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FORM 10-KSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [No Fee Required]
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [No Fee Required]
For the fiscal year ended December 31, 1996
Commission File Number 33-76422
LINDA'S DIVERSIFIED HOLDINGS INC.
(Exact name of registrant as specified in its charter)
Delaware 22-3280395
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11 Commerce Drive, Cranford, New Jersey 07016
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (908) 276-2080
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class
Class A Common Stock, $.001 par value
Redeemable Class A Warrants
Redeemable Class B Warrants
Redeemable Class C Warrants
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The registrant's revenues for its most recent fiscal year were $1,300,000.
The aggregate market value of the voting stock held by non-affiliates of the
registrant, computed by reference to the last sale price of the registrant's
Common Stock on March 5, 1997, is $5,018,625.
As of March 7, 1997, the registrant had 2,065,000 shares of Class A Common
Stock, $.001 par value per share, and 800,000 shares of Class B Common Stock,
$.001 par value per share, outstanding.
Transitional Small Business Disclosure Format
Yes No X
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PART I
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ITEM 1. DESCRIPTION OF BUSINESS
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Linda's Diversified Holdings Inc. (formerly Linda's Flame Roasted Chicken
Incorporated) (the "Company") is a holding company consisting of restaurant
operations, restaurant franchising and home-equity loan operations. The loan
operations are conducted through National Home Guaranty Inc. ("NHG"), a
wholly-owned subsidiary of the Company which commenced operations in April 1996,
providing both conventional and federally-guaranteed financing to homeowners and
lead-generation services for contractors with respect to home improvement
services in the low-to-moderate income housing markets. The Company's restaurant
business, operating under the name, Linda's Rotisserie & Kitchen, consists of
two company-owned and five (four at December 31, 1996) franchised quick-service
restaurants. The company expects that its future results of operations will be
predominantly affected by the success or failure of NHG.
The Company was formed as a Delaware corporation in February 1994 to
acquire all of the outstanding capital stock of four New Jersey corporations,
formed at various times in 1991 and 1992 (collectively, the "Subsidiaries"). In
March 1994, all of the outstanding stock of the Subsidiaries was exchanged for
800,000 shares of newly-issued Class B Common Stock of the Company (the
"Reorganization") and, as a result, the Subsidiaries became wholly-owned by the
Company. The 800,000 shares are owned by the same individuals and in the same
proportions as the stock of the Subsidiaries owned by them immediately prior to
the Reorganization.
During the years ended December 31, 1994, 1995 and 1996, the Company
incurred net losses of approximately $(1,203,000), $(2,070,000) and
$(3,117,000), respectively. The Company had an accumulated deficit of
approximately $(6,300,000) at December 31, 1996. In view of the Company's
continuing losses, the Company is limiting its expansion entirely to
diversifying its business through NHG. However, this strategy may not be
successful and such losses may continue. Moreover, even if the Company's
strategy of diversification through NHG is successful, offsetting losses from
the Company's corporate overhead could materially and adversely affect the
ability of stockholders of the Company to realize any benefit from such success.
There can be no assurance that the Company will ever achieve profitable
operations. The Company's prospects must be considered in light of the risks and
difficulties frequently encountered in the highly competitive loan and
restaurant businesses.
The Loan Business
NHG, a New Jersey corporation, provides low-to-moderate income homeowners
with a single source for federally guaranteed and conventional home improvement
credit and qualified contractors to do the home improvement. NHG also provides
second mortgage loans for other purposes. Low-to-moderate income homeowners have
traditionally encountered difficulties obtaining affordable financing and
securing the services of qualified contractors for home improvements.
Since commencing business in April 1996, NHG has originated home
improvement loans, and purchased home improvement loan contracts from
contractors, of between $6,300 and $40,000, totalling approximately $822,000.
Most of these loans have been conventional loans and substantially all of them
have been sold on a service-released nonrecourse basis to third party lenders
without NHG having any continuing obligations to service the loans. NHG intends
to continue to originate, purchase and sell home improvement loans and loan
contracts and second mortgage loans for other purposes on this basis but NHG may
decide to retain and/or continue to service its loans.
NHG has derived revenue from administrative fees paid by participating
contractors representing a percentage of each completed contract and by selling
loans at a premium to third-party buyers. NHG has also derived revenue by
charging loan origination fees to borrowers.
NHG's federally guaranteed loan program is governed by the U.S. Department
of Housing and Urban Development ("HUD") pursuant to its Title I Property
Improvement Program ("Title I") which makes federally guaranteed home
improvement loans available to low-to-moderate income homeowners ("Title I
Loans") in the amount of up to $25,000 for single-family homes and up to $60,000
for multi-family homes.
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Other features of NHG's loan programs include:
o For Title I Loans, there is 90% insurance against loss due to
homeowner default; for conventional loans, NHG is not insured but
is usually secured as a second or third mortgagee.
o Title I Loans may be unsecured up to $7,500; NHG's conventional
loans are secured by a second or third mortgage except under the
unsecured loan program which has a maximum loan amount of $12,500
and minimum credit rating of the borrower of A-.
o Title I Loans have fixed interest rates with repayment terms of up
to 20 years; NHG's conventional loans have fixed-interest rates
with terms of up to 25 years.
o For Title I Loans of up to $25,000, the homeowner is not required
to have any equity in the home; some of NHG's conventional loan
programs require equity in the home and appraisals of the
property.
o Up to 100% of the renovations can be financed under both the Title
I Loans and NHG's conventional loans.
o Under Title I Loans, the percentage of the homeowner's total fixed
housing expenses to gross income can be as high as 45%; for NHG's
conventional loans, this percentage ranges from 45% to 50%.
NHG has enrolled home improvement contractors who meet its quality
standards as well as the requirements under Title I (a "Participating
Contractor"). Title I requires that, on the basis of experience and information,
NHG must determine that a Participating Contractor is reliable, financially
responsible (with a minimum net worth), and qualified to satisfactorily perform
its contractual obligations to homeowners and to comply with any requirements
imposed by Title I regulations. NHG must supervise and monitor each
Participating Contractor's activities with respect to Title I insured contracts.
NHG mediates complaints from homeowners about Participating Contractors with
respect to all of its loans. In addition, with respect to home improvement
contracts which NHG purchases from Participating Contractors, NHG does not
advance funds to a Participating Contractor for its work until the homeowner has
signed a completion certificate, an acknowledgement that the work has been
completed to the homeowner's satisfaction; however, with respect to loans which
NHG originates directly with the homeowner, NHG may advance funds to the
homeowner prior to completion of the home improvement. Furthermore, NHG requires
all Participating Contractors to guaranty their work for a reasonable period of
time and to indemnify NHG against any claims by a homeowner referred by NHG that
relate to the quality of workmanship and/or materials used by the Participating
Contractor.
NHG markets the availability of its services to low and moderate income
homeowners ("Prospects"). NHG pre-qualifies each responding Prospect for the
home improvements he or she desires and can afford. NHG in turn refers each
Prospect to a Participating Contractor that can provide the Prospect with the
desired improvements. Participating Contractors agree to pay NHG, as part of
such contractor's overhead expenses, a percentage of the final agreed upon total
contract price for each contract entered into between the Participating
Contractor and the Prospect whether the Prospect pays for the home improvements
in cash (including by obtaining direct financing from other sources) or finances
the work through NHG.
If a Prospect finances home improvement work through NHG with an
installment sale contract ("Contract"), NHG purchases the Contract from a
Participating Contractor at a discount upon the completion of the job. If NHG
makes a direct loan (a "Loan") to a Prospect, the Loan may be disbursed prior to
completion of the work, and the Loan may be for other than home improvement
purposes. However, prior to the purchase of a Contract or the release of any
Loan funds, NHG sells the Contract or Loan to a third-party lender, a practice
which NHG intends to, but may not, continue.
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Due to the referral relationship between NHG and Participating Contractors,
the Loan or Contract is subject to all claims and defenses that the homeowner
has against a Participating Contractor but in an amount not exceeding the amount
paid by the homeowner under the Loan or Contract.
NHG has hired various personnel with lending experience as well as sales
and telemarketing consultants. NHG has nine full time employees engaged in the
following: three in management, one in underwriting, two in document processing,
one in investigations, one in data entry and one in administration. NHG also has
several part time employees who are customer service representatives.
NHG has developed an advertising and marketing program using a combination
of television and direct mail. Additionally, NHG will open in 1997 information
kiosks in area malls, designed to generate additional Prospects for its products
and services. NHG directs its marketing activities towards a homeowner base
characterized by (i) an average annual household income ranging from $25,000 to
$75,000; (ii) first time homebuyers or elderly homeowners; (iii) female heads of
household and (iv) homeowners living in older homes in stable communities with
no immediate plans of moving. Many homeowners in its target group may have
already been denied credit for insufficient income or other reasons.
