upon conversion of the Preferred Stock. Each
share of Preferred Stock, together with accumulated dividends, is
convertible into a number of shares of Common Stock determined by dividing
the aggregate stated value of the Preferred Stock being
17
<PAGE> 20
converted ($10.00 per share of Preferred Stock), together with
accrued dividends, by the lesser of (i) 80% (subject to adjustment) of
the average closing bid price for the Common Stock, as reported by the
Nasdaq SmallCap Market or the OTC Bulletin Board for the five
consecutive trading days ending on the trading day prior to the
conversion date and (ii) $1.125. Calculated by dividing the aggregate
stated value of Preferred Stock owned by each holder by an assumed
conversion rate of $0.72 based on the average of the closing bid
prices of the Common Stock for the five trading days ended March 13,
1998.
<TABLE>
<CAPTION>
Beneficial Ownership After
Beneficial Number of Shares the Offering
Ownership to be Acquired Number of ----------------------------
Prior to upon Exercise Shares to Number Percentage
Name Exercise of Options (1) of Options be Sold of Shares of Class
- ----------------------------- ---------------------- ------------ --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Perrin, Holden & Davenport
Capital Corp.............. - 139,275 139,275 - -
Donald Kleban................ - 24,575 24,575 - -
Andrew Glashow............... - 5,000 5,000 - -
Clifton Asset Management..... - 6,150 6,150 - -
</TABLE>
(1) Does not include shares of Common Stock issuable upon exercise of the
Placement Agent Options.
PLAN OF DISTRIBUTION
The Company agreed to file a registration statement under the Securities Act
covering resale by the Selling Securityholders (i) the shares of Common Stock
issuable upon conversion of the Preferred Stock, (ii) the Placement Agent
Options and (iii) the shares of Common Stock issuable upon exercise of the
Placement Agent Options within 30 days after February 19, 1998 and agreed to use
its best efforts to cause such registration statement to be declared effective
as soon as possible thereafter, and to use its best efforts to keep such
registration statement effective until the earlier of the sale of all the
Securities or the Securities may be sold pursuant to Rule 144(k) under the
Securities Act. The Company agreed to bear all expenses of such registration,
including registration and filing fees, exchange or Nasdaq listing fees, fees of
complying with federal and state securities laws, attorneys' and accountants'
fees, and printing expenses.
The Selling Securityholders have advised the Company that sales of the
Securities may be effected from time to time in transactions (which may include
block transactions) on Nasdaq, in negotiated transactions, or a combination of
such methods of sale, at fixed prices which may be changed, at market prices
prevailing at the time of sale, or at negotiated prices. The Selling
Securityholders have advised the Company that they have not entered into any
agreements, understandings or arrangements with any underwriters or
broker-dealers regarding the sale of their Securities. The Selling
Securityholders may effect such transactions by selling their Securities
directly to purchasers or to or through broker-dealers (including the Placement
Agent), which may act as agents or principals. Such broker-dealers may receive
compensation in the form of discounts, concessions, or commissions from the
Selling Securityholders and/or the purchasers of the Securities for whom such
broker-dealers may act as agents or to whom they sell as principal, or both. The
Selling Securityholders and any broker-dealers that act in connection with the
sale of the Securities might be deemed to be "underwriters" within the meaning
of Section 2(11) of the Securities Act. The Selling Securityholders may agree to
indemnify any agent, dealer or broker-dealer that participates in transactions
involving sales of the Securities against certain liabilities, including
liabilities arising under the Securities Act.
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<PAGE> 21
The registration rights granted to the Selling Securityholders generally
provide that the Company and the Selling Securityholders indemnify each other
against certain liabilities, including liabilities under the Securities Act. In
the opinion of the Commission, such indemnification is against public policy and
is, therefore, unenforceable. See "Disclosure of Commission Position on
Indemnification for Securities Act Liabilities."
MINNESOTA ANTI-TAKEOVER LAW
The Company is governed by the provisions of Sections 302A.671 and 302A.673
of the Minnesota Business Corporation Act. In general, Section 302A.671 provides
that the shares of a corporation acquired in a "control share acquisition" have
no voting rights unless voting rights are approved in a prescribed manner. A
"control share acquisition" is an acquisition, directly or indirectly, of
beneficial ownership of shares that would, when added to all other shares
beneficially owned by the acquiring person, entitle the acquiring person to have
voting power of 20% or more in the election of directors. In general, Section
302A.673 prohibits a publicly-held Minnesota corporation from engaging in a
"business combination" with an "interested shareholder" for a period of four
years after the date of transaction in which the person became an interested
shareholder, unless the business combination is approved in a prescribed manner.
"Business combination" includes mergers, asset sales and other transactions
resulting in a financial benefit to the interested shareholder. An "interested
shareholder" is a person who is the beneficial owner, directly or indirectly, or
10% or more of the corporation's voting stock or who is an affiliate or
associate of the corporation and at any time within four years prior to the date
in question was the beneficial owner, directly or indirectly, of 10% or more of
the corporation's voting stock.
LEGAL MATTERS
Certain legal matters in connection with the validity of the securities
offered hereby will be passed upon for the Company by Maslon Edelman Borman &
Brand, LLP, Minneapolis, Minnesota.
EXPERTS
The consolidated financial statements of Woodroast Systems, Inc. as of
December 29, 1996 and December 31, 1995, and for the years then ended
incorporated by reference in the Registration Statement of which this Prospectus
is a part, have been audited by Lund Koehler Cox & Company, PLLP, independent
public accountants, as indicated in their report with respect thereto, and are
incorporated herein in reliance upon the authority of that firm as experts in
giving said report.
DISCLOSURE OF COMMISSION POSITION ON
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Minnesota Statutes Section 302A.521 provides that a corporation shall
indemnify any person made or threatened to be made a party to any proceeding by
reason of the former or present official capacity of such person against
judgments, penalties, fines, including, without limitation, excise taxes
assessed against such person with respect to an employee benefit plan,
settlements, and reasonable expenses, including attorney's fees and
disbursements, incurred by such person in connection with the proceeding, if,
with respect to the acts or omissions of such person complained of in the
proceeding, such person has not been indemnified by another organization or
employee benefit plan for the same expenses with respect to the same
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<PAGE> 22
acts or omissions; acted in good faith; received no improper personal benefit
and Section 302A.255, if applicable, has been satisfied; in the case of a
criminal proceeding, had no reasonable cause to believe the conduct was
unlawful; and in the case of acts or omissions by persons in their official
capacity for the corporation, reasonably believed that the conduct was in the
best interests of the corporation, or in the case of acts or omissions by
persons in their capacity for other organizations, reasonably believed that the
conduct was not opposed to the best interests of the corporation. Subdivision 4
of Section 302A.521 of the Minnesota Statutes provides that a company's articles
of incorporation or bylaws may prohibit such indemnification or place limits
upon the same. The Company's articles and bylaws do not include any such
prohibition or limitation. As a result, the Company is bound by the
indemnification provisions set forth in Section 302A.521 of the Minnesota
Statutes. As permitted by Section 302A.251 of the Minnesota Statutes, the
Articles of Incorporation of the Company provide that a director shall have no
personal liability to the Company and its shareholders for breach of fiduciary
duty as a director, to the fullest extent permitted by law.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling the Company
pursuant to the foregoing provisions, the Company has been informed that in the
opinion of the Commission such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
20
<PAGE> 23
================================================================================
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING MADE HEREBY, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL,
OR SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES OFFERED HEREBY TO ANY PERSON
IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN
IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
TABLE OF CONTENTS PAGE
AVAILABLE INFORMATION.................................................... 3
INCORPORATION OF CERTAIN
DOCUMENTS BY REFERENCE................................................... 3
PROSPECTUS SUMMARY....................................................... 5
RISK FACTORS............................................................. 6
USE OF PROCEEDS.......................................................... 10
RECENT DEVELOPMENTS...................................................... 10
BUSINESS................................................................. 11
MANAGEMENT............................................................... 16
CERTAIN TRANSACTIONS..................................................... 17
SELLING SECURITYHOLDERS.................................................. 17
PLAN OF DISTRIBUTION..................................................... 18
LEGAL MATTERS............................................................ 19
EXPERTS.................................................................. 19
DISCLOSURE OF COMMISSION POSITION
ON INDEMNIFICATION FOR SECURITIES
ACT LIABILITIES.......................................................... 19
================================================================================
WOODROAST SYSTEMS, INC.
COMMON STOCK
COMMON STOCK
PURCHASE OPTIONS
---------------------
PROSPECTUS
---------------------
__________, 1998
================================================================================
<PAGE> 24
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses in connection with the issuance and distribution of
the securities registered hereby are set forth in the following table:
<TABLE>
<S> <C>
SEC registration fee............................... $ 477
Nasdaq SmallCap Market additional listing fee...... 7,500
Legal fees and expenses............................ 10,000
Printing and engraving expense..................... 1,000
Transfer agent fees and expenses................... 700
Accounting fees and expenses....................... 1,500
Miscellaneous...................................... 823
-------
Total.............................................. $22,000
=======
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company is governed by Minnesota Statutes Chapter 302A. Minnesota
Statutes Section 302A.521 provides that a corporation shall indemnify any person
made or threatened to be made a party to any proceeding by reason of the former
or present official capacity of such person against judgments, penalties, fines,
including, without limitation, excise taxes assessed against such person with
respect to an employee benefit plan, settlements, and reasonable expenses,
including attorney's fees and disbursements, incurred by such person in
connection with the proceeding, if, with respect to the acts or omissions of
such person complained of in the proceeding, such person has not been
indemnified by another organization or employee benefit plan for the same
expenses with respect to the same acts or omissions; acted in good faith;
received no improper personal benefit and Section 302A.255, if applicable, has
been satisfied; in the case of a criminal proceeding, had no reasonable cause to
believe the conduct was unlawful; and in the case of acts or omissions by
persons in their official capacity for the corporation, reasonably believed that
the conduct was in the best interests of the corporation, or in the case of acts
or omissions by persons in their capacity for other organizations, reasonably
believed that the conduct was not opposed to the best interests of the
corporation. Subdivision 4 of Section 302A.521 of the Minnesota Statutes
provides that a company's articles of incorporation or bylaws may prohibit such
indemnification or place limits upon the same. The Company's articles and bylaws
do not include any such prohibition or limitation. As a result, the Company is
bound by the indemnification provisions set forth in Section 302A.521 of the
Minnesota Statutes.
As permitted by Section 302A.251 of the Minnesota Statutes, the Articles of
Incorporation of the Company provide that a director shall have no personal
liability to the Company and its shareholders for breach of his fiduciary duty
as a director, to the fullest extent permitted by law. The Agency Agreement
contains provisions under which the Company, on the one hand, and the Placement
Agent, on the other hand, have agreed to indemnify each other (including
officers and directors of the Company and the Placement Agent, and any person
who may be deemed to control the Company or the Placement Agent) against certain
liabilities, including liabilities under the Securities Act of 1933, as amended.
II-1
<PAGE> 25
ITEM 16. EXHIBITS.