NHG is a licensed lender in seven states: Massachusetts, New Jersey,
Delaware, Maryland, New Hampshire, Rhode Island and Connecticut. NHG also
operates in Pennsylvania which does not require a license for NHG to conduct its
current activities there of purchasing Contracts but not originating Loans. In
addition, NHG operates in New York which does not require a license for NHG to
purchase Contracts and originate home improvement Loans. However, in order for
NHG to originate second mortgage Loans in New York for purposes other than home
improvement and in Pennsylvania for home improvement and other purposes, NHG
will have to be licensed in such states. A license application in New York is
pending.
The business of NHG is subject to compliance with federal laws and
regulations relating to consumer lending, including compliance with the Equal
Credit Opportunity Act, the Consumer Credit Protection Act, the Real Estate
Settlement Procedures Act and other federal laws and regulations relating to
consumer lending and mortgage activities. In addition, NHG is subject to various
state laws applicable to licensed and unlicensed home improvement financing
agencies, sales finance companies and second mortgage lenders as well as
periodic examinations by HUD (for Title I Loans) and various state licensing
agencies.
Financings for Loan Business
The Company received net proceeds of approximately $1,654,000 from its
private placement completed in May 1996 (the "Second Quarter Private Placement")
and net proceeds of approximately $1,000,000 from the private placement of its
Series A Convertible Preferred Stock completed in December 1996 (the "Fourth
Quarter Private Placement). The Company may require additional financing within
the next twelve months or thereafter and there can be no assurance that
additional financing will be available on acceptable terms or at all.
Second Quarter Private Placement
To finance NHG, the Company completed in May 1996 the Second Quarter
Private Placement of 40 units ("Units"), each unit consisting of 20,000 shares
of the Company's Class A Common Stock and Class C Warrants to purchase Class A
Common Stock, for an aggregate offering price of $2,000,000. The Class C
Warrants were exercisable at $5.25 per warrant, subject to adjustment. D.H.
Blair Investment Banking Corp. ("Blair") acted as Placement Agent. A portion of
the net proceeds of the Second Quarter Private Placement was used to repay a
$500,000 advance which had been made by the Company to NHG.
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The Placement Agent received (i) a placement fee equal to 10% of the gross
proceeds from the offering, (ii) a non-accountable expense allowance equal to 3%
of the gross proceeds from the offering and (iii) a Unit Purchase Option to
purchase 14 Units at an exercise price of $50,000 per Unit. In addition, the
Placement Agent received a right of first refusal for certain Company financings
and indemnification for liabilities arising out of the Second Quarter Private
Placement. The Placement Agent also received registration rights with respect to
the securities underlying the Unit Purchase Options. The Company agreed, under
certain circumstances, to pay the Placement Agent a fee of 5% upon the exercise
of the Class C Warrants.
Fourth Quarter Private Placement
In December 1996, the Company sold in a private offering 120,000 shares of
its Series A Convertible Preferred Stock, $.001 par value ("Series A
Preferred"), for the aggregate purchase price of $1,200,000. Blair acted as
Placement Agent and received a 10% placement fee from the gross proceeds of the
Fourth Quarter Private Placement, a 3% expense allowance, a right of first
refusal for certain Company financings and indemnification for liabilities
arising out of the Fourth Quarter Private Placement. The Company received net
proceeds of approximately $1,000,000 from the Fourth Quarter Private Placement,
substantially all of which are expected to be used as working capital of NHG. As
a result of the issuance of the Series A Preferred and the anti-dilution
provisions of the Class A, B and C Warrants, the number of such warrants were
increased and their exercise prices were reduced.
The terms of the Series A Preferred were set forth in a Certificate of
Designations which was filed with the Secretary of State of the State of
Delaware immediately prior to the consummation of the Fourth Quarter Private
Placement (the "Certificate of Designations"). A brief summary of certain
provisions of the Certificate of Designations follows.
Liquidation Preference. In the event of any liquidation or winding up of
the Company, the holders of the Series A Preferred will be entitled to receive
$10.00 per share plus any accrued dividends before any distribution to the
holders of the Company's Class A Common Stock or Class B Common Stock (each
"Class A Common Stock" and "Class B Common Stock," collectively, "Common
Stock").
Dividend. A dividend is payable on the Series A Preferred equal to $.70 per
share per annum from the date of its issuance ("Original Issue Date") until the
first anniversary of the Original Issue Date and, thereafter, at the rate of
$1.00 per share per annum, payable quarterly in arrears, out of funds legally
available therefor, on the 15th day of March, June, September and December of
each year commencing March 15, 1997.
Conversion. Following the expiration of six months after the Original Issue
Date, each share of Series A Preferred will become convertible, at the option of
the holder, into the number of shares of Class A Common Stock determined by
dividing $10.00 by a divisor equal to $2.75, subject to antidilution adjustments
as a result of, among other things, a subdivision or combination of the
outstanding Common Stock, a payment by the Company of a stock dividend to
holders of the Common Stock and issuances of Common Stock, under specified
circumstances, for less than the then current market price of the Class A Common
Stock, all as specified in the Certificate of Designations.
Voting Rights. The holders of the Series A Preferred have no voting rights.
However, so long as shares of Series A Preferred are outstanding, without the
approval of at least a majority of the outstanding shares of Series A Preferred,
the Company may not (a) adversely alter or change the rights, preferences,
privileges or restrictions of shares of Series A Preferred, or (b) increase the
authorized number of shares of Series A Preferred or increase or decrease the
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par value of the Series A Preferred. Furthermore, in the event the Company has
failed to make any four quarterly dividend payments on the Series A Preferred,
the majority in interest of the holders of the Series A Preferred will have the
right to elect a majority of the members of the Company's Board of Directors
until such dividends are paid in full.
Redemption. The Series A Preferred is subject to redemption, in whole or in
part, on any date specified by the Company (the "Redemption Date") after the
fifth anniversary of the Original Issue Date at a price per share equal to
$10.00 plus accrued but unpaid dividends, provided that, as of the Redemption
Date, the market price of the Class A Common is at least 200% of the market
price (as defined) of the Class A Common Stock at the Original Issue Date. If a
dividend payment on the Series A Preferred is past due, the Company may redeem
not less than all of the Series A Preferred outstanding.
Risks of NHG's Business
NHG has incurred direct expenses of approximately $1,594,000 from
commencement of operations in April 1996 through December 31, 1996 with
negligible revenues. NHG is subject to all of the risks associated with start-up
businesses including those associated with the highly competitive home finance
business, which is dominated by large institutions. There can be no assurance
that profitability will be achieved by NHG, or if achieved, that it will be
sustained.
NHG sells its Contracts and Loans to third party lenders prior to its
purchase of such Contracts from a Participating Contractor upon completion of a
job or its funding of Loans. Therefore, NHG's ability to originate Loans and buy
Contracts on an ongoing basis is dependent upon its ability to sell the Loans
and Contracts to such third-party lenders, primarily commercial banks, savings
and loan associations and other large credit companies, on a timely basis and
upon terms acceptable to NHG. While NHG has sold substantially all such Loans
and Contracts written since inception of operations, there may not continue to
be a sufficient market for NHG's Loans and Contracts and NHG may not be able to
continue to sell the Loans and Contracts on a timely basis, on acceptable terms,
or at all. NHG's inability to sell the Loans and Contracts could have a material
adverse effect on the business and operations of NHG and the Company.
A key component of the proposed business of NHG involves providing
low-to-moderate income homeowners with access to qualified contractors who can
perform the needed improvement work on acceptable terms. NHG currently has
agreements with eight contractors and is continuing to seek to expand this
network.
NHG faces competition from home mortgage lenders that offer Title I and
conventional home renovation loans. Many of these competitors have substantially
greater financial, marketing and other resources than the Company. In addition,
homeowners may finance renovations by obtaining home equity lines, home
improvement loans and second mortgages through banks, savings institutions and
mortgage companies.
The success of NHG will depend, to a large extent, upon marketing efforts
that have required and will continue to require substantial expenditures by the
Company, primarily for the production and placement of television and direct
mail. The Company may not have the necessary funds to sustain its marketing
campaign. The Company's marketing activities relating to its restaurant
operations have achieved limited success. Moreover, NHG targets a
non-traditional homeowner market and, although NHG has retained the services of
marketing consultants, the Company may not be able to gain acceptance in such
market.
The business of NHG is subject to compliance with federal laws and
regulations relating to consumer lending, including compliance with the Equal
Credit Opportunity Act, the Consumer Credit Protection Act, the Real Estate
Settlement Procedures Act and other federal laws and regulations relating to
consumer lending activities. HUD regulations also require that NHG maintain at
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least a $500,000 warehouse line of credit in order to originate Title I Loans.