DESCRIPTION OF DOCUMENT
3.1 Amended and Restated Articles of Incorporation of Woodroast Systems,
Inc., as amended on February 19, 1998
4.1 Certificate of Designations, Preferences and Other Rights and
Qualifications of Class A 8% Convertible Preferred Stock (included in
Exhibit 3.1 above)
4.2 Form of Purchase Option dated February 19, 1998
5 Opinion of Maslon Edelman Borman & Brand, LLP
10.19 Employment Agreement between Woodroast Systems, Inc. and Sheldon F.
Jacobs dated as of January 1, 1998
10.20 Promissory Note of Woodroast Systems, Inc. to Sheldon F. Jacobs dated
December 12, 1997
10.21 Promissory Note of Woodroast Systems, Inc. to Sheldon F. Jacobs dated
January 27, 1998
23.1 Consent of Lund Koehler Cox & Company, PLLP
23.2 Consent of Maslon Edelman Borman & Brand, LLP (included in Exhibit 5).
24 Power of Attorney (included on page II-4).
ITEM 17. UNDERTAKINGS.
(a) Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions or otherwise, the Registrant has
been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(b) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement: (i) to include any
prospectus required by Section 10(a)(3) of the Securities Act; (ii) to reflect
in the Prospectus any facts or events arising after the effective date of the
Registration Statement (or the most recent post-effective amendment thereof)
which, individually or in the aggregate, represent a fundamental change in the
information set forth in the Registration Statement; and (iii) to include any
material information with respect to the plan of distribution not previously
disclosed in the Registration Statement or any material change to such
information in the Registration Statement;
(2) That, for the purpose of determining any liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof;
II-2
<PAGE> 26
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering; and
(4) That, for purposes of determining any liability under the Securities
Act, each filing of the Registrant's annual report pursuant to Section 13(a) or
15(d) of the Exchange Act (and, where applicable, each filing of an employee
benefit plan's annual report pursuant to Section 15(d) of the Exchange Act) that
is incorporated by reference in the registration statement shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
II-3
<PAGE> 27
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Eden Prairie, State of
Minnesota, on March 19, 1998.
WOODROAST SYSTEMS, INC.
Registrant
By: /s/ Sheldon F. Jacobs
----------------------------------
Name: Sheldon F. Jacobs
Title: Chairman and Chief
Executive Officer
POWER OF ATTORNEY
KNOW ALL BY THESE PRESENTS, that each person whose signature appears below
hereby constitutes and appoints Sheldon F. Jacobs and Russell F. Lederman, each
or either of them, his or her true and lawful attorneys-in-fact and agents, with
full power of substitution and resubstitution for him or her and in his or her
name, place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement and to file
the same with all exhibits thereto, and other documents in connection therewith
with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite or necessary to be done in
and about the premises, as fully to all intents and purposes as he or she might
or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or their or his or her substitutes,
may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below on the 19th day of March, 1998 by
the following persons in the capacities indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE
<S> <C>
/s/Sheldon F. Jacobs Chairman, Chief Executive Officer (principal
------------------------- executive officer)
Sheldon F. Jacobs
/s/ Ralph J. Guarino President and Chief Operating Officer and
------------------------- Director
Ralph J. Guarino (principal financial and accounting officer)
/s/ Richard A. Orenstein Director
-------------------------
Richard A. Orenstein
/s/ Merle J. Shapiro Director
-------------------------
Merle J. Shapiro
</TABLE>
II-4
<PAGE> 28
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION OF DOCUMENT PAGE
<S> <C> <C>
3.1 Amended and Restated Articles of Incorporation of Woodroast Systems,
Inc., as amended on February 19, 1998
4.1 Certificate of Designations, Preferences and Other Rights and
Qualifications of Class A 8% Convertible Preferred Stock
(included in Exhibit 3.1 above)
4.2 Form of Purchase Option dated February 19, 1998
5 Opinion of Maslon Edelman Borman & Brand, LLP
10.19 Employment Agreement between Woodroast Systems, Inc. and Sheldon F.
Jacobs dated as of January 1, 1998
10.20 Promissory Note of Woodroast Systems, Inc. to Sheldon F. Jacobs dated
December 12, 1997
10.21 Promissory Note of Woodroast Systems, Inc. to Sheldon F. Jacobs dated
January 27, 1998
23.1 Consent of Lund Koehler Cox and Company, PLLP
23.2 Consent of Maslon Edelman Borman & Brand, LLP (included in Exhibit 5).
24 Power of Attorney (included on page II-4).
</TABLE>
II-5
<PAGE> 1
EXHIBIT 3.1
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
WOODROAST SYSTEMS, INC.
ARTICLE 1
NAME
The name of the Corporation is Woodroast Systems, Inc.
ARTICLE 2
REGISTERED OFFICE
The address of the registered office of the Corporation is 4200 IDS Center,
Minneapolis, Minnesota 55402.
ARTICLE 3
CAPITAL
A. The Corporation is authorized to issue one hundred million (100,000,000)
shares of capital stock, having a par value of $.005 per share in the
case of common stock, and having a par value as determined by the Board
of Directors in the case of preferred stock, to be held, sold and paid
for at such times and in such manner as the Board of Directors may from
time to time determine in accordance with the laws of the State of
Minnesota.
B. In addition to any and all powers conferred upon the Board of Directors
by the laws of the State of Minnesota, the Board of Directors shall have
the authority to establish by resolution more than one class or series
of shares, either preferred or common, and to fix the relative rights,
restrictions and preferences of any such different classes or series,
and the authority to issue shares of a class or series to another class
or series to effectuate share dividends, splits or conversion of the
Corporation's outstanding shares.
C. The Board of Directors shall also have the authority to issue rights to
convert any of the Corporation's securities into shares of stock of any
class or classes, the authority to issue options to purchase or
subscribe for shares of stock of any class or classes, and the authority
to issues share purchase or subscription warrants or any other evidence
of such option rights which set forth the terms, provisions and
conditions thereof, including the price or prices at which such shares
may be subscribed for or purchased. Such options, warrants and rights,
may be transferable or nontransferable and separable or inseparable from
other securities of the Corporation. The Board of Directors is
authorized to fix the terms, provisions and
-1-
<PAGE> 2
conditions of such options, warrants and rights, including the conversion
basis or bases and the option price or prices at which shares may be
subscribed for or purchased.
ARTICLE 4
SHAREHOLDER RIGHTS
A. No shareholder of the Corporation shall have any preemptive rights.
B. No shareholder of the Corporation shall have any cumulative voting
rights.
ARTICLE 5
WRITTEN ACTION BY LESS THAN ALL OF THE DIRECTORS
Any action required or permitted to be taken at a Board meeting, other than
an action requiring shareholder approval, may be taken by written action of the
Board of Directors if signed by the number of directors that would be required
to take the same action at a meeting at which all directors were present.
ARTICLE 6
LIMITED LIABILITY OF DIRECTORS
To the fullest extent permitted by law, a director shall have no personal
liability to the Corporation or its shareholders for breach of fiduciary duty as
a director. Any amendment to or repeal of this Article 6 shall not adversely
affect any right or protection of a director of the Corporation for or with
respect to any acts or omissions of such director occurring prior to such
amendment or repeal.
STATE OF MINNESOTA
DEPARTMENT OF STATE
FILED
MAY 04, 1994
/s/ Joan Anderson Growe
Secretary of State
-2-
<PAGE> 3
ARTICLES OF AMENDMENT
OF
ARTICLES OF INCORPORATION
OF
WOODROAST SYSTEMS, INC.
I, the undersigned, Sheldon F. Jacobs, President of Woodroast Systems,
Inc., a corporation subject to the provisions of Chapter 302A, Minnesota
Statutes, known as the Minnesota Business Corporation Act, do hereby certify
that the resolutions hereinafter set forth were duly adopted by the affirmative
vote of a majority of the directors present and entitled to vote at a meeting of
the Board of Directors held on May 22, 1995, pursuant to which the Board of
Directors declared a share combination in the form of a 1-for-3 reverse stock
split on the outstanding shares of common stock of the Corporation and reduced
the authorized capital stock of the Corporation:
NOW, THEREFORE, BE IT RESOLVED, that the Board of Directors hereby declares
a 1-for-3 reverse stock split of the outstanding common stock of the
corporation held by all shareholders of record as of the closing of
business on May 22, 1995 (the "Record Date"), effective as of 6:00 a.m.,
Central Daylight Time, on May 25, 1995, with each holder of record of
common stock of the Corporation as of the Record Date to be deemed the
owner of one share of common stock for each three shares of common stock
owned by such h older as of such date;
FURTHER RESOLVED, that fractional shares of common stock shall not be
issued, and that the Corporation shall pay cash in lieu of fractional
shares that would otherwise be outstanding as a result of a reverse stock
split, at the fair market value of such common stock, determined with
reference to the average of the closing bid and asked price of the
Company's common stock on the Record Date;
FURTHER RESOLVED, that the Board of Directors hereby authorizes the
amendment of the Corporation's Articles of Incorporation decreasing the
shares of authorized capital stock from 100,000,000 shares, par value
$.005, to 33,000,000 shares, par value $.005;
FURTHER RESOLVED, that, to effect said amendment, Article 3, Paragraph
A of the Corporation's Articles of Incorporation hereby is amended to read
as follows:
"CAPITAL
A. The Corporation is authorized to issue Thirty-Three Million
(33,000,000) shares of Capital Stock, having a par value of $.005 par
share in the case of Common Stock, and having a par value as
determined by the Board of Directors in the case of Preferred Stock,
to be held, sold and paid for at such times and in such manner as the
Board of Directors may from time to time determine in accordance with
the laws of the State of Minnesota."
I further certify that the Amendment to the Articles of Incorporation
referred to in the foregoing resolutions will not adversely affect the rights or
preferences of the holders of outstanding shares of any class or series of
capital stock of the Corporation and will not result in the percentage of
authorized shares that
-3-
<PAGE> 4
remains unissued after the stock split to exceed the percentage of authorized
shares that were unissued before the stock split.
IN WITNESS WHEREOF, I have hereunto set my hand this 23rd day of May, 1995.
/s/ Sheldon F. Jacobs
-----------------------------
Sheldon F. Jacobs, President
STATE OF MINNESOTA
DEPARTMENT OF STATE
FILED
MAY 24, 1995
/s/ Joan Anderson Growe
Secretary of State
-4-
<PAGE> 5
STATE OF MINNESOTA
SECRETARY OF STATE
NOTICE OF CHANGE OF REGISTERED OFFICE/
REGISTERED AGENT
Please read the instructions on the back before completing this form.
1. Corporate Name:
WOODROAST SYSTEMS, INC.
2. Registered Office Address (No. & Street): List a complete street
address or rural route and rural route box number. A post office box is
not acceptable.
10250 VALLEY VIEW ROAD, STE 145, EDEN PRAIRIE, MN 55344
3. Registered Agent (Registered agents are required for foreign
corporations but optional for Minnesota corporations):
NONE
-----------------------------------------------------------------------------
If you do not wish to designate an agent, you must list "NONE" in this box.
DO NOT LIST THE CORPORATE NAME.
In compliance with Minnesota Statutes, Section 302A.123, 303.10, 308A.025,
317A.123 or 322B.135 I certify that the above listed company has resolved to
change the company's registered office and/or agent as listed above.
I certify that I am authorized to execute this certificate and I further certify
that I understand that by signing this certificate, I am subject to the
penalties of perjury as set forth in Minnesota Statutes Section 609.48 as if I
had signed this certificate under oath.
/s/ Sheldon F. Jacobs
---------------------------------
(Signature of Authorized Person)
Name and Telephone Number of a Contact Person: Sheldon F. Jacobs (612) 944-5113
<TABLE>
<S><C>
Filing fee: Minnesota Corporations, Cooperatives OFFICE USE ONLY
and Limited Liability Companies: $35.00
Non-Minnesota Corporations: $50.00
STATE OF MINNESOTA
Make checks payable to Secretary of State DEPARTMENT OF STATE
FILED
Return to: Minnesota Secretary of State SEP 27, 1995
180 State Office Building /s/ Joan Anderson Growe
100 Constitution Ave. Secretary of State
St. Paul, MN 55155
(612) 296-2803
</TABLE>
-5-
<PAGE> 1
EXHIBIT 4.1
WOODROAST SYSTEMS, INC.
CERTIFICATE OF DESIGNATIONS, PREFERENCES
AND OTHER RIGHTS AND QUALIFICATIONS OF
CLASS A 8% CONVERTIBLE PREFERRED STOCK
----------------------------------
Pursuant to Section 401(3)(b) of the
Business Corporation Act of the State of Minnesota
----------------------------------
WOODROAST SYSTEMS, INC., a corporation organized and existing under the
Business Corporation Act of the State of Minnesota ("Corporation"),
DOES HEREBY CERTIFY: That, pursuant to authority conferred upon the Board
of Directors of the Corporation ("Board") by the Amended and Restated Articles
of Incorporation of said Corporation, and pursuant to the provisions of Section
401 of the Minnesota Business Corporation Act, said Board duly determined that
117,500 shares of Preferred Stock shall be designated "Class A 8% Convertible
Preferred Stock," and to that end the Board adopted a resolution providing for
the designation, preferences and relative, participating, optional or other
rights, and the qualifications, limitations and restrictions, of the Class A 8%
Convertible Preferred Stock, which resolution is as follows:
RESOLVED, that the Board, pursuant to the authority vested in it by
the provisions of the Amended and Restated Articles of Incorporation of the
Corporation, hereby creates a series of Preferred Stock of the Corporation,
par value $10.00 per share, to be designated as "Class A 8% Convertible
Preferred Stock" and to consist of an aggregate of 117,500 shares. The Class A
8% Convertible Preferred Stock shall have such designations, preferences and
relative, participating, optional or other rights, and the qualifications,
limitations and restrictions as follows:
a. Designations and Amount. 117,500 shares of the Preferred Stock
of the Corporation, par value $10.00 per share, shall constitute a
class of Preferred Stock designated as "Class A 8% Convertible
Preferred Stock" ("Class A Preferred Stock"). The Class A Preferred
Stock shall have a stated value of $10.00 per share ("Stated Value").
b. Rank. The Class A Preferred Stock shall rank senior to all classes and
series of capital stock of the Corporation now or hereafter
authorized, issued or outstanding, including, without limitation, the
Common Stock, par value $.005 per share ("Common Stock") of the
Corporation, and any other classes and series of stock of the
Corporation now or hereafter authorized, issued or outstanding
(collectively, the "Junior Securities"). The Corporation will not
issue any class or series of any class or capital stock which ranks
senior to or pari passu with the Class A Preferred Stock with respect
to dividend rights or rights on liquidation or dissolution of the
Corporation.
c. Dividends.
<PAGE> 2
(a) Each share of Class A Preferred Stock will earn cumulative
dividends at the per annum rate of 8% of the Stated Value (or $.80 per share) of
such Class A Preferred Stock (pro rated for shorter periods) ("Preferred
Dividend"). The Preferred Dividends shall accrue and be paid only in accordance
with Paragraph 3(b) below.
(b) Preferred Dividends shall be payable upon (i) the
conversion of the Class A Preferred Stock into shares of Common Stock in
accordance with Section 7 (such Preferred Dividends accruing through the date of
conversion), (ii) in the event of any liquidation or similar event as described
in Section 4 below (such Preferred Dividends accruing through the date of
distribution of the Company's assets) and (iii) the redemption of the Class A
Preferred Stock as provided in Section 5 (such Preferred Dividends accruing
through the date of redemption). Dividends accruing for any period less than a
full dividend period will be computed on the basis of a 360-day year comprised
of twelve 30-day months.
(c) The Corporation may not declare or pay any dividend
(except dividends payable solely in shares of Common Stock) or make any
distribution of assets on, or redeem, purchase or otherwise acquire, Junior
Securities, while any Class A Preferred Stock is outstanding.
d. Rights on Liquidation, Dissolution or Winding Up, etc.
(a) In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Corporation, the assets of the Corporation
available for distribution to stockholders, whether from capital, surplus or
earnings, shall be distributed in the following order of priority:
(i) The holders of Class A Preferred Stock shall be
entitled to receive, prior and in preference to any distribution to the
holders of any Junior Securities an amount equal to the greater of (A)
the Stated Value of each Class A Preferred Stock then outstanding plus
an amount equal to the accrued but unpaid Preferred Dividends on such
shares of Class A Preferred Stock as of the date such payment is made
to the holders of Class A Preferred Stock, or (B) the amount the
holders of Class A Preferred Stock would have received had the holder
of Class A Preferred Stock converted the Class A Preferred Stock (and
all Preferred Dividends) into Common Stock as provided in Section 7
immediately prior to the record date for such voluntary or involuntary
liquidation, dissolution or winding up.
(ii) If there is a distribution pursuant to Section
4(a)(i)(A) or 4(a)(i)(B) hereof, the remaining assets of the
Corporation available for distribution, if any, to the stockholders of
the Corporation shall be distributed to the holders of issued and
outstanding shares of Common Stock.
e. Redemption Rights. Subject to conversion rights set
forth in Section 7 of this Certificate, the Company may redeem
all, but not less than all of the Class A Preferred Stock,
upon 20 days' written notice to the holders thereof at a price
equal to 120% of the sum of (i) the Stated Value of the Class
A Preferred Stock being redeemed plus (ii) all accrued and
unpaid Preferred Dividends thereon through the date of
redemption, but only if a registration statement registering
the shares of Common Stock into which the Class A Preferred
Stock, including the Preferred Dividends thereon, may convert
(collectively "Conversion Shares") is then current and
effective.
2
<PAGE> 3
f. Voting Rights. The holders of Class A Preferred Stock
shall have no voting rights until such time as they convert
their Class A Preferred Stock into Common Stock, except as
provided by law.
g. Conversion of Class A Preferred Stock.
i. The holders of Class A Preferred Stock shall have
the right, at such holders' option, at any time or from
time to time, to convert each share of Class A Preferred
Stock (together with the accrued Preferred Dividends
payable thereon through the Conversion Date (as defined
in subsection 7(c) below) into the number of shares of
Common Stock calculated in accordance with paragraph
7(b) below.
ii. The number of shares of Common Stock to be issued
upon conversion of the Class A Preferred Stock,
including the Class A Preferred Stock issued upon
payment of the Preferred Dividends, will be determined
by dividing the aggregate Stated Value of the Class A
Preferred Stock being converted plus the amount of
accrued dividends, by the lesser of (i) 80% ("Conversion
Rate") of the average Closing Bid Price (as hereinafter
defined) of a share of Common Stock for the five
consecutive trading days ending on the trading day prior
to the Conversion Date or (ii) $1.125 (the price
determined by the foregoing subsections (i) and (ii) is
referred to herein as the "Conversion Price").
Notwithstanding the foregoing, the Conversion Rate shall
(a) under certain circumstances, be reduced to the
"Reduced Rates" set forth in subsection 7 (b) (I) below
and (b) from and after November 19, 1998, the then
effective Conversion Rate (or Reduced Rates, as the case
may be) shall be reduced by five percentage points. In
addition, the Conversion Price shall be adjusted for
stock splits, stock dividends and recapitalizations as
set forth in subsection 7 (b) (II) below.
(I) Reduced Rates. If the Conversion Shares are
not registered by the Corporation with the Securities and Exchange Commission
("Commission") pursuant to a registration statement ("Registration Statement")
which is declared effective by the Commission and cleared by the National
Association of Securities Dealers Inc. on or before the close of business on the
120th day after the Closing ("Closing") of the private placement of the Class A
Preferred Stock ("Target Date"), then on the Target Date and on each monthly
anniversary of the Target Date until the earlier of the date that the
Registration Statement is so declared effective and cleared ("Effective Date")
or the fourth monthly anniversary of the Target Date, the Conversion Rate will
be reduced to the Reduced Rates as indicated below:
Reduced Rate Date of Reduction
------------ -----------------
79.0% Target Date ("T")
78.0% T+one month
77.0% T+two months
76.0% T+three months
75.0% T+four months
The "Closing Bid Price" shall mean the closing bid price for the
Corporation's Common Stock, as reported by The Nasdaq Stock Market if the Common
Stock is quoted on the Nasdaq National Market or
3
<PAGE> 4
Nasdaq SmallCap Market, or the last sales price of the Common Stock if the
Common Stock is listed on a national securities exchange, whichever is the
principal trading market for the Common Stock. If the Common Stock is not listed
on a national securities exchange or quoted on the Nasdaq National Market or
Nasdaq SmallCap Market, but is traded in the over-the-counter market, the
Closing Bid Price shall mean the closing bid price for the Common Stock, as
reported by the OTC Bulletin Board or the National Quotation Bureau,
Incorporated, or similar publisher of such quotations. If the Closing Bid Price
cannot be determined pursuant to the above, the Closing Bid Price shall be such
price as the Board of Directors of the Company shall determine in good faith.
(II) Adjustment for Stock Splits, Stock Dividends and
other Recapitalizations.
(i) Merger or Consolidation. If any of the
following shall occur: (a) any reclassification or change of outstanding shares
of Common Stock (other than a change in par value, or from par value to no par
value, or from no par value to par value or as a result of a subdivision or
combination described in subsection (ii) directly below), (b) any consolidation
or merger to which the Corporation is a party other than a merger in which the
Corporation is the continuing corporation and which does not result in any
reclassification of, or change in, outstanding shares of Common Stock, or (c)
any share exchange pursuant to which all of the outstanding shares of Common
Stock are converted into other securities or property, then in addition to all
of the rights granted to the holders of the Class A Preferred Stock as
designated herein, each share of the Class A Preferred Stock (and the Preferred
Dividend thereon) immediately prior to such reclassification, change,
consolidation or merger ("Corporate Change") shall be convertible into the kind
and amount of shares of capital stock and other securities and property
(including cash) receivable upon the Corporate Change by a holder of the number
of shares of Common Stock deliverable upon conversion of such shares of the
Class A Preferred Stock (including the Preferred Dividend thereon). If, in the
case of any such Corporate Change, the stock or other securities and property
(including cash) receivable thereupon by a holder of Common Stock includes
shares of capital stock or other securities and property of a corporation other
than the corporation which is the successor of the Corporation in such Corporate
Change, then the certificate of incorporation or other charter document of such
other corporation shall contain such additional provisions to protect the
interests of the holders of shares of the Class A Preferred Stock as the Board
of Directors shall reasonably consider necessary by reason of the foregoing. The
Corporation shall not effect any transaction described in this subsection (II)
unless (x) each holder of the Class A Preferred Stock has been mailed written
notice of such transaction at least 20 days prior thereto and in no event later
than 10 days prior to the record date for the determination of shareholders
entitled to vote with respect thereto, and (y) the resulting successor or
acquiring entity (if not the Corporation) assumes by written instrument the
obligations of this subsection 7 (b)(II)(i). The above provisions shall
similarly apply to successive reclassifications, consolidations, mergers, sales,
transfers or share exchanges.