NHG has obtained a $3,000,000 line of credit although NHG may not be able to
maintain such line of credit and is not certain that such line will be
sufficient to meet its future needs. In addition, NHG is subject to various
state laws applicable to licensed and unlicensed home improvement financing
agencies, sales finance companies and second mortgage lenders as well as
periodic examinations by HUD (for Title I Loans) and various state licensing
agencies.
Although NHG does not advance funds on a Contract to Participating
Contractors until the homeowner has signed a completion certificate and has also
verbally verified satisfaction to NHG, NHG may make advances on Loans without
obtaining such completion certificate and verbal verification. In either event,
NHG may be subject to subsequent claims by Prospects that a Participating
Contractor referred by NHG did not perform his work as agreed. Although NHG
requires all Participating Contractors to guaranty their work for a reasonable
period of time and to indemnify NHG against any claims raised by a Prospect
referred by NHG that relate to the quality of workmanship and/or materials used
by the Participating Contractor, a Participating Contractor may not honor, or
NHG may not be able to enforce without undue expense, any guarantees or
indemnifications.
The Restaurant Business
The Company currently owns and operates, and is offering franchises to
operate, quick-service restaurants that specialize in preparing and serving
complete meals featuring marinated flame roasted rotisserie chicken, turkey,
meatloaf, roast beef and a variety of side dishes. To date, the Company has
opened five Company-owned restaurants, all in New Jersey, of which two have been
closed and one has been sold as a franchise operation. In addition the Company
has sold an additional seven franchises (six in New Jersey and one in New York)
five of which have been opened.
The Company has been exploring the possibility of selling its restaurant
business or entering into a strategic alliance with respect to its restaurant
business. There can be no assurance that these efforts will be successful.
The Linda's Rotisserie & Kitchen restaurants serve homestyle meals while
offering the convenience and value of fast food. Side dishes include hot items
such as "smashed" potatoes, herbed stuffing, sweet potatoes, steamed vegetables,
warm applesauce and creamed spinach, as well as cold items such as cold slaw,
fat-free potato salad, Santa Fe pasta salad and cranberry relish. The Company's
menu also offers oven-roasted turkey, turkey specials such as meatloaf, stew and
chili, potpies, gourmet sandwiches, soups, salads, cornbread, desserts and
beverages. While the Company's menu is standardized, certain items are rotated
on a daily basis and seasonal specials are also available.
The two Company-owned restaurants are located in West Caldwell and Summit,
New Jersey. The Company-owned and franchised restaurants range in size from
approximately 1,400 to 3,100 square feet. The decor of each restaurant
incorporates pastel colors, light woods, and colorful pictures in order to
provide a casual atmosphere appealing to a broad base of customers. The
Company's restaurant design is intended to be sufficiently flexible to
accommodate a variety of available sites as well as a high volume of customer
traffic. In addition, the Company's open rotisserie ovens, with their roasting
chickens, can be seen through each restaurant's glass front windows to attract
walk-in traffic. The restaurants provide both eat-in and take-out services.
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Restaurant Design and Operations
Layout and Design. The exterior of each Company-owned and franchised
restaurant is dominated by over 25 feet of glass frontage, through which the
restaurant's open-hearth brick rotisserie oven is in prominent view. The
interior atmosphere of each restaurant is casual with decor and artifacts themed
around chicken and seasonal promotions. Earth tone colors, light woods and
colorful pictures give the restaurant a fresh, clean and casual atmosphere
appealing to a broad base of customers. Each restaurant consists of a
kitchen/preparation area and ordering counter and seating capability for between
24 and 60 customers. Included in the preparation area is the rotisserie oven
with the capacity to cook up to 56 chickens at the same time. Each restaurant
also has a convection cooking oven that is used to roast turkey and other
products and can be used, if necessary, to roast additional chickens. The
Company's restaurant design is flexible and can be adapted to local
architectural styles and existing buildings. However, to ensure compliance with
Company specifications and standards, restaurant and complete kitchen design and
plans for franchised restaurants are required to be approved by the Company. The
Westwood franchise is the Company's first free-standing restaurant and is based
on a prototype that the Company plans to use as a standard design at other new
locations.
Food Preparation and Service. The Company's menu, while standardized and
focused principally on flame roasted chicken and turkey, offers a variety of
items and includes main and side dishes that may vary from day-to-day. Customers
are served cafeteria-style and pay when their orders are completely filled. Hot
and cold side dishes are prominently displayed so that the customer may see the
product, sample it upon request and watch as a meal is served. Take-out food is
served in reusable packages, some of which utilize the Company's registered
service mark and logo and servers behind the counters wear uniforms featuring
the Company's logo. The Company provides generous portions at prices it believes
are competitive with its quick-service restaurant competitors and well below
prices of comparable menu items in traditional restaurants.
Operations and Management. The Company's restaurants are operated seven
days a week generally from 11:00 a.m. to 9:00 p.m. under uniform standards set
forth in the Company's confidential operating and recipe manuals, that include
specifications relating to food quality, procurement and preparation (including
exact recipes for all food products and marinades), restaurant design and decor,
hiring and training of employees, cash control systems, sanitation and
day-to-day operations. The Company requires franchisees to maintain the same
uniform standards as Company-owned restaurants.
Each existing restaurant employs between 6 and 15 people daily, generally
on a staggered basis designed to match employee work hours with customer
traffic. Restaurant personnel consist of a restaurant manager, an assistant
restaurant manager, one to three full-time kitchen personnel and eight to twelve
part-time employees that serve as counter personnel. For each restaurant
position, there is a complete job description and policy, training and
procedures that are articulated in the Company's operations manual. Restaurant
managers are responsible for day-to-day operations, including food purchasing,
preparation and quality, inventory control, customer relations, restaurant
maintenance, cost control, selecting and training new employees and personnel
relations. The Company uses employee incentives to help promote friendly and
efficient service.
Each restaurant is equipped with a computer cash register system that is
linked by modem to a central computer system at the Company's headquarters so
that management can monitor restaurant operations at any time of the day. These
registers permit the register operator to enter the menu items selected, but not
its price, which is automatically entered and totalled by the register. The
Company monitors sales at all locations each day and is able to obtain general
sales, inventory, labor cost and customer account data using information
provided by the cash registers. The Company handles financial, accounting and
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management controls for its restaurants through the use of centralized
accounting systems and budgets. The Company has procedures to protect against
the internal mishandling of cash, including computerized cash registers, and, in
order to further minimize losses due to theft, the manager or assistant manager
of each restaurant is required to deposit cash receipts at a bank or drop box at
least once per day.
A complete inventory of spare parts is maintained at each restaurant for
the roasting ovens. The Company believes that such spare parts are, and will
continue to be, readily available from several different suppliers. In the
event, however, that spare parts are not available, the Company's restaurants
could be materially adversely affected. To date, however, malfunctions of the
Company's roasting ovens have not had a material adverse effect on restaurant
sales. The Company believes that its equipment is state of the art.
Franchising
The Company believes that franchised restaurants will have a greater
potential for profitability than Company-owned restaurants because it expects
that franchisees will be more directly and closely involved in the day-to-day
operations of their restaurants than managers of Company-owned stores. There
can, however, be no assurances as to when, if ever, the Company's current
franchisees that have yet to open their restaurants will do so, that the Company
will attempt to or be able to sell any additional franchises or that the
franchises will be successful and pay royalties to the Company.
As of December 31, 1996, the Company's franchised restaurants were located
in the following New Jersey locations: Colonia, Westwood, Oakland and
Flemington. Another franchised restaurant opened in South Orange, New Jersey in
March 1997 and two additional restaurants, in Dutchess County, New York, and
Belleville, New Jersey, are expected to open later in 1997. The restaurants in
Flemington and Dutchess County are part of a single area development agreement,
entered into in March 1996, pursuant to which up to 18 franchised restaurants
may be developed by specified dates at selected shopping centers throughout the
country. In March, 1997, the Company entered into a master license agreement for
development of a minimum of 20 restaurants in the Philippines by specified dates
within a ten year period. The Company received $120,000 upon signing of the
master license agreement and will receive a fee for each restaurant which is
opened and royalties on each restaurant's net sales.
The Company's single franchises are governed by a form of franchise
agreement developed for the Company which provides for, among other things,
payment by the franchisee of an initial franchise fee and a royalty fee based
on a percentage of the net sales of the restaurant. The Company's standard
initial franchise fee is $25,000. In addition, a franchisee must pay a
percentage of net sales to the Company's advertising fund and spend an
additional percentage of net sales for local advertising. Each franchise
agreement specifies a territory within which the Company will not establish and
operate, or grant other parties the right to establish and operate, a Linda's
Rotisserie & Kitchen restaurant for a specified period of time. Each franchisee
will be required to operate its Linda's Rotisserie & Kitchen restaurant in
accordance with the franchise agreement and with the methods, standards and
specifications set forth in the Company's confidential operating manual.