(ii) Adjustment Due to Stock Split, Stock
Dividend, Etc. If at any time when any shares of Class A Preferred Stock are
issued and outstanding, the number of outstanding shares of Common Stock is
increased by a stock split, stock dividend, combination, reclassification or
other similar event, the Conversion Price set forth in 7(b)(ii) above shall be
proportionately reduced, or if the number of outstanding shares of Common Stock
is decreased by a reverse stock split, combination or reclassification of
shares, or other similar event, such Conversion Price shall be proportionately
increased.
(iii) Other Events. If any event occurs as to
which the foregoing provisions of this Section 7 (b) (II) are not strictly
applicable or, if strictly applicable, would not, in the good faith judgment of
the Board of Directors of the Corporation, fairly and adequately protect the
conversion
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rights of the Class A Preferred Stock in accordance with the essential intent
and principles of such provisions, then the Board of Directors shall make such
adjustments in the application of such provisions, in accordance with such
essential intent and principles, as shall be reasonably necessary, in the good
faith opinion of the Board of Directors, to protect such conversion rights as
aforesaid, but in no event shall any such adjustment have the effect of
increasing the Conversion Price or decreasing the number of shares of Common
Stock issuable upon conversion of any shares of Class A Preferred Stock.
(iv) Calculation of Adjustment. Upon the
occurrence of each adjustment or readjustment of the Conversion Price pursuant
to this Section 7, the Corporation, at its expense, shall promptly compute such
adjustment or readjustment in accordance with the terms hereof and prepare and
furnish to each holder of Class A Preferred Stock a certificate setting forth
such adjustment or readjustment and showing in detail the facts upon which such
adjustment or readjustment is based. The Corporation shall, upon the written
request at any time of any holder of Class A Preferred Stock, furnish or cause
to be furnished to such holder a like certificate setting forth (a) such
adjustment or readjustment, (b) the Conversion Price in effect at the time and
(c) the number of shares of Common Stock and the amount, if any, of other
securities or properties which at the time should be received upon conversion of
a share of Class A Preferred Stock.
(c) In order to convert the Class A Preferred Stock and Preferred
Dividends into shares of Common Stock, a holder shall give written notice
("Written Notice") to the Corporation at its principal corporate office, of the
election to convert the same and shall state therein the name or names in which
the certificate or certificates for Conversion Shares are to be issued. The
Written Notice must be delivered via telecopier prior to 3:00 p.m. EST on any
day and shall be deemed to be received by the Corporation upon receipt by it or
by its general counsel. The Corporation shall, as soon as practicable, but not
later than the second business day thereafter, issue and deliver to a location
in New York City designated by such holder, a certificate or certificates for
the number of Conversion Shares to which such holder shall be entitled as
aforesaid. If the Corporation fails to deliver the Conversion Shares to such
holder within such two days, it shall pay to such holder a penalty fee of $100 a
day until the day the Conversion Shares are delivered and received by the
holder. Such remedy shall be in addition to, and not in lieu of, any other
rights and remedies available to the holder under law or in equity.
Simultaneously with such delivery, such holder shall surrender the certificate
or certificates for the Class A Preferred Stock duly endorsed for transfer to an
overnight courier service for delivery to the Corporation or its general counsel
the next business day after the Conversion Date. Such conversion shall be deemed
to have been made immediately prior to the close of business on the date which
the Written Notice is received by the Corporation in accordance herewith
("Conversion Date"), and the person or persons entitled to receive the
Conversion Shares shall be treated for all purposes as the record holder or
holders of such shares of Common Stock as of such Conversion Date.
(d) The Corporation shall not be required to issue fractions of
shares of Common Stock upon conversion of the Class A Preferred Stock and
Preferred Dividend. If any fractions of a share would, but for this Section, be
issuable upon any conversion, in lieu of such fractional share the Company shall
round up or down to the nearest whole number of Conversion Shares.
(e) The Corporation shall reserve and shall at all times have
reserved out of its authorized but unissued shares of Common Stock sufficient
shares of Common Stock to permit the conversion of the then outstanding shares
of the Class A Preferred Stock and payment of the Preferred Dividend pursuant to
this Section 7. All Conversion Shares shall be validly issued, fully paid and
nonassessable. In order that the Corporation may issue Conversion Shares, the
Corporation will endeavor
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<PAGE> 6
to comply with all applicable Federal and state securities laws and will
endeavor to list such Conversion Shares on each securities exchange on which
Common Stock is listed and endeavor to maintain such listing for such period of
time as either the Class A Preferred Stock or Common Stock issuable upon
conversion of such Class A Preferred Stock remains outstanding.
(f) If any Class A Preferred Stock is issued and outstanding on
February 19, 2001, such Class A Preferred Stock and the Preferred Dividends
thereon through such date shall, without any action on the part of the holder
thereof, be automatically converted into Common Stock on that date at the then
Conversion Price.
(g) In the event any shares of Class A Preferred Stock shall be
converted pursuant to Section 7 hereof, the shares of Class A Preferred Stock so
converted shall be canceled.
(h) The Corporation will not, by amendment of its Amended and
Restated Certificate of Incorporation or through any reorganization, transfer of
assets, consolidation, merger, dissolution, issue or sale of securities or any
other voluntary action, avoid or seek to avoid the observance or performance of
any of the terms to be observed or performed hereunder by the Corporation, but
will at all times in good faith assist in the carrying out of all the provisions
of this Section 7 and in the taking of all such action as may be necessary or
appropriate in order to protect the conversion rights of the holders of the
Class A Preferred Stock against impairment.
h. Amendments and Other Actions. So long as shares of Class A
Preferred Stock are outstanding, the Corporation shall not,
without first obtaining the approval (by vote or written
consent) of the holders of all of the then outstanding shares
of Class A Preferred Stock:
i. alter or change the rights, preferences or privileges
of the Class A Preferred Stock or any other capital
stock of the Corporation so as to affect adversely
the Class A Preferred Stock; or
(b) create any new class or series of senior to or pari
passu with the Class A Preferred Stock.
Notwithstanding the foregoing, the Corporation when authorized by
resolutions of its Board of Directors may amend or supplement this Certificate
without the consent of any holder of Class A Preferred Stock to cure any
ambiguity, defect or inconsistency or make any other change provided that such
amendments or supplements shall not adversely affect the interests of such
holders.
i. Registration and Transfer. The Corporation shall maintain at
its principal executive offices (or at the principal executive
offices of its transfer agent or such other office or agency of
the Corporation as it may designate by notice to the holders of
the Class A Preferred Stock) a stock register for the Class A
Preferred Stock in which the Corporation shall record the names
and addresses of persons in whose names the shares of Class A
Preferred Stock are issued, as well as the name and address of
each transferee. Holders of share certificates for the Class A
Preferred Stock may present such certificates for transfer and
exchange at such offices.
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<PAGE> 7
Prior to due presentment for registration of transfer of any
Class A Preferred Stock, the Corporation may deem and treat the person in whose
name any Class A Preferred Stock is registered as the absolute owner of such
Class A Preferred Stock and the Corporation shall not be affected by notice to
the contrary.
No service charge shall be made to a holder of Class A Preferred
Stock for any registration, transfer or exchange.
Such resolution was signed by the President and Secretary of the
Corporation.
IN WITNESS WHEREOF, we have executed this Certificate of Designation
this 19th day of February, 1998.
WOODROAST SYSTEMS, INC.
By: /s/ Ralph J. Guarino
------------------------------
Ralph J. Guarino, President
By: /s/ Mark D. Dacko
------------------------------
Mark D. Dacko, Secretary
STATE OF MINNESOTA
DEPARTMENT OF STATE
FILED
FEB 19, 1998
/s/ Joan Anderson Growe
Secretary of State
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<PAGE> 1
EXHIBIT 4.2
THE REGISTERED HOLDER OF THIS PURCHASE OPTION, BY ITS ACCEPTANCE
HEREOF, AGREES THAT IT WILL NOT SELL, TRANSFER OR ASSIGN
THIS PURCHASE OPTION EXCEPT AS HEREIN PROVIDED.
VOID AFTER 5:00 P.M. EASTERN TIME, FEBRUARY 18, 2002
PURCHASE OPTION
FOR THE PURCHASE OF
[ ] SHARES OF COMMON STOCK
OF
WOODROAST SYSTEMS, INC.
1. Purchase Option.
THIS CERTIFIES THAT, in consideration of $_____ and other good and
valuable consideration, duly paid by or on behalf of __________________________
("Holder"), as registered owner of this Purchase Option, to Woodroast Systems,
Inc. ("Company"), Holder is entitled, at any time or from time to time at or
after February 19, 1998 ("Commencement Date"), and at or before 5:00 p.m.,
Eastern Time February 18, 2002 ("Expiration Date"), but not thereafter, to
subscribe for, purchase and receive, in whole or in part, up to
_______________________________________________ (________) shares of Common
Stock of the Company, $.005 par value ("Common Stock"). If the Expiration Date
is a day on which banking institutions are authorized by law to close, then this
Purchase Option may be exercised on the next succeeding day which is not such a
day in accordance with the terms herein. During the period ending on the
Expiration Date, the Company agrees not to take any action that would terminate
the Purchase Option. This Purchase Option is initially exercisable at the lower
of (i) $1.125 (the average closing bid price of a share of Common Stock for the
five trading days ending on the day prior to the closing of the private
placement offering, the "Closing Price") or (ii) $1.50; provided, however, that
upon the occurrence of any of the events specified in Section 6 hereof, the
rights granted by this Purchase Option, including the exercise price and the
number of shares of Common Stock to be received upon such exercise, shall be
adjusted as therein specified. The term "Exercise Price" shall mean the initial
exercise price or the adjusted exercise price, depending on the context, of a
share of Common Stock. The term "Securities" shall mean the shares of Common
Stock issuable upon exercise of this Purchase Option. This Purchase Option is
being issued in connection with the offering (the "Offering") by the Company of
Class A 8% Convertible Preferred Stock ("Class A Preferred Stock"), in which PHD
has acted as the exclusive placement agent. Capitalized terms used herein, but
not otherwise defined, shall have the meanings set forth in the Agency Agreement
between PHD and the Company with respect to the Offering.
2. Exercise.
2.1 Exercise Form. In order to exercise this Purchase Option, the
exercise form attached hereto must be duly executed and completed and delivered
to the Company, together with this Purchase Option and payment of the Exercise
Price for the Securities being purchased. If the subscription rights represented
hereby shall not be exercised at or before 5:00 p.m., Eastern time, on the
Expiration Date, this Purchase Option shall become and be void without further
force or effect, and all rights represented hereby shall cease and expire.
<PAGE> 2
2.2 Legend. Each certificate for Securities purchased under this
Purchase Option shall bear a legend as follows, unless such Securities have been
registered under the Securities Act of 1933, as amended ("Act"):
"This security has not been registered under the Securities Act of
1933, as amended or applicable state securities laws and may not be
sold, pledged or otherwise transferred without an effective
registration statement under such Act, or pursuant to an exemption from
the registration requirements of said Act or applicable state
securities laws, supported by an opinion of counsel, reasonably
satisfactory to the Company and its counsel, that such registration is
not required."
After the Registration Statement, referenced in Section 5 below, is declared
effective by the Securities and Exchange Commission ("Commission"), the Holder
may deliver to the Company the certificate representing the Common Stock of the
Company issued to such Holder upon conversion of the Class A Preferred Stock and
the Company will, within three days after receipt by the Company of the
foregoing, issue a new certificate representing and in exchange for the
aforementioned certificate, which new certificate shall be legended as follows:
"The securities represented by this certificate have been registered
under the Securities Act of 1933, as amended. The securities may be
sold pursuant to the registration statement provided that (i) the
registration statement is current and effective, (ii) the holder
complies with the prospectus delivery requirements under the Securities
Act of 1933, as amended, and (iii) the sale is in compliance with the
plan of distribution set forth in the prospectus. The transfer of such
securities and any securities issuable upon conversion or exercise of
such security is restricted as set forth in a subscription agreement
between the Company and the holder, a copy of which may be obtained
from the Company."
2.3 Conversion Right.
2.3.1 Determination of Amount. In lieu of the payment of the
Exercise Price in the manner provided by Section 2.1, the Holder shall have the
right (but not the obligation) to convert this Purchase Option, in whole or in
part, into Common Stock ("Conversion Right"), as follows: upon exercise of the
Conversion Right, the Company shall deliver to the Holder (without payment by
the Holder of any of the Exercise Price) that number of shares of Common Stock
equal to the quotient obtained by dividing (x) the "Value" (as defined below) of
the portion of the Purchase Option being converted at the time the Conversion
Right is exercised by (y) the Market Price (as defined below). The "Value" of
the portion of the Purchase Option being converted shall equal the remainder
derived from subtracting (a) the Exercise Price multiplied by the number of
shares of Common Stock underlying the portion of the Purchase Option being
converted from (b) the Market Price of the Common Stock multiplied by the number
of shares of Common Stock underlying the portion of the Purchase Option being
converted. As used herein, the term "Market Price" at any date shall be deemed
to be the last reported sale price of the Common Stock on the trading day
immediately preceding such date, or, in case no such reported sale takes place
on the immediately preceding trading day, the average of the last reported sale
prices for the immediately preceding three trading days, in either case as
officially reported by the principal securities exchange on which the Common
Stock is listed or admitted to trading, or, if the Common Stock is not listed or
admitted to trading on any national securities exchange or if any such exchange
on which the Common Stock is listed is not its principal trading market, the
last reported sale price as furnished by the National Association of Securities
Dealers, Inc. ("NASD") through the Nasdaq National Market or SmallCap Market,
or, if applicable, the OTC Bulletin Board, or if
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<PAGE> 3
the Common Stock is not listed or admitted to trading on any of the foregoing
markets, or similar organization, as determined in good faith by resolution of
the Board of Directors of the Company, based on the best information available
to it.
2.3.2 Exercise of Conversion Right. The Conversion Right may
be exercised by the Holder on any business day on or after the Commencement Date
and not later than the Expiration Date by delivering the Purchase Option with a
duly executed exercise form attached hereto with the conversion section
completed.
3. Transfer.
3.1 General Restrictions. The registered Holder of this Purchase
Option, by its acceptance hereof, agrees that it will not sell, transfer or
assign or hypothecate this Purchase Option to anyone except upon compliance
with, or pursuant to exemptions from, applicable securities laws. In order to
make any permitted assignment, the Holder must deliver to the Company the
assignment form attached hereto duly executed and completed, together with this
Purchase Option and payment of all transfer taxes, if any, payable in connection
therewith. The Company shall immediately transfer this Purchase Option on the
books of the Company and shall execute and deliver a new Purchase Option or
Purchase Options of like tenor to the appropriate assignee(s) expressly
evidencing the right to purchase the aggregate number of shares of Common Stock
purchasable hereunder or such portion of such number as shall be contemplated by
any such assignment.
3.2 Restrictions Imposed by the Securities Act. This Purchase
Option and the Securities underlying this Purchase Option shall not be
transferred unless and until (i) the Company has received the opinion of
counsel for the Holder that such securities may be sold pursuant to an
exemption from registration under the Act, and applicable state law, the
availability of which is established to the reasonable satisfaction of the
Company, or (ii) a registration statement relating to such Securities has been
filed by the Company and declared effective by the Securities and Exchange
Commission and compliance with applicable state law.
4. New Purchase Options to be Issued.
4.1 Partial Exercise or Transfer. Subject to the restrictions in
Section 3 hereof, this Purchase Option may be exercised or assigned in whole or
in part. In the event of the exercise or assignment hereof in part only, upon
surrender of this Purchase Option for cancellation, together with the duly
executed exercise or assignment form and funds (or conversion equivalent)
sufficient to pay any Exercise Price and/or transfer tax, the Company shall
cause to be delivered to the Holder without charge a new Purchase Option of like
tenor to this Purchase Option in the name of the Holder evidencing the right of
the Holder to purchase the aggregate number of shares of Common Stock
purchasable hereunder as to which this Purchase Option has not been exercised or
assigned.
4.2 Lost Certificate. Upon receipt by the Company of evidence
satisfactory to it of the loss, theft, destruction or mutilation of this
Purchase Option and of reasonably satisfactory indemnification, the Company
shall execute and deliver a new Purchase Option of like tenor and date. Any such
new Purchase Option executed and delivered as a result of such loss, theft,
mutilation or destruction shall constitute a substitute contractual obligation
on the part of the Company.
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<PAGE> 4
5. Registration Obligation.
5.1 Filing of Registration Statement. The Company shall register
under the registration statement ("Registration Statement") to be filed for the
subscribers for shares of Class A Preferred Stock in the Offering, this
Purchase Option and the shares of Common Stock underlying this Purchase Option
("Registrable Securities"). The Company shall file the Registration Statement
on or before the 30-day anniversary of the Closing of the Offering. The Company
shall use its best efforts and undertakes to have the Registration Statement
declared effective by the Commission and cleared by the Corporate Financing
Department of the NASD Regulation, Inc. ("NASD"), by June 19, 1998. The Company
shall bear all the expenses and pay all the fees it incurs in connection with
the preparation, filing and modification or amendment of the Registration
Statement and pay (up to $10,000) for the fees of counsel for the persons
holding securities registered pursuant to the Registration Statement, including
the Holder(s). The Company shall keep the Registration Statement effective and
current until all the Registrable Securities are sold or until all such
securities may be sold by the holders thereof under Rule 144, without volume
limitations.
5.2 General Terms
5.2.1 Indemnification.
(a) The Company shall indemnify the Holder(s) of
the Registrable Securities to be sold pursuant to any registration statement
hereunder and any underwriter or person deemed to be an underwriter under the
Act and each person, if any, who controls such Holders or underwriters or
persons deemed to be underwriters within the meaning of Section 15 of the Act
or Section 20(a) of the Securities Exchange Act of 1934, as amended ("Exchange
Act"), against all loss, claim, damage, expense or liability (including all
reasonable attorneys' fees and other expenses reasonably incurred in
investigating, preparing or defending against any claim whatsoever) to which
any of them may become subject under the Act, the Exchange Act or otherwise,
arising from such registration statement, except with respect to information
furnished to the Company for specific inclusion in such registration statement
by PHD, the Holder or any of the persons seeking to be indemnified. The
Holder(s) of the Registrable Securities to be sold pursuant to such
registration statement, and their successors and assigns, shall severally, and
not jointly, indemnify the Company, against all loss, claim, damage, expense or
liability (including all reasonable attorneys' fees and other expenses
reasonably incurred in investigating, preparing or defending against any claim
whatsoever) to which they may become subject under the Act, the Exchange Act or
otherwise, arising from information furnished by or on behalf of such Holders,
in writing, for specific inclusion in such registration statement.
(b) If any action is brought against a party
hereto, ("Indemnified Party") in respect of which indemnity may be sought
against the other party ("Indemnifying Party"), such Indemnified Party shall
promptly notify Indemnifying Party in writing of the institution of such action
and Indemnifying Party shall assume the defense of such action, including the
employment and fees of counsel reasonably satisfactory to the Indemnified Party.
Such Indemnified Party shall have the right to employ its or their own counsel
in any such case, but the fees and expenses of such counsel shall be at the
expense of such Indemnified Party unless (i) the employment of such counsel
shall have been authorized in writing by Indemnifying Party in connection with
the defense of such action, or (ii) Indemnifying Party shall not have employed
counsel to defend such action, or (iii) such Indemnified Party shall have been
advised by counsel that there may be one or more legal defenses available to it
which may result in a conflict between the
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<PAGE> 5
Indemnified Party and Indemnifying Party (in which case Indemnifying Party shall
not have the right to direct the defense of such action on behalf of the
Indemnified Party), in any of which events, the reasonable fees and expenses of
not more than one additional firm of attorneys designated in writing by the
Indemnified Party shall be borne by Indemnifying Party. Notwithstanding anything
to the contrary contained herein, if Indemnified Party shall assume the defense
of such action as provided above, Indemnifying Party shall not be liable for any
settlement of any such action effected without its written consent.
(c) If the indemnification or reimbursement
provided for hereunder is finally judicially determined by a court of competent
jurisdiction to be unavailable to an Indemnified Party (other than as a
consequence of a final judicial determination of willful misconduct, bad faith
or gross negligence of such Indemnified Party), then Indemnifying Party agrees,
in lieu of indemnifying such Indemnified Party, to contribute to the amount paid
or payable by such Indemnified Party (i) in such proportion as is appropriate to
reflect the relative benefits received, or sought to be received, by
Indemnifying Party on the one hand and by such Indemnified Party on the other or
(ii) if (but only if) the allocation provided in clause (i) of this sentence is
not permitted by applicable law, in such proportion as is appropriate to reflect
not only the relative benefits referred to in such clause (i) but also the
relative fault of Indemnifying Party and of such Indemnified Party; provided,
however, that in no event shall the aggregate amount contributed by a Holder
exceed the profit, if any, earned by such Holder as a result of the exercise by
him or it of the Purchase Option and the sale by him of the underlying shares of
Common Stock.
(d) The rights accorded to Indemnified Parties
hereunder shall be in addition to any rights that any Indemnified Party may have
at common law, by separate agreement or otherwise.
5.2.2 Exercise of Purchase Options. Nothing contained in
this Purchase Option shall be construed as requiring the Holder(s) to exercise
their Purchase Options prior to or after the initial filing of any registration
statement or the effectiveness thereof.
6. Adjustments
6.1 Adjustments to Exercise Price and Number of Securities. The
Exercise Price and the number of shares of Common Stock underlying this Purchase
Option shall be subject to adjustment from time to time as hereinafter set
forth:
6.1.1 Stock Dividends - Recapitalization,
Reclassification, Split-Ups. If, after the date hereof, and subject to the
provisions of Section 6.2 below, the number of outstanding shares of Common
Stock is increased by a stock dividend on the Common Stock payable in shares of
Common Stock or by a split-up, recapitalization or reclassification of shares of
Common Stock or other similar event, then, on the effective date thereof, the
number of shares of Common Stock issuable on exercise of this Purchase Option
shall be increased in proportion to such increase in outstanding shares.
6.1.2 Aggregation of Shares. If after the date hereof,
and subject to the provisions of Section 6.3, the number of outstanding shares
of Common Stock is decreased by a consolidation, combination or reclassification
of shares of Common Stock or other similar event, then, upon the effective date
thereof, the number of shares of Common Stock issuable on exercise of this
Purchase Option shall be decreased in proportion to such decrease in outstanding
shares.
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<PAGE> 6
6.1.3 Adjustments in Exercise Price. Whenever the number of
shares of Common Stock purchasable upon the exercise of this Purchase Option is
adjusted, as provided in this Section 6.1, the Exercise Price shall be adjusted
(to the nearest cent) by multiplying such Exercise Price immediately prior to
such adjustment by a fraction (x) the numerator of which shall be the number of
shares of Common Stock purchasable upon the exercise of this Purchase Option
immediately prior to such adjustment, and (y) the denominator of which shall be
the number of shares of Common Stock so purchasable immediately thereafter.