The Company spent approximately $201,000 on its franchising program during
its fiscal year ending December 31, 1996.
Service Marks
The Company owns its word mark "Linda's Flame Roasted Chicken" and a logo
which includes its word mark and a stylized chicken. The Company has a federal
registration for its logo mark. The Company considers its service marks and
trademarks to be important to its business and intends to actively protect them.
The Company plans to license the use of the federally registered logo mark to
franchisees in its franchising program.
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Suppliers
The Company negotiates directly with local suppliers for all food
ingredients, beverage and poultry products utilized by its restaurants in order
to ensure uniform quality and adequate supply and to obtain competitive prices.
The Company has negotiated with poultry suppliers to provide pre-marinated
chicken to each store. The Company believes that alternative sources for
poultry, groceries and produce are available from other suppliers if its current
suppliers are not able to provide adequate quantities of products or services at
competitive prices.
To date, the Company has not been materially adversely affected by changes
in the cost of chicken, shortages or interruptions in supplies of chicken, fresh
produce or other supplies or delays or stoppages in deliveries of supplies.
Risks of Restaurant Business
The restaurant industry, and particularly the quick-service segment, is
intensely competitive with respect to price, service, restaurant location and
food quality. There are numerous well-established competitors possessing
substantially greater financial and other resources than the Company and
substantially longer operating histories. The Company believes that it competes
with other takeout food service companies, fast-food restaurants, casual
full-service dine-in restaurants, delicatessens, cafeteria-style buffets and
prepared food stores as well as supermarkets and convenience stores. Competitors
also include national, regional and local pizza restaurants, chinese food
restaurants and other providers of carry-out food. Other direct competitors
include independent rotisserie chicken establishments operating in New Jersey,
and supermarkets who feature prepared foods to-go and rotisserie chicken. Many
of the Company's competitors have achieved significant national, regional and
local brand name and product recognition and engage in extensive advertising and
promotional programs, both generally and in response to efforts by additional
competitors to enter new markets or introduce new products. The Company believes
that its restaurants compete favorably in terms of taste, food quality,
convenience, customer service and value, which the Company believes are the most
important factors to its target customers. In addition to other restaurant
companies, the Company also competes with numerous other retail food businesses
for suitable locations for its restaurants and with other franchisors for
qualified franchisees.
9
<PAGE>
In addition, competition in the food service business is often affected by
other factors, over which the Company has no control and which could have a
material adverse effect on its business including changes in consumer
preferences, national, regional and local economic conditions, demographic
trends, traffic patterns, labor costs and the availability of supplies.
While the Company is currently offering franchises, only five franchised
restaurants have opened. Although the Company provided interim construction
financing to its first franchisee, the Company does not have the resources to
offer significant financing assistance to franchisees and, as a result, may be
at a competitive disadvantage relative to other franchisors. Compliance with
Federal and state franchise sales laws and state franchise relationship laws is
costly and time consuming. The Company's franchisees may not be successful and
franchisees may not operate Linda's Rotisserie & Kitchen restaurants in a manner
consistent with the Company's methods, standards and specifications.
Increases in the cost of chicken and fresh produce could have a direct and
immediate effect on the Company's results of operations. A substantial portion
of the Company's revenues and food costs are derived from the sale and purchase
of chicken. The cost of fresh chicken fluctuates from time to time depending on
a variety of factors beyond the control of the Company, such as weather
conditions and seasonal demand. Dependence on frequent deliveries of chicken and
fresh produce also subjects food service businesses to the risk that shortages
or interruptions in supply, caused by adverse weather or other conditions, could
adversely affect the availability, quality, and cost of ingredients.
Furthermore, any delays or stoppages in such deliveries could subject the
Company's restaurants to shortages or interruptions which could adversely affect
restaurant sales. Additional factors such as inflation, increased utility, labor
and employee benefit costs and the availability of qualified management and
hourly employees are beyond the Company's control and may in the future affect
the restaurant industry in general and the Company's restaurants in particular.
The Company is subject to various federal, state and local laws, and
regulations affecting its restaurant business, including state and local
licensing, zoning, land use, construction and environmental regulations and
various health, sanitation, safety and fire standards affecting its restaurants.
The Company is also subject to the Fair Labor Standards Act and various state
laws governing such matters as minimum wages, overtime and working conditions.
To date, the Company has not been materially burdened by such laws, rules and
regulations other than delays in obtaining permits for the construction of one
of its restaurants and believes it is currently in compliance, in all material
respects, with applicable federal, state and local laws and regulations.
The Company has not made, nor does it anticipate making, any material
capital expenditures in order to comply with environmental regulations. There
can be no assurance, however, that new environmental regulations will not be
adopted which will require the Company to make material capital expenditures to
comply therewith.
10
<PAGE>
The Company is subject to the Federal Trade Commission's Trade Regulation
Rule entitled "Disclosure Requirements and Prohibitions Concerning Franchising
and Business Opportunity Ventures" (the "FTC Franchise Rule") and state laws and
regulations that govern the offer and sale of franchises. To offer and sell
franchises, the Company is required by the FTC Franchise Rule to furnish each
prospective franchisee with a current franchise offering circular prior to the
sale of a franchise. In addition, the laws of 16 states require a franchisor to
comply with registration or filing requirements prior to offering a franchise in
the state and to provide a prospective franchisee with a current franchise
offering circular complying with the state's laws, prior to the sale of the
franchise. The Company has prepared a franchise offering circular and has
complied with all applicable federal and state laws regulating the offer and
sale of franchises.
The Company will be required to update its franchise offering circular to
reflect material changes, under applicable law, regarding its franchise offering
and to comply with changes in disclosure requirements. The occurrence of any
such material changes may, from time to time, require the Company to stop
offering and selling franchises until its franchise offering circular is
updated. The Company's franchising program may be adversely affected by its
failure to register or file in certain states consistent with its expansion
plans, because compliance with applicable law necessitates that the Company
cease offering and selling franchises in certain states until its franchise
offering circular is updated or because of its inability to comply with existing
or future franchise laws.
The Company will also be subject to a number of state laws and regulations
that regulate certain substantive aspects of the franchisor-franchisee
relationship, including those governing the termination or non-renewal of a
franchise agreement (such as requirements that "good cause" exist as a basis for
such termination and that a franchisee be given advance notice of, and a right
to cure, a default prior to termination), requirements that the franchisor deal
with its franchisees in good faith, prohibitions against interference with the
right of free association among franchisees and those regulating discrimination
among franchisees in charges, royalties or fees. Compliance with federal and
state laws regulating franchising is costly and time consuming and the Company
may encounter difficulties or delays in this area and may require significant
capital for franchising activities.
Insurance
The Company carries property, liability, business interruption, and
workers' compensation insurance policies, which it believes are customary for
businesses of its size and type. The Company's franchisees are also required to
maintain a certain minimum standard of insurance pursuant to their franchise
agreements, including commercial general liability insurance, workers'
compensation insurance and all risk property and casualty insurance, with the
Company being named as an additional insured on appropriate policies.
Employees
At March 24, 1997, the Company had 47 employees, consisting of 17 full-time
and 30 part-time (hourly) employees, two of whom are executive officers. Fifteen
of the Company's employees work at the Company's headquarters in Cranford, New
Jersey, including 10 employed with NHG; one full-time and one part-time employee
work at NHG's Massachusetts office and the remainder work at one of the two
restaurants owned and operated by the Company. None of the Company's employees
are represented by any labor union or covered by any collective bargaining
contract. The Company believes its relationship with its employees is good.
11
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTY
-----------------------
The table below sets forth information with respect to each of the
Company's Properties:
Lease Terms
-------------------
Expiration Annual
Location Opening Date Square Footage Date Rental
- -------- ------------ -------------- ---------- ------
11 Commerce Drive................ 12/94 3,600 6/97 $54,000
Cranford, New Jersey 07016 (1)
771 Bloomfield Avenue............ 10/91 2,900 10/2001 $73,000
West Caldwell, New Jersey (2)(4)
63 Union Place .................. 6/95 1,400 12/99 $18,000
Summit, New Jersey (3)(4)
951 East Street ................. 5/96 2,000 12/98 $24,000
Tewksbury, Massachusetts (5)
(1) Lease has a two-and-one-half-year term.
(2) Lease has an initial ten-year term and two five-year renewal options.
(3) Lease has an initial five-year term and four five-year renewal options.
(4) Lease provides for additional payment of common area maintenance charges
and increases in real estate taxes.
(5) Lease has a two-year, eight month term.
In the opinion of the management of the Company, the above named locations
are adequately covered by insurance.
In addition to the above properties, subsidiaries of the Company lease
three of its franchised locations for sublease to franchisees at the same rent
payable by the lessor.