6.1.4 Replacement of Securities upon Reorganization, etc. In
case of any reclassification or reorganization of the outstanding shares of
Common Stock other than a change covered by Section 6.1.1 hereof or which solely
affects the par value of such shares of Common Stock, or in the case of any
merger or consolidation of the Company with or into another corporation (other
than a consolidation or merger in which the Company is the continuing
corporation and which does not result in any reclassification or reorganization
of the outstanding shares of Common Stock), or in the case of any sale or
conveyance to another corporation or entity of the property of the Company as an
entirety or substantially as an entirety in connection with which the Company is
dissolved, the Holder of this Purchase Option shall have the right thereafter
(until the expiration of the right of exercise of this Purchase Option) to
receive upon the exercise hereof, for the same aggregate Exercise Price payable
hereunder immediately prior to such event, the kind and amount of shares of
stock or other securities or property (including cash) receivable upon such
reclassification, reorganization, merger or consolidation, or upon a dissolution
following any such sale or other transfer, by a Holder of the number of shares
of Common Stock of the Company obtainable upon exercise of this Purchase Option
immediately prior to such event; and if any reclassification also results in a
change in shares of Common Stock covered by Sections 6.1.1 or 6.1.2, then such
adjustment shall be made pursuant to Sections 6.1.1, 6.1.2, 6.1.3 and this
Section 6.1.4. The provisions of this Section 6.1.4 shall similarly apply to
successive reclassifications, reorganizations, mergers or consolidations, sales
or other transfers.
6.1.5 Changes in Form of Purchase Option. This form of
Purchase Option need not be changed because of any change pursuant to this
Section, and Purchase Options issued after such change may state the same
Exercise Price and the same number of shares of Common Stock as are stated in
the Purchase Option initially issued pursuant to this Agreement. The acceptance
by any Holder of the issuance of a new Purchase Option reflecting a required or
permissive change shall not be deemed to waive any rights to a prior adjustment
or the computation thereof.
6.2 Elimination of Fractional Interests. The Company shall not be
required to issue certificates representing fractions of shares of Common Stock
upon the exercise of this Purchase Option, nor shall it be required to issue
scrip or pay cash in lieu of any fractional interests, it being the intent of
the parties that all fractional interests shall be eliminated by rounding any
fraction up to the nearest whole number of shares of Common Stock or other
securities, properties or rights.
7. Reservation and Listing. The Company shall at all times reserve and
keep available out of its authorized shares of Common Stock, solely for the
purpose of issuance upon exercise of this Purchase Option, such number of
shares of Common Stock or other securities, properties or rights as shall be
issuable upon the exercise thereof. The Company covenants and agrees that, upon
exercise of the Purchase Options and payment of the Exercise Price therefor,
all shares of Common Stock and other securities issuable upon such exercise
shall be duly and validly issued, fully paid and non-assessable and not subject
to preemptive rights of any stockholder. As long as the Purchase Option shall
be outstanding, the Company shall use its
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<PAGE> 7
best efforts to cause all shares of Common Stock issuable upon exercise of the
Purchase Option to be listed (subject to official notice of issuance) on all
securities exchanges (or, if applicable on Nasdaq) on which the Common Stock is
then listed and/or quoted.
8. Certain Notice Requirements.
8.1 Holder's Right to Receive Notice. Nothing herein shall be construed
as conferring upon the Holders the right to vote or consent or to receive notice
as a stockholder for the election of directors or any other matter, or as having
any rights whatsoever as a stockholder of the Company. If, however, at any time
prior to the expiration of the Purchase Option and its exercise, any of the
events described in Section 8.2 shall occur, then, in one or more of said
events, the Company shall give written notice of such event at least fifteen
days prior to the date fixed as a record date or the date of closing the
transfer books for the determination of the stockholders entitled to such
dividend, distribution, conversion or exchange of securities or subscription
rights, or entitled to vote on such proposed dissolution, liquidation, winding
up or sale. Such notice shall specify such record date or the date of the
closing of the transfer books, as the case may be.
8.2 Events Requiring Notice. The Company shall be required to give the
notice described in this Section 8 upon one or more of the following events: (i)
if the Company shall take a record of the holders of its shares of Common Stock
for the purpose of entitling them to receive a dividend or distribution payable
otherwise than in cash, or a cash dividend or distribution payable otherwise
than out of retained earnings, as indicated by the accounting treatment of such
dividend or distribution on the books of the Company, or (ii) the Company shall
offer to all the holders of its Common Stock any additional shares of capital
stock of the Company or securities convertible into or exchangeable for shares
of capital stock of the Company, or any option, or right to subscribe therefor,
or (iii) a merger or reorganization in which the Company is not the surviving
party, or (iv) a dissolution, liquidation or winding up of the Company (other
than in connection with a consolidation or merger) or a sale of all or
substantially all of its property, assets and business shall be proposed.
8.3 Notice of Change in Exercise Price. The Company shall, promptly
after an event requiring a change in the Exercise Price pursuant to Section 6
hereof, send notice to the Holders of such event and change ("Price Notice").
The Price Notice shall describe the event causing the change and the method of
calculating same and shall be certified as being true and accurate by the
Company's President and Chief Financial Officer.
8.4 Transmittal of Notices. All notices, requests, consents and other
communications under this Purchase Option shall be in writing and shall be
deemed to have been duly made on the date of delivery if delivered personally or
sent by overnight courier, with acknowledgment of receipt by the party to which
notice is given, or on the fifth day after mailing if mailed to the party to
whom notice is to be given, by registered or certified mail, return receipt
requested, postage prepaid and properly addressed as follows: (i) if to the
registered Holder of this Purchase Option, to the address of such Holder as
shown on the books of the Company, or (ii) if to the Company, to its principal
executive office.
9. Miscellaneous.
9.1 Headings. The headings contained herein are for the sole purpose of
convenience of reference, and shall not in any way limit or affect the meaning
or interpretation of any of the terms or provisions of this Purchase Option.
7
<PAGE> 8
9.2 Entire Agreement. This Purchase Option (together with the other
agreements and documents being delivered pursuant to or in connection with this
Purchase Option) constitutes the entire agreement of the parties hereto with
respect to the subject matter hereof, and supersedes all prior agreements and
understandings of the parties, oral and written, with respect to the subject
matter hereof.
9.3 Binding Effect. This Purchase Option shall inure solely to the
benefit of and shall be binding upon, the Holder and the Company and their
respective successors, legal representatives and assigns, and no other person
shall have or be construed to have any legal or equitable right, remedy or claim
under or in respect of or by virtue of this Purchase Option or any provisions
herein contained.
9.4 Governing Law; Submission to Jurisdiction. This Purchase Option
shall be governed by and construed and enforced in accordance with the law of
the State of New York, without giving effect to conflict of laws. The Company
hereby agrees that any action, proceeding or claim against it arising out of, or
relating in any way to this Purchase Option shall be brought and enforced in the
courts of the State of New York or of the United States of America for the
Southern District of New York, and irrevocably submits to such jurisdiction,
which jurisdiction shall be exclusive. The Company hereby waives any objection
to such exclusive jurisdiction and that such courts represent an inconvenient
forum. Any process or summons to be served upon the Company may be served by
transmitting a copy thereof by registered or certified mail, return receipt
requested, postage prepaid, addressed to it at the address set forth in Section
8 hereof. Such mailing shall be deemed personal service and shall be legal and
binding upon the Company in any action, proceeding or claim. The Company agrees
that the prevailing party(ies) in any such action shall be entitled to recover
from the other party(ies) all of its reasonable attorneys' fees and expenses
relating to such action or proceeding and/or incurred in connection with the
preparation therefor.
9.5 Waiver, Etc. The failure of the Company or the Holder to at any
time enforce any of the provisions of this Purchase Option shall not be deemed
or construed to be a waiver of any such provision, nor to in any way affect the
validity of this Purchase Option or any provision hereof or the right of the
Company or any Holder to thereafter enforce each and every provision of this
Purchase Option. No waiver of any breach, non-compliance or non-fulfillment of
any of the provisions of this Purchase Option shall be effective unless set
forth in a written instrument executed by the party or parties against whom or
which enforcement of such waiver is sought; and no waiver of any such breach,
non-compliance or non-fulfillment shall be construed or deemed to be a waiver of
any other or subsequent breach, non-compliance or non- fulfillment.
IN WITNESS WHEREOF, the Company has caused this Purchase Option to be
signed by its duly authorized officer as of the 19th day of February, 1998.
WOODROAST SYSTEMS, INC.
By:
----------------------------------
Name: Ralph J. Guarino
Title: President, Chief Operating
Officer and Chief Financial Officer
8
<PAGE> 9
Form to be used to exercise Purchase Option:
Woodroast Systems, Inc.
10250 Valley View Road, Suite 145
Eden Prairie, MN 55344
Date: _____________________, 19___
The undersigned hereby elects irrevocably to exercise the
within Purchase Option and to purchase ________ shares of Common Stock of
Woodroast Systems, Inc. and hereby makes payment of $____________ (at the rate
of $_________ per share of Common Stock) in payment of the Exercise Price
pursuant thereto. Please issue the Common Stock as to which this Purchase Option
is exercised in accordance with the instructions given below.
or
The undersigned hereby elects irrevocably to convert its right
to purchase ____________ shares of Common Stock purchasable under the within
Purchase Option into __________ shares of Common Stock of Woodroast Systems,
Inc. (based on a "Market Price" of $________ per share of Common Stock). Please
issue the Common Stock in accordance with the instructions given below.
--------------------------------------
Signature
- ---------------------------
Signature Guaranteed
NOTICE: THE SIGNATURE TO THIS FORM MUST CORRESPOND WITH THE
NAME AS WRITTEN UPON THE FACE OF THE WITHIN PURCHASE OPTION IN EVERY PARTICULAR
WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER, AND MUST BE
GUARANTEED BY A BANK, OTHER THAN A SAVINGS BANK, OR BY A TRUST COMPANY OR BY A
FIRM HAVING MEMBERSHIP ON A REGISTERED NATIONAL SECURITIES EXCHANGE.
INSTRUCTIONS FOR REGISTRATION OF SECURITIES
Name
--------------------------------------------------------
(Print in Block Letters)
Address
--------------------------------------------------------
9
<PAGE> 10
Form to be used to assign Purchase Option:
ASSIGNMENT
(To be executed by the registered Holder to effect a transfer
of the within Purchase Option):
FOR VALUE RECEIVED, ________________________________ does
hereby sell, assign and transfer unto _________________________________ the
right to purchase _____________________ shares of Common Stock of Woodroast
Systems, Inc. ("Company") evidenced by the within Purchase Option and does
hereby authorize the Company to transfer such right on the books of the Company.
Dated:____________________, 19___
--------------------------------------
Signature
NOTICE: THE SIGNATURE TO THIS FORM MUST CORRESPOND WITH THE
NAME AS WRITTEN UPON THE FACE OF THE WITHIN PURCHASE OPTION IN EVERY PARTICULAR
WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER.
10
<PAGE> 1
EXHIBIT 5
March 19, 1998
Woodroast Systems, Inc.
10250 Valley View Road, Suite 145
Eden Prairie, MN 55344
Ladies and Gentlemen:
We have acted on behalf of Woodroast Systems, Inc., a Minnesota
corporation (the "Company") in connection with the preparation of a
Registration Statement on Form S-3 (the "Registration Statement") to be filed
by the Company with the Securities and Exchange Commission on March 19, 1998
relating to the registration under the Securities Act of 1933, as amended, of
(i) an indeterminable number of shares of common stock, par value $.005 per
share ("Common Stock") (up to the number of then authorized but unissued
shares) to be issued by the Company upon conversion of 117,500 shares of Class
A 8% Convertible Preferred Stock, par value and stated value $10.00 per share
("Preferred Stock") and 175,000 shares of Common Stock to be issued by the
Company upon exercise of those certain options issued to Perrin, Holden &
Davenport Capital Corp. and its designees dated February 19, 1998 ("Placement
Agent Options") and (ii) 175,000 Placement Agent Options.
Upon examination of such corporate documents and records as we have
deemed necessary or advisable for the purposes hereof and including and in
reliance upon certain certificates by the Company, it is our opinion that:
a. The Company is a validly existing corporation in good standing
under the laws of the State of Minnesota.
b. The shares of Common Stock to be issued upon conversion of the
Preferred Stock have been duly authorized and, when issued in
accordance with the terms thereof and in the manner provided
in the Registration Statement, will be legally issued, fully
paid and non-assessable.
c. The shares of Common Stock to be issued upon exercise of the
Placement Agent Options, have been duly authorized and, when
issued in accordance with the terms of such Options and in the
manner provided in the Registration Statement, will be legally
issued, fully paid and non-assessable.
d. The Placement Agent Options currently outstanding have been
duly authorized and legally issued.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and the reference to our firm under the heading "Legal
Matters" in the Registration Statement.
Very truly yours,
MASLON EDELMAN BORMAN & BRAND, LLP
<PAGE> 1
EXHIBIT 10.19
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") by and between Woodroast
Systems, Inc., a Minnesota corporation (the "Company"), and Sheldon F. Jacobs
("Employee") is hereby entered into and effective as of January 1, 1998. This
Agreement hereby supersedes any other employment agreements or understandings;
written or oral, between the Company and Employee.
RECITALS:
As of the date of this Agreement, the Company is engaged primarily in
the business of owning and operating restaurants and cigar parlors.
Employee is employed hereunder by the Company in a confidential
relationship wherein Employee, in the course of his employment with the Company,
has and will continue to become familiar with and aware of information as to the
Company's customers, specific manner of doing business, including the processes,
techniques and trade secrets utilized by the Company, and future plans with
respect thereto, all of which has been and will be established and maintained at
great expense to the Company; this information is a trade secret and constitutes
the valuable goodwill of the Company.
Therefore, in consideration of the mutual promises, terms covenants and
conditions set forth herein and the performance of each, it is hereby agreed as
follows:
AGREEMENTS:
1. EMPLOYMENT AND DUTIES.
(a) The Company hereby employs Employee as Chief Executive Officer
effective January 1, 1998. As such, Employee shall have responsibilities, duties
and authority reasonably accorded to and expected of a Chief Executive Officer
and will report directly to the Board of Directors (the "Board") of the Company.
Employee hereby accepts this employment upon the terms and conditions herein
contained and, subject to paragraph 1(b), agrees to devote his working time,
attention and efforts to promote and further the business of the Company.
(b) Employee shall not, during the term of his employment hereunder, be
engaged in any other business activity pursued for gain, profit or other
pecuniary advantage; provided however, the foregoing limitation shall not be
construed as prohibiting Employee from making personal investments in such form
or manner as will not require his services in the operation or affairs of the
companies or enterprises in which such investments are made nor violate the
terms of paragraph 3 hereof.
2. COMPENSATION. For all services rendered by Employee, the Company shall
compensate Employee as follows:
<PAGE> 2
(a) BASE SALARY. The base salary payable to Employee shall be Two
Hundred Twenty Five Thousand Dollars ($225,000) per year, payable on a regular
basis in accordance with the Company's standard payroll procedures but not less
than twice monthly. On at least an annual basis, the Board of Directors of the
Company (the "Board") will review Employee's performance and may make increases
to such base salary if, in its discretion, any such increase is warranted. Such
recommended increase would, in all likelihood, require approval by the Board or
a duly constituted committee thereof.
(b) INCENTIVE BONUS PLAN. Employee shall be eligible for a bonus to be
awarded at the discretion of the Board and based upon such criteria as may from
time to time be determined by the Board.
(c) EXECUTIVE PERQUISITES, BENEFITS AND OTHER COMPENSATION.
Employee shall be entitled to receive additional benefits and compensation from
the Company in such form and to such extent as specified below:
(i) Payment of premiums for coverage for Employee and his
spouse and children under health, hospitalization, disability, life and other
employee benefit plans that the Company may have in effect from time to time,
with benefits provided to Employee under this clause (i) to be not less
favorable than the benefits provided to other Company executives.
(ii) Reimbursement for all business travel and other out-of-pocket
expenses reasonably incurred by Employee in the performance of his services
pursuant to this Agreement. All reimbursable expenses shall be appropriately
documented in reasonable detail by Employee upon submission of any request for
reimbursement, and in a format and manner consistent with the Company's expense
reporting policy.
(iii) Four (4) weeks paid vacation for each year during the period of
employment. Earned and unused paid vacation for each year shall not carry
forward to subsequent years.
(iv) The Company shall provide Employee with other executive
perquisites as may be available to or deemed appropriate for Employee by the
Board and participation in all other Company-wide employee benefits as available
from time to time.
(v) Employee shall be eligible for stock options and
restricted and deferred stock grants under the Company's 1994 Stock Plan as the
Board may from time to time grant to Employee in its sole discretion.
3. NON-COMPETITION AGREEMENT.
(a) Employee will not, during the period of his employment by or with
the Company, and for a period of one (1) year immediately following the
termination of his employment under this Agreement, for any reason whatsoever,
directly or indirectly, for himself or on behalf of or in
2
<PAGE> 3
conjunction with any other person, persons, company, partnership, corporation or
business of whatever nature:
(i) engage, as an officer, director, shareholder, owner,
partner, joint venturer, or in a managerial capacity, whether as an employee,
independent contractor, consultant or advisor, or as a sales representative, in
any business selling any products or services in direct competition with the
Company's Shelly's Back Room(R) cigar parlor restaurant concept (the "Parlor"),
within the United States (the "Territory");
(ii) call upon any person who is, at that time, within the
Territory, an employee of the Company (including the subsidiaries thereof) for
the purpose or with the intent of enticing such employee away from or out of the
employ of the Company including the subsidiaries thereof);
(iii) call upon any person or entity which is, at that time,
or which has been, within one (1) year prior to that time, a tobacco supplier
(and excluding a food supplier), joint venturer, licensee, or operator of the
Company (including the subsidiaries thereof) within the Territory for the
purpose of soliciting or selling products or services in direct competition with
the Parlors within the Territory;
(iv) call upon any prospective acquisition candidate, on
Employee's own behalf or on behalf of any competitor, which candidate was either
called upon by the Company (including the subsidiaries thereof) or for which the
Company made an acquisition analysis, for the purpose of acquiring such entity;
or
(v) disclose the Company's tobacco suppliers (and excluding
food suppliers), joint venturers, licensees or operators, whether in existence
or proposed, of the Company (or the Subsidiaries thereof) to any person, firm,
partnership, corporation or business for any reason or purpose whatsoever.
Notwithstanding the above, the foregoing covenant shall not be deemed
to prohibit Employee from acquiring as an investment not more than three percent
(3%) of the capital stock of a competing business, whose stock is traded on a
national securities exchange or over-the-counter.
(b) Because of the difficulty of measuring economic losses to the
Company as a result of a breach of the foregoing covenant and because of the
immediate and irreparable damage that could be caused to the Company for which
it would have no other adequate remedy, Employee agrees that the foregoing
covenant may be enforced by the Company in the event of breach by his by
injunctions and restraining orders.
(c) It is agreed by the parties that the foregoing covenants in this
paragraph 3 impose a reasonable restraint on Employee in light of the activities
and business of the Company (including the Company's subsidiaries) on the date
of the execution of this Agreement and the current plans of the Company
(including the Company's subsidiaries).
3
<PAGE> 4
(d) The covenants in this paragraph 3 are severable and separate, and
the unenforceability of any specific covenant shall not affect the provision of
any other covenant. Moreover, in the event any court of competent jurisdiction
shall determine that the scope, time or territorial restrictions set forth are
unreasonable, then it is the intention of the parties that such restrictions be
enforced to the fullest extent which the court deems reasonable, and the
Agreement shall thereby be reformed.
(e) All of the covenants in this paragraph 3 shall be construed as an
agreement independent of any other provision in this Agreement, and the
existence of any claim or cause of action of Employee against the Company,
whether predicated on this Agreement or otherwise, shall not constitute a
defense to the enforcement by the Company of such covenants. It is specifically
agreed that the period of one (1) year stated at the beginning of this paragraph
3 shall be effective, shall be computed by excluding from such computation any
time during which Employee is in violation of any provision of this paragraph 3.
4. TERM; TERMINATION; RIGHTS ON TERMINATION. The term of this Agreement shall
begin on January 1, 1998 and continue through December 31, 2000 (the "Initial
Term"), and, unless terminated sooner as herein provided, shall continue
thereafter on a year-to-year basis on the same terms and conditions contained
herein. This Agreement and Employee's employment may be terminated in any one of
the following ways:
(a) DEATH. The death of Employee shall immediately terminate the
Agreement with no severance compensation due to Employee's estate.
(b) DISABILITY. If, as a result of incapacity due to physical or mental
illness or injury, Employee shall have been absent from his full-time duties
hereunder for three (3) consecutive months, then thirty (30) days after
receiving written notice (which notice may occur before or after the end of such
three (3) month period, but which shall not be effective earlier than the last
day of such three (3) month period), the Company may terminate Employee's
employment hereunder provided Employee is unable to resume his full-time duties
at the conclusion of such notice period. Thereafter, all of Employee's rights to
compensation and other benefits hereunder shall terminate except where
continuation of such benefits is required under applicable Company benefit plans
or by law.
(c) GOOD CAUSE. The Company may terminate the Agreement ten (10) days
after written notice to Employee for good cause, which shall be: (i) Employee's
material breach of this Agreement (continuing for ten (10) days after receipt of
written notice); (ii) Employee's gross negligence in the performance or
intentional nonperformance (continuing for ten (10) days after receipt of
written notice) of any of Employee's material duties and responsibilities
hereunder; (iii) Employee's dishonesty, fraud or misconduct with respect to the
business or affairs of the Company which materially and adversely affects the
operations or reputation of the Company; (iv) Employee's conviction of a felony
or chronic alcohol abuse or illegal drug abuse by Employee. In the event of a
termination for good cause, as enumerated above, Employee shall have no right to
any severance compensation.
4
<PAGE> 5
(d) WITHOUT CAUSE. At any time after the commencement of employment,
the Company may, without cause, terminate this Agreement and Employee's
employment, effective thirty (30) days after written notice is provided by the
Company. Should Employee be terminated by the Company without cause, Employee
shall receive from the Company, in a lump-sum payment due on the effective date
of termination, the base salary at the rate then in effect for one (1) year.