ITEM 3. LEGAL PROCEEDINGS
-----------------
The Company is not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
No matters were submitted to a vote of security holders of the Company
during the fourth quarter of its fiscal year ended December 31, 1996.
12
<PAGE>
PART II
-------
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
--------------------------------------------------------
The Company's Class A Common Stock is quoted on The Nasdaq SmallCap Market
under the symbol LINCA. There is no public trading market for the Company's
Class B Common Stock. As of March 20, 1997, there were approximately 53 holders
of record of the Company's Class A Common Stock and eight holders of record of
the Company's Class B Common Stock. The following table sets forth the high and
low last sale prices for the Company's Class A Common Stock, as reported by
NASDAQ, for the periods indicated.
Year Ended December 31, 1995: High Low
---- ---
First quarter.................................. $4.50 $3.25
Second quarter................................. $5.25 $3.00
Third quarter.................................. $7.25 $4.75
Fourth quarter................................. $5.63 $4.25
Year Ended December 31, 1996:
First quarter.................................. $5.25 $4.25
Second quarter................................. $6.30 $4.63
Third quarter.................................. $6.00 $5.50
Fourth quarter................................. $6.50 $3.38
The closing price of the Company's Common Stock on March 5, 1997 was $3.00
The Company has never paid any cash dividends on its Common Stock. The
Company anticipates that, in the future, earnings, if any, will be retained for
use in its business or for other corporate purposes, and it is not anticipated
that cash dividends in respect of the Class A Common Stock or Class B Common
Stock will be paid.
For recent sales by the Company of unregistered securities, see "Financings
for Loan Business" under "Item 1. Description of Business," above.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
Results of Operations
Overview
The Company is a holding corporation consisting of restaurant operations,
restaurant franchising, and home-equity loan operations. The restaurant
entities, operating under the name Linda's Rotisserie & Kitchen (formerly
Linda's Flame Roasted Chicken), consist of seven restaurants, two of which are
Company-owned and operated, and five of which are franchised. Additionally, the
Company has sold an additional two franchises, one in New Jersey and one in New
York, which are expected to open later in 1997. The loan operations are
conducted through NHG, a wholly-owned subsidiary which commenced operations in
April 1996, providing both conventional and federally-guaranteed financing for
homeowners and lead-generation services for contractors with respect to
home-improvement services in the low-to-moderate income housing markets. In
April 1996, NHG was approved by the US Department of Housing and Urban
Development to originate federally-guaranteed Title I loans. NHG is currently a
licensed lender in seven states including New Jersey, Massachusetts, Rhode
Island, Delaware, Maryland, New Hampshire and Connecticut, and also operates in
Pennsylvania and New York which do not require a special license.
13
<PAGE>
Restaurant Operations
Gross restaurant sales for the year ended December 31, 1996 decreased
$1,415,000 (54%) as compared to the year ended December 31, 1995. Comparable
store gross sales (for locations opened at least one year) decreased $106,000
(9%). The total sales decreases were due to the Company having four to five
Company-owned locations in 1995 compared with two to three such locations in
1996 (two at December 31, 1996). The Company closed a restaurant in October
1995, franchised a second restaurant in December 1995, and closed a third
restaurant in June 1996. The Company closed these stores to reduce its losses
and preserve its working capital. The same store sales decreases were due to the
Company's prior year Buy 1 Get 1 Free chicken meal promotion which ran for six
weeks in August and September of 1995 which temporarily increased volume at all
of the Company's locations in the prior year. Additional decreases in sales were
due to the increased saturation of, and intense competition from, similar
restaurant concepts throughout New Jersey.
Food and paper costs collectively increased as a percentage of gross sales
for the year ended December 31, 1996 compared to 1995 to $473,000 (40% of gross
sales) from $1,031,000 (39% of gross sales), respectively due essentially to
higher poultry costs which were at a ten-year high. These higher costs offset
food cost reductions that the Company had achieved through the expansion of its
menu to feature oversized gourmet sandwiches, roast beef and turkey meat loaf
meals.
The paper cost component of cost of sales decreased due essentially to the
Company's phase-out of some of its higher-priced branded paper products. The
Company has retained certain high exposure branded components such as take-out
container lids and carry-out bags since these items carry high visibility within
the take-out segment of the business. The non-branded paper products retain the
same quality level as the branded products.
Restaurant labor and related expenses decreased to $385,000 (32% of gross
sales) for the year ended December 31, 1996 as compared to $893,000 (34% of
gross sales) for 1995. This decrease, as a percentage of gross sales, is due to
the closing, in June 1996, of the Company's Livingston, New Jersey location
which had its highest labor costs, as well as the Company's continued focus on
correlating hourly labor to projected sales.
Operating expenses, including such items as local promotion, repairs and
maintenance and store supplies, amounted to $65,000 (5% of gross sales) for 1996
compared to $167,000 (6% of gross sales) for 1995.
Occupancy costs, including such fixed and recurring items as rent, common
area maintenance charges and utilities, amounted to $229,000 (19% of gross
sales) and $431,000 (16% of gross sales) for the years ended December 31, 1996
and 1995, respectively. This increase as a percentage of gross sales results
from the fixed nature of such expenses which will increase as a percentage of
sales as sales decrease.
Depreciation and amortization decreased to $131,000 (11% of gross sales)
for the year ended December 31, 1996 from $152,000 (6% of gross sales) for 1995.
This decrease is attributable to the fact that the Company had equipment and
leasehold improvements at two additional locations in 1995, one store of which
was closed, and one of which was franchised.
14
<PAGE>
The restructuring charges of $267,000 and $114,000 for the years ended
December 31, 1996 and 1995, respectively represent the costs associated with the
Company's closing of its restaurants in Livingston and Edison, NJ.
The impairment loss of $335,000 consists of $72,000 related to equipment
and other expenses associated with a proposed mobile restaurant concept which
the Company does not expect to pursue, and $263,000 related to leasehold
improvements on and equipment in one of the Company's restaurants.
Preopening costs for 1995 of $69,000 represented expenses related to the
grand opening of the Company's restaurants in Livingston and Summit, New Jersey
in January 1995 and June 1995, respectively, including various training,
payroll, promotion and start-up costs. No preopening expenses were incurred by
the Company during 1996.
Restaurant Franchising
The Company's franchising operations are administered through its
subsidiary, Linda's Chicken International. As of December 31, 1996, four
franchises were opened (A fifth opened in March 1997). The first in Colonia, New
Jersey, began operations in December 1995. The second, a free-standing prototype
in Westwood, New Jersey, opened in April 1996. The third location opened in
Flemington, New Jersey in September 1996. The fourth location opened in Oakland,
New Jersey in November 1996. The fifth location, which opened in March 1997, is
located in South Orange, New Jersey. Franchise royalty income, amounted to
$30,000 for the year ended December 31, 1996. There was no such revenue for the
year ended December 31, 1995.
The Company maintains an advertising fund to be used for regional
advertising expenditures which benefit all locations. Franchisees are required
to contribute a percentage of their net sales to this fund. The Company also
contributes to the fund promotional rebates received from suppliers. As of
December 31, 1996, this fund had excess expenditures over revenues approximating
$14,000.
Expenses related to the franchising operation, consisting of such items as
franchise support personnel, legal fees and advertising, are included in general
and administrative expenses in the Company's financial statements, and amounted
to $201,000 and $221,000 for the years ended December 31, 1996 and 1995,
respectively.
Loan Operations
The Company's loan operations include providing low-to-moderate income
homeowners with a single source for both home improvement loans (conventional
and federally-guaranteed) and qualified contractors. Initially, NHG intended to
provide essentially federally-guaranteed loans, but has expanded to now include
both federally-guaranteed and conventional loans. NHG derives its revenue from
administrative fees received from participating contractors representing a
percentage of each completed contract. The Company additionally can derive
revenue from loan participation by means of receiving a premium from a
third-party buyer of such loans, or loan origination fees from a borrower.
NHG first began receiving revenue in May 1996 which resulted from the
Company's test marketing efforts. Gross revenue for the period ended December
31, 1996 totalled $57,000 including $37,000 in completed contract fee income,
and $8,000 in loan origination fees and $12,000 in loan participation premiums.
The Company recognizes contract fee income when the related contract is
completed by the contractor.
15
<PAGE>
NHG experienced charges of $1,594,000 from commencement of operations
through December 31, 1996, as described below, relating to the test marketing
and other start-up costs associated with the commencement of its operations.
Payroll and related expenses, consisting of management, customer service
representatives, credit analysts and processors, totalled $555,000 (35% of total
expenses) for commencement of operations through December 31, 1996. While
management labor is a fixed expense, NHG has the ability to correlate the amount
of its other operations personnel to the loan request volume it receives. All
customer service representatives are paid hourly, and some are part-time
employees.
Media and advertising costs, consisting of media time bought on television
and radio, as well as the production and distribution of direct mail
advertising, and the production of both television and radio commercials,
totalled $764,000 (48% of total expenses) for the period ended December 31,
1996. Due to initially disappointing results from its test advertising campaign,
NHG worked with media consultants on redesigning and refocusing its commercials
to better attract its target markets. These new commercials continue to be
tested in NHG's core markets. The Company expects media costs to be one of the
largest expense items in future operations and to have a significant impact on
the generation of future revenues.
Operating expenses, consisting of expenses necessary to operate the
Company's main office in New Jersey and its branch office in Massachusetts, as
well as legal and consulting fees and expenses related to obtaining licenses and
permits, totalled $275,000 (17% of total expenses) for the period ended December
31, 1996. Typically, most of these expenses are of a fixed and recurring nature
and will decrease as a percentage of revenue as revenue increases.
Corporate
General and administrative expenses decreased to $991,000 for the year
ended December 31, 1996 from $1,657,000 in 1995. This is as a result of
continued reductions in overhead as a result of the elimination of several
corporate positions. While the Company anticipates that cost containment will
continue to take place in this expense category, general and administrative
expenses will continue to represent a large percentage of revenues until the
Company's subsidiaries can develop gross revenue volume sufficient to absorb
these costs.
Interest income decreased to $68,000 from $122,000 for the years ended
December 31, 1996 and 1995, respectively. Investment earnings are principally
from the Company's investments in short-term United States government-backed
obligations. This source of income has decreased as the Company has expended
funds which were invested in 1995 on its operations.
Liquidity and Capital Resources
Current assets at December 31, 1996 were $1,483,000 compared to $1,576,000
at December 31, 1995 and current liabilities were $443,000 at December 31, 1996
compared to $361,000 at December 31, 1995. The Company's restaurants sell to
consumers in what are substantially all cash transactions. Any credit and debit
card business transacted is electronically credited to the Company's accounts
within 48 hours. The Company's debt at December 31, 1996, consisted of
obligations owed under capitalized leases for point-of-sale terminals at each of
the restaurants totalling $36,000. Additionally, the Company issued a note
payable, with a remaining balance of $19,000 at December 31, 1996, in
conjunction with its acquisition of the restaurant in Summit, NJ. The Company
currently has no bank borrowings. For dividends payable on the Company's
outstanding Series A Preferred, see "Financings for Loan Business" under "Item
1. Description of Business," above.
16
<PAGE>
The Company requires capital principally to expand the operations of NHG.
The Company is not pursuing new franchisees for its restaurant business and does
not currently intend to open additional Company-owned restaurants. Funds will be
used primarily for NHG to continue to refine its marketing programs, buy media
time and expand its operations into other metropolitan areas. The Company
expects that its future results will be predominantly affected by the success or
failure of NHG.
The Company's franchising operation currently has seven franchisees, five
of which have stores which are currently open, and two of which are expected to
open later in 1997. Additionally, in March 1997, the Company signed a master
license agreement with a licensee for territory rights to develop a minimum of
20 restaurants in the Philippines over a ten year term.
The Company had provided temporary construction financing to a franchisee
for the construction of the free-standing restaurant in Westwood, NJ under a
promissory note dated August 29, 1995, and advanced to this franchisee
approximately $375,000. This loan was repaid in full in September 1996.
The Company has been exploring the possibility of selling its restaurant
business or entering into a strategic alliance with respect to its restaurant
business. There can be no assurance that these efforts will be successful.
Through the period ended December 31, 1996, NHG had closed loans totalling
$822,000, of which $779,000 had been sold to a third-party lender. Thus, retail
loans receivable amounted to $43,000 at December 31, 1996. The Company sold all
such retail loans in January 1997.
The Company anticipates that the current trend of losses will continue
through, at least, the first quarter of 1997. NHG, whose business is based upon
the home improvement industry, experiences a decrease in potential revenues
during the winter months due to a significant slowdown in home improvement
requests and contractor ability to complete projects during adverse winter
weather in the Northeast, the primary area where NHG currently lends. In order
to offset the seasonal decreases expected in its business in the future, the
Company is reviewing the possibility of becoming a licensed lender in
southeastern states to improve its ability to generate loan volume during the
winter. License application processes are lengthy, however, and there is no
assurance as to when the Company will actually obtain the requisite licenses in
any state. In order to improve its liquidity and provide additional working
capital during the start-up phase of NHG's business, the Company requires, and
is actively seeking additional financing through a private placement of debt or
equity. However, there can be no assurance of success. The Company expects that
additional funding may be required for it to meet its cash requirements for the
next twelve months.
Forward-Looking Information May Prove Inaccurate
This report contains forward-looking statements and information that are
based on management's beliefs as well as assumptions made by, and information
currently available to, management. When used in this document, the words
anticipate, believe, estimate, expect and similar expressions are intended to
identify forward-looking statements. Such statements involve a number of risks
17
<PAGE>
and uncertainties. Among the factors that could cause actual results to differ
materially are the following: business conditions and growth in the industry,
general economic conditions, product development, competition, government
regulations, rising costs for food and paper supplies, the risk of franchising,
and all the risks associated with start-up businesses as it relates to the
activities of NHG, and the risk factors listed above under "Description of
Business" and from time to time in the Company's SEC reports, including but not
limited to the Company's Registration Statement filed on Form S-3 on July 24,
1996.
Charge to Income in the Event of Release of Escrow Shares
In the event that any shares are released from escrow to stockholders of
the Company who are officers, directors or employees of, or consultants to, the
Company, compensation expense will be recorded for financial reporting purposes
as required by GAAP. Therefore, in the event that the Company attains any of the
earnings thresholds or the Company's Class A common stock meets certain minimum
bid prices required for the release of the escrow shares, such release will be
deemed as additional compensation expense of the Company. Accordingly, the
Company will, in the event of such release, recognize during the period in which
the earnings thresholds are met or are probable of being met or such minimum bid
prices attained, what will likely be a substantial charge equal to the fair
market value of the shares released from escrow, which charge will have the
effect of substantially increasing the Company's loss or reducing or eliminating
earnings, if any, at such time. Furthermore, the release of the escrow shares
would have a dilutive effect on earnings per share or a corresponding reduction
in loss per share, as a result of the increase in the number of shares deemed
outstanding for this purpose. Although the amount of compensation expense
recognized by the Company will not affect the Company's total stockholders'
equity or its working capital, it may have a depressive effect on the market
price of the Company's securities.
Seasonality
Both of the Company's businesses are affected by seasonality. The Company's
restaurants, similar to the rest of the restaurant industry, has experienced
lower revenues in the months of January, February and March due to the effects
of inclement weather in the Northeast. Severe weather conditions had a material
adverse effect on traffic at the Company's restaurants during the first quarter
of 1996. In addition, the prices that the Company pay on certain food items,
notably produce, can and have varied according to seasonal demand and
availability. In addition, NHG experiences a decrease in potential revenues due
to a significant slowdown in home improvement requests in the Northeast during
the winter.
Impact of Inflation
The Company believes that inflation has not materially affected its
operations to date. Substantial increases in costs and expenses in its
restaurants, particularly food and labor expenses, as a result of inflation,
could have an adverse impact on the Company's operating results to the extent
that such increases cannot be passed along to customers.
ITEM 7. FINANCIAL STATEMENTS
--------------------
See index to the Company's financial statements attached hereto.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
None.
18
<PAGE>
PART III
--------
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
-------------------------------------------------------------
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
-------------------------------------------------
Directors and Executive Officers
The following table sets forth certain information concerning all directors
and executive officers of the Company. Directors are elected at each annual
meeting of stockholders, or in the case of vacancy, by the directors then in
office, to serve until the next annual meeting of the stockholders of the
Company and until their respective successors have been elected and qualified or
until their earlier resignation or removal. Executive officers are elected by
the Board of Directors to serve at the pleasure of the Board.
Name Age Position with the Company
- ---------------- --- -------------------------
Peter Weissbrod (1) 40 President, Chief Executive Officer and
Director
Stuart Fuchsman (1) 39 Vice President, Chief Operating Officer
and Director
Richard Goldberger (1)(2) 67 Chairman of the Board of Directors
Lewis Levine (2) 44 Director
William Ozzard 81 Director
Ivan Szathmary 60 Director
- -----------------------------
(1) Member of Executive Committee.
(2) Member of Audit Committee.
Peter Weissbrod is the founder of the Company and has served as its
President, Chief Executive Officer and a director since the Company's inception
in February 1991. Mr. Weissbrod is also the President of NHG. From February 1990
to December 1990, he served as a consultant to Charlie Brown's/Office Restaurant
Group, a division of Restaurant Associate Industries, Inc. ("Charlie Brown's").