(e) TERMINATION BY EMPLOYEE FOR GOOD REASON. The Employee may terminate
his employment hereunder for "Good Reason." As used herein, "Good Reason" shall
mean the continuance of any of the following after 10 days' prior written notice
by Employee to the Company, specifying the basis for such Employee's having Good
Reason to terminate this Agreement:
(i) the assignment to Employee of any duties materially and
adversely inconsistent with the Employee's position as specified in paragraph 1
hereof, including status, offices, responsibilities or persons to whom the
Employee reports as contemplated under paragraph 1 of this Agreement, or any
other action by the Company which results in a material and adverse change in
such position, status, offices, titles or responsibilities;
(ii) Employee's removal from, or failure to be reappointed or
re-elected to, Employee's position under this Agreement, except as contemplated
by paragraphs 4(a), (b) and (c); or
(iii) any other material breach of this Agreement by the
Company, including the failure to pay Employee on a timely basis the amounts to
which he is entitled under this Agreement.
In the event of any termination by the Employee for Good Reason, as
determined by a court of competent jurisdiction or pursuant to the provisions of
paragraph 14 below, the Company shall pay to Employee in a lump-sum payment the
base salary at the rate then in effect for one (1) year.
(f) TERMINATION BY EMPLOYEE WITHOUT CAUSE. If Employee resigns or
otherwise terminates his employment without Good Reason pursuant to paragraph
4(e), Employee shall receive no severance compensation.
Upon termination of this Agreement for any reason provided in clauses
(a) through (f) above, Employee shall be entitled to receive all compensation
earned and all benefits vested and reimbursements due through the effective date
of termination. Additional compensation subsequent to termination, if any, will
be due and payable to Employee only to the extent and in the manner expressly
provided above. All other rights and obligations of the Company and Employee
under this Agreement shall cease as of the effective date of termination, except
that the Company's obligations under paragraph 8 herein and Employee's
obligations, if any, under paragraphs 3, 5, 6, 7 and 9 herein shall survive such
termination in accordance with their terms.
5
<PAGE> 6
5. RETURN OF COMPANY PROPERTY. All records, designs, patents, business plans,
financial statements, manuals, memoranda, lists and other property delivered to
or compiled by Employee by or on behalf of the Company shall be and remain the
property of the Company and be subject at all times to its discretion and
control. Likewise, all correspondence, reports, records, charts, advertising
materials and other similar data pertaining to the business, activities or
future plans of the Company which is collected by Employee shall be delivered
promptly to the Company without request by it upon termination of Employee's
employment.
6. INVENTIONS. Employee shall disclose promptly to the Company any and all
significant conceptions and ideas for inventions, improvements and valuable
discoveries, whether patentable or not, which are conceived or made by Employee,
solely or jointly with another, during the period of employment and which are
directly related to the business or activities of the Company. Employee hereby
assigns and agrees to assign all his interests therein to the Company or its
nominee. Whenever requested to do so by the Company, Employee shall execute any
and all applications, assignments or other instruments that the Company shall
deem necessary or apply for and obtain Letters of Patent of the United States or
any foreign country or to otherwise protect the Company's interest therein. This
paragraph 6 does not apply to an invention for which no equipment, supplies,
facility or trade secret or confidential information of the Company was used and
which invention was developed entirely on the Employee's own time, and (i) which
does not relate (a) directly to the business of the Company, or (b) to the
Company's actual or demonstrably anticipated research or development, or (ii)
which invention does not result from any work performed by the Employee for the
Company.
7. TRADE SECRETS. Employee agrees that he will not, during the term of this
Agreement with the Company, disclose the specific terms of the Company's
relationships or agreements with its significant vendors or customers or any
other significant and material trade secret of the Company, whether in existence
or proposed, to any person, firm, partnership, corporation or business for any
reason or purpose whatsoever, except as is disclosed in the ordinary course of
business, unless compelled by court order.
8. INDEMNIFICATION. In the event Employee is made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by the Company against
Employee), by reason of the fact that he is or was performing services under
this Agreement or is or was an officer of the Company, then the Company shall
indemnify Employee against all expenses (including attorney's fees), judgments,
fines and amounts paid in settlement, as actually and reasonably incurred by
Employee in connection therewith to the fullest extent authorized by Minnesota
law. In the event that both Employee and the Company are made a party to the
same thirty-party action, complaint, suit or proceeding, the Company agrees to
engage competent legal representation, and Employee agrees to use the same
representation, provided that if counsel selected by the Company shall have a
conflict of interest that prevents such counsel from representing Employee,
Employee may engage separate counsel and the Company shall pay all attorneys'
fees of such separate counsel. Further, while Employee is expected at all times
to use his best efforts to faithfully discharge his duties under this Agreement,
Employee cannot
6
<PAGE> 7
be held liable to the Company for errors or omissions made in good faith where
Employee has not exhibited gross, willful and wanton negligence and misconduct
or performed criminal and fraudulent acts which materially damage the business
of the Company.
9. NO PRIOR AGREEMENTS. Employee hereby represents and warrants to the Company
that the execution of this Agreement by Employee and his employment by the
Company and the performance of his duties hereunder will not violate or be a
breach of any Agreement with a former employer, client or any other person or
entity. Further, Employee agrees to indemnify the Company for any claim,
including, but not limited to, attorneys' fees and expenses of investigation, by
any such third party that such third party may now have or may hereafter come to
have against the Company based upon or arising out of any non-competition
Agreement, invention or secrecy Agreement between Employee and such third party
which was in existence as of the date of this Agreement.
10. ASSIGNMENT; BINDING EFFECT. Employee understands that he has been selected
for employment by the Company on the basis of his personal qualifications,
experience and skills. Employee agrees, therefore, he cannot assign all or any
portion of his performance under this Agreement. Subject to the preceding two
(2) sentences, this Agreement shall be binding upon, inure to the benefit of and
be enforceable by the parties hereto and their respective heirs, legal
representatives, successor and assigns.
11. COMPLETE AGREEMENT. This Agreement is a promise of future employment.
Employee has no oral representations, understanding or agreements with the
Company or any of its officers, directors or representatives covering the same
subject matter as this Agreement. This written Agreement is the final, complete
and exclusive statement and expression of the agreement between the Company and
Employee and of all the terms of this Agreement, and it cannot be varied,
contradicted or supplemented by evidence of any prior or contemporaneous oral or
written agreements. This written Agreement may not be later modified except by a
further writing signed by a duly authorized officer of the Company and Employee,
and no term of this Agreement may be waived except by writing signed by the
party waiving the benefit of such term.
12. NOTICE. Whenever any notice is required hereunder, it shall be given in
writing addressed as follows:
To the Company:
Woodroast Systems, Inc.
10250 Valley View Road
Suite 145
Eden Prairie, Minnesota 55344
Attn: Mr. Ralph J. Guarino
7
<PAGE> 8
To the Employee:
Mr. Sheldon F. Jacobs
1500 Tamarack Drive
Medina, MN 55356-9514
Notice shall be deemed given and effective three (3) days after the deposit in
the U.S. mail of a writing addressed as above and sent first class mail,
certified, return receipt requested, or when actually received. Either party may
change the address for notice by notifying the other party of such change in
accordance with this paragraph 12.
13. SEVERABILITY; HEADINGS. If any portion of this Agreement is held invalid or
inoperative, the other portions of this Agreement shall be deemed valid and
operative and, so far as is reasonable and possible, effect shall be given to
the intent manifested by the portion held in valid or inoperative. The paragraph
headings herein are for reference purposes only and are not intended in any way
to describe, interpret, define or limit the extent or intent of the Agreement or
of any part hereof.
14. ARBITRATION. Any unresolved dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by arbitration,
conducted before a panel of three (3) arbitrators in Minneapolis, Minnesota, in
accordance with the rules of the American Arbitration Association then in
effect. The arbitrators shall not have the authority to add to, detract from, or
modify any provisions hereof nor to award punitive damages to any injured party.
The arbitrators shall have the authority to order back pay, severance
compensation, vesting of options (or cash compensation in lieu of vesting of
options), reimbursement of costs, including those incurred to enforce this
Agreement and interest thereon. A decision by a majority of the arbitration
panel shall be final and binding. Judgment may be entered on the arbitrators'
award in any court having jurisdiction. The direct expense of any arbitration
proceeding shall be borne equally by the Company and Employee.
8
<PAGE> 9
15. GOVERNING LAW. This Agreement shall in all respects be construed according
to the laws of the State of Minnesota.
SIGNATURES:
Date: February 19, 1998
/s/ Sheldon F. Jacobs
---------------------------
Sheldon F. Jacobs
"Employee"
WOODROAST SYSTEMS, INC.
Dated:February 19, 1998 By /s/ Ralph J. Guarino
-----------------------
Ralph J. Guarino
President and Chief
Operating Officer "Company"
9
<PAGE> 1
EXHIBIT 10.20
WOODROAST SYSTEMS, INC.
PROMISSORY NOTE
$250,000 Eden Prairie, Minnesota
December 12, 1997
FOR VALUE RECEIVED, the undersigned, Woodroast Systems, Inc., promises to
pay to the order of Sheldon F. Jacobs, 1500 Tamarack Drive, Medina, MN 55356,
the principal sum of Two Hundred Fifty Thousand Dollars ($250,000), together
with interest on the unpaid principal balance, from the date hereof until this
Note is fully paid at the rate of prime plus two percent per annum. Interest
shall be computed on the basis of the actual number of days elapsed in a 360-day
year and paid at the surrender of this Note.
THE TERM OF THIS NOTE, shall not exceed one year (1) from the date hereof.
All or any part of the unpaid balance of this Note may be prepaid at any time
without penalty.
THIS NOTE IS UNSECURED.
<TABLE>
<S><C>
Address of borrower: Suite 145 WOODROAST SYSTEMS, INC.
10250 Valley View Road
Eden Prairie, MN 55344
By: /s/ Ralph J. Guarino
-----------------------------
Ralph J. Guarino, President
SHELDON F. JACOBS
By: /s/ Sheldon F. Jacobs
-----------------------------
Lender
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<PAGE> 1
EXHIBIT 10.21
WOODROAST SYSTEMS, INC.
PROMISSORY NOTE
$150,000 Eden Prairie, Minnesota
January 27, 1998
FOR VALUE RECEIVED, the undersigned, Woodroast Systems, Inc., promises to
pay to the order of Sheldon F. Jacobs, 1500 Tamarack Drive, Medina, MN 55356,
the principal sum of One Hundred Fifty Thousand Dollars ($150,000), together
with interest on the unpaid principal balance, from the date hereof until this
Note is fully paid at the rate of prime plus two percent per annum. Interest
shall be computed on the basis of the actual number of days elapsed in a 360-day
year and paid at the surrender of this Note.
THE TERM OF THIS NOTE, shall not exceed one year (1) from the date hereof.
All or any part of the unpaid balance of this Note may be prepaid at any time
without penalty.
THIS NOTE IS UNSECURED.
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<S><C>
Address of borrower: Suite 145 WOODROAST SYSTEMS, INC.
10250 Valley View Road
Eden Prairie, MN 55344
By: /s/ Ralph J. Guarino
--------------------------------
Ralph J. Guarino, President
SHELDON F. JACOBS
By: /s/ Sheldon F. Jacobs
----------------------------------
Lender
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<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this registration statement of
Woodroast Systems, Inc. on Form S-3 (File No. 333- ) of our report dated
February 13, 1997 on our audits of the consolidated financial statements and
financial statement schedule of Woodroast Systems, Inc. We consent to the
reference to our Firm under the caption "Experts."
LUND KOEHLER COX & COMPANY, PLLP
Minneapolis, Minnesota
March 19, 1998