From May 1986 to February 1990, Mr. Weissbrod served as Vice President of Real
Estate of Charlie Brown's, where his responsibilities included real estate
leasing, site selection and construction of new stores as well as remodelling
existing facilities.
19
<PAGE>
Stuart Fuchsman has served as Vice President, Chief Operating Officer and a
director of the Company since November 1992. From August 1986 to October 1992,
he served as Project Manager of Central Jersey Management Group, a real estate
developer in New Jersey. His responsibilities included supervising the
construction of single family homes, including monitoring subcontractors
activities and project costs.
Richard Goldberger has served as the Chairman of the Board of Directors
since the Company's inception in February 1991. Mr. Goldberger is also a
consultant to NHG. Since October 1989, he has also served as the President and
General Partner of Mid-Investment Company, a diversified real estate company
owned by him and members of his family. From February 1953 to September 1989,
Mr. Goldberger was the Chief Executive Officer of Garden State Brickface &
Stucco Company, a concern which he founded and was owned by him and members of
his family. Since 1990, he has also served as a director of United Jersey Bank
Central N.A.
Lewis Levine has served as a director of the Company since February 1991.
From February 1991 to January 1996, he also served as Vice President and
Treasurer of the Company. Since March 1992, he has also served as the President
of New England Brickmaster Windows and Exteriors, Inc., a firm owned by his wife
and Mildred Goldberger. From April 1979 to March 1992, Mr. Levine served as
President of New England Brickmaster, Inc., a firm owned by him, Richard
Goldberger and other members of Mr. Goldberger's family and which was liquidated
in March 1992.
William Ozzard has served as a director of the Company since December 1994.
Since 1970, he has been the Senior and Managing Partner of the law firm of
Ozzard Wharton.
Ivan Szathmary was appointed to the Board in July 1995. Since 1979, Mr.
Szathmary has been a Senior Vice President of the Great Atlantic and Pacific Tea
Co., Inc.
Richard Goldberger is the father-in-law of each of Messrs. Weissbrod,
Fuchsman and Levine. Linda Weissbrod is the wife of Peter Weissbrod and the
daughter of Mr. Goldberger.
Marc Roberts was a member of the Board as of December 31, 1996, but has
since resigned from such position.
The Executive Committee has all the power and authority of the Board of
Directors in the management and affairs of the Company between meetings of the
Board of Directors, to the extent permitted by law. The Audit Committee reviews
the engagements of the independent accountants and reviews the independence of
the accounting firm, among other matters.
The following individuals, who are not executive officers or Directors of
the Company, make significant contributions to the business of the Company:
Linda Weissbrod has served as Director of Marketing of the Company since
October 1991 and served as a Vice-President of the Company until 1994. From
April 1990 until August 1991, she served as the President of Handwriting
Research Corp., a firm she founded, of which she was the sole shareholder and
which specialized in analyzing handwriting samples of potential employees of
various employers.
Angelo Maione joined NHG in January 1996 as a senior lending officer. For
more than 10 years, Mr. Maione was employed at United Jersey Bank in various
capacities, including as Deputy Portfolio Manager for the Home Equity Lending
Unit and as Manager of the Loan and Customer Service Unit at United Jersey Bank
Central, N.A.
20
<PAGE>
Limitation of Liability and Indemnification
The Company's Certificate of Incorporation eliminates or limits in certain
circumstances the liability of directors of the Company for monetary damages for
breach of their fiduciary duty as directors and provides, generally, for
indemnification by the Company to the fullest extent permitted by Delaware law.
The Company believes that it is the position of the Commission that,
insofar as any of the foregoing provisions may be invoked to disclaim liability
for damages arising under the Securities Act, such provision is against public
policy as expressed in the Securities Act and is therefore unenforceable.
The Company is currently a party to Indemnity Agreements with each of its
directors and executive officers.
Compliance with Section 16(a) of the Exchange Act
The Company is not aware of any late flings with respect to 1996.
ITEM 10. EXECUTIVE COMPENSATION
----------------------
Directors' Compensation
The Company pays all outside directors $100 for each board or committee
meeting attended. Outside directors may also be reimbursed for expenses incurred
by them in their capacity as a member of the Board of Directors or any committee
thereof. In 1996, the Company granted options to each of its three outside
directors to purchase 15,000 shares of Class A Common Stock at prices per share
not less than the fair market value per share on the date of grant. The options
are exercisable for three years commencing one year from the date of grant.
Executive Compensation
The following table sets forth the compensation paid by the Company for the
past three fiscal years to Mr. Peter Weissbrod, its Chief Executive Officer and
President, and Stuart Fuchsman, its Chief Operating Officer (each a "named
executive officer"). No other executive officer's annual compensation exceeded
$100,000 for the fiscal year ended December 31, 1996.
21
<PAGE>
Summary Compensation Table
Annual Long Term
Compensation All Other Compensation
------------ ------------
Name and Principal Position Year Salary Compensation Stock Options (#)
- --------------------------- ---- ------ ------------ -----------------
---------------------------------------------------
Peter Weissbrod . . . . . . 1996 $128,846 - 15,000
President and CEO
1995 $100,000 - 100,000
1994 $92,000 - -
Stuart Fuchsman . . . .. .
Chief Operating Officer
1996 $117,461 - 15,000
1995 $90,000 - 30,000
1994 $65,769 - -
22
<PAGE>
Option Grants in Last Fiscal Year
The following table sets forth information concerning the stock option
grants made to the named executive officers for the fiscal year ended December
31, 1996. No stock appreciation rights were granted to these individuals during
such year.
Percent of
Total Options
Number of Securities Granted to
Underlying Options Employees in Exercise or Base Expiration
Name Granted(#)(1) Fiscal Year Price ($/Sh) Date
---- ------------- ----------- ------------ ------
Peter Weissbrod 15,000 6.2% $6.00 7/2000
Stuart Fuchsman 15,000 6.2% $6.00 7/2000
- ---------------------------
(1) Options are non-qualified options to purchase shares of Class A Common
Stock and are immediately exercisable.
Aggregate Option Exercises in Last Fiscal Year
and Fiscal Year-End Option Values
The following table sets forth information concerning option exercises and
the value of unexercised options for the fiscal year ended December 31, 1996
with respect to the named executive officers. No stock appreciation rights were
exercised or were outstanding during such year.
<TABLE>
<CAPTION>
Value of Unexercised
Number of Unexercised Options In-the-Money Options at
at December 31, 1996 (#) December 31, 1996 ($)(1)
----------------------------- ------------------------
Shares
Acquired on Value
Name Exercise(#) Realized Exercisable Unexercisable Exercisable Unexercisable
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Peter Weissbrod 0 $0 115,000 0 $43,750 $0
Stuart Fuchsman 0 $0 45,000 0 $13,125 $0
</TABLE>
- ---------------------
(1) Based on the closing price of the Company's Class A Common S tock at
December 27, 1996 of $4-3/16 per share, less the exercise price payable for
such shares.
Employment Agreements
The Company has entered into employment agreements with Peter Weissbrod,
its Chief Executive Officer and President, and Stuart Fuchsman, as its
Vice-President and Chief Operating Officer. The agreements are for three year
terms which commenced on May 25, 1994. Messrs. Weissbrod and Fuchsman receive a
salary of $110,000 and $99,000 per annum, respectively, and are entitled to
participate in employee benefit plans. The agreements contain confidentiality
and non-competition provisions.
The Company has the right to terminate either agreement for cause (as
defined therein) or as a result of the employee's death or permanent disability.
Except in the case of termination by the Company for cause or voluntary
termination by the employee, upon early termination of their agreements, Mr.
Weissbrod and Mr. Fuchsman are entitled to receive their salary plus fringe
benefits for a period of up to 24 months from the date of termination and any
bonuses prorated through the date of termination.
23
<PAGE>
1994 Stock Option Plan
In February 1994, the Board of Directors and the stockholders of the
Company adopted and approved the Company's 1994 Stock Option Plan (the " 1994
Plan"). The 1994 Plan provides for the grant of incentive stock options ("ISOs")
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code"), and non-qualified stock options ("NQSOs") to certain
employees of the Company. The 1994 Plan further provides for the grant of NQSOs
to directors, agents of, and consultants to, the Company, whether or not
employees of the Company. The purpose of the 1994 Plan is to attract and retain
employees, agents, consultants and directors. Options granted under the 1994
Plan may not be exercisable for terms in excess of 10 years from the date of
grant. In addition, no options may be granted under the 1994 Plan later than 10
years after the 1994 Plan's effective date of February 17, 1994. A maximum of
130,000 shares of Class A Common Stock may be issued under the 1994 Plan.
1995 Stock Option Plan
In September 1995, the Board of Directors, and subsequently the
stockholders of the Company, adopted and approved the Company's 1995 Stock
Option Plan (the "1995 Plan"). The 1995 Plan provides for the grant of incentive
stock options ("ISOs") within the meaning of Section 422 of the Internal Revenue
Code of 1986, as amended (the "Code"), and non-qualified stock options ("NQSOs")
to certain employees of the Company. The 1995 Plan further provides for the
grant of NQSOs to directors, agents of, and consultants to, the Company, whether
or not employees of the Company. The purpose of the 1995 Plan is to attract and
retain employees, agents, consultants and directors. Options granted under the
1995 Plan may not be exercisable for terms in excess of 10 years from the date
of grant. In addition, no options may be granted under the 1995 Plan later than
10 years after the 1995 Plan's effective date of September 14, 1995. A maximum
of 600,000 shares of Class A Common Stock may be issued under the 1995 Plan.
24
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
The following table sets forth, as of March 20, 1997, certain information
as to the stock ownership by (i) each executive officer of the Company, (ii)
each director of the Company (iii) all executive officers and directors of the
Company as a group and (iv) all persons known by the Company to be the
beneficial owner of more than five percent of the outstanding Common Stock of
the Company:
<TABLE>
<CAPTION>
Common Stock Percentage Ownership Percent of Voting Power
Name and Address of Beneficial Beneficially of all Common Stock of all Common Stock
Owner of Member in Group(1) Owned(2) Outstanding Outstanding
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Peter Weissbrod 213,375(3)(4)(5) 7.16 10.10
Stuart Fuchsman 218,375(3)(4)(6) 7.32 10.17
Linda Weissbrod 133,375(3)(4)(7) 4.60 9.06
Richard Goldberger 15,000(8) * *
Mildred Goldberger 236,750(3)(4)(9) 8.15 17.67
Lewis Levine 113,375(3)(4)(13) 3.94 8.80
Wendy Fuchsman 113,375(3)(4)(13) 3.94 8.80
Caryl Levine 113,375(3)(4)(13) 3.94 8.80
William Ozzard 55,000(10) 1.89 *
Ivan Szathmary 49,000(11) 1.69 *
All officers and directors
as a group (6 persons)(12) 664,125(3)(4) 21.17 29.67
</TABLE>
- ------------------------
*Less than 1%
(1) The address of each named stockholder is c/o Linda's Diversified Holdings
Inc., 11 Commerce Drive, Cranford, New Jersey 07067.
(2) All shares owned are Class B Common Stock unless otherwise indicated.
Holders of Class B Common Stock have the right to cast six votes (compared
to one vote for the holders of Class A Common Stock) for each share held of
record.
(3) Includes the holder's pro rata portion of the Escrow Shares. See "Escrow
Shares."
(4) The shares owned by each of Mr. and Mrs. Weissbrod, Mr. and Mrs. Fuchsman
and Mr. and Mrs. Levine do not include the shares or warrants owned by
their respective spouses, beneficial ownership of which is disclaimed by
each of them. Mrs. Weissbrod, Mrs. Fuchsman and Mrs. Levine are sisters and
the adult daughters of Mr. and Mrs. Goldberger.
(5) Includes 115,000 shares of Class A Common Stock issuable upon the exercise
of outstanding options.
(6) Includes 45,000 shares of Class A Common Stock issuable upon the exercise
of outstanding options and 75,000 shares of Class A Common Stock underlying
Class A Warrants. See "Certain Relationships and Related Transactions."
(7) Includes 35,000 shares of Class A Common Stock issuable upon the exercise
of outstanding options.
25
<PAGE>
(8) Does not include the 196,750 shares of Class B Common Stock, 15,000 shares
of Class A Common Stock issuable upon exercise of outstanding options and
25,000 shares of Class A Common Stock underlying outstanding Class A
Warrants, owned by Mr. Goldberger's wife, Mildred Goldberger, beneficial
ownership of which is disclaimed by Mr. Goldberger. Includes 15,000 shares
of Class A Common Stock issuable upon the exercise of outstanding options.
(9) Includes 25,000 shares of Class A Common Stock underlying Class A Warrants
and 15,000 shares of Class A Common Stock issuable upon exercise of
outstanding options.
(10) Consists of 10,000 issued shares of Class A Common Stock and 45,000 shares
of Class A Common Stock underlying outstanding options and warrants.
(11) Consists of 11,000 issued shares of Class A Common Stock and 37,000 shares
of Class A Common Stock underlying outstanding options and warrants.
(12) The percent of ownership and voting power of all outstanding Common Stock
held by the group and their spouses listed in the table is 38.54% and
71.45% respectively.
(13) Includes 15,000 shares of Class A Common Stock issuable upon the exercise
of outstanding options.
Escrow Shares
The present holders of the Company's 800,000 outstanding shares of Class B
Common Stock have placed an aggregate of 450,000 of their shares into escrow
(the "Escrow Shares"). Such stockholders continue to vote the Escrow Shares;
however, the Escrow Shares are not assignable or transferable. The Escrow Shares
will be released to the holders on a pro rata basis, if, and only if, at least
one of the following conditions is met:
(i) The Minimum Pretax Income is at least $5,000,000 for the fiscal
year ending December 31, 1997.
(ii) The Bid Price of the Class A Common Stock averages in excess of
$17.50 per share for 30 consecutive business days during the 18 month
period commencing November 25, 1995.
(iii) The Company is acquired by or merged into another entity for
which stockholders of the Company receive per share consideration equal to
the level set forth in (ii) above.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
NONE
ITEM 13. EXHIBIT INDEX
-------------
Exhibit No. Description of Exhibit
- ----------- ----------------------
2.1 Exchange of Shares Agreement, dated February 14, 1994 between
Registrant and Mildred Goldberger, Peter Weissbrod, Linda
Weissbrod, Stuart Fuchsman, Wendy Fuchsman, Lewis Levine, Caryl
Levine, and Martha Rivera.***
3.1 Certificate of Incorporation of the Registrant and all amendments
thereof including the Certificate of Designations relating to
Series A Preferred.*
26
<PAGE>
3.2 By-Laws of the Company.***
4.1 Form of Warrant Agreement.***
4.2 Form of Specimen Class A Common Stock Certificate.***
4.3 Form of Specimen Redeemable Class A Warrant Certificate.***
4.4 Form of Specimen Redeemable Class B Warrant Certificate.***
4.5 Class C Warrant Agreement****
4.6 Form of Specimen Redeemable Class C Warrant Certificate.****
10.1 1994 Stock Option Plan.***
10.2 Employment Agreement between the Registrant and Peter
Weissbrod.***
10.3 Employment Agreement between the Registrant and Stuart
Fuchsman.***
10.4 Lease, dated July 17, 1991, between M.S.M. Associates and
Springfield Rotisserie, Inc., of the premises at 771 Bloomfield
Avenue, West Caldwell, New Jersey.***
10.5 Lease, dated February 11, 1992, between Raritan Enterprises
Partners and Linda's Chicken of Woodbridge, Inc., of the premises
at Bradlees Shopping Center on 1555 St. George Avenue, Township
of Woodbridge, New Jersey.***
10.6 Lease, dated September 23, 1992, between Leslie S. Turchin and
Linda's Chicken of Edison, Inc. of the premises at Tops Plaza
Shopping Center, Route 27, Edison, New Jersey.***
10.7 Form of Stock Escrow Agreement.***
10.8 Lease, dated December 5, 1994, between Eaton Corporation and the
Registrant, of the premises at 11 Commerce Drive, Cranford, New
Jersey.**
10.9 Lease, dated December 17, 1994, between Bassett Associates and
Linda's Flame Roasted Chicken, Inc., of the premises at 63 Union
Place, Summit, New Jersey.**
10.10 Lease, dated August 24, 1994, between The Prospect Realty Company
and Linda's Chicken of Livingston, Inc., of premises at 504 South
Livingston Avenue, Livingston, New Jersey.**
10.11 Lease, dated October 17, 1994, between Fremartin Realty, Inc. and
Linda's Chicken of Westwood, Inc., of the premises at 499
Broadway, Westwood, New Jersey.**
10.13 Registrant's Information for Prospective Franchisees, dated
August 19, 1994.**
27
<PAGE>
10.14 Form of Indemnity Agreement, between the Registrant and each
executive officer and director of the Company.**
10.15 1995 Stock Option Plan.****
10.16 Agreement of Sale, dated December 20, 1995, between Linda's
Chicken of Woodbridge and Kareem International****
10.17 Form of Sublease Agreement between Linda's Chicken of Woodbridge
and Kareem International****
10.18 Sublease Agreement, dated August 29, 1995, between Linda's
Chicken of Westwood, Inc. and Rita's Enterprises, Inc. of the
premises at 499 Broadway, Westwood, New Jersey****
11.1 Calculation of Loss Per Share of Common Stock. See Consolidated
Financial Statements.*
21.1 Subsidiaries of the Registrant (including state of
incorporation).****
23.1 Consent of Rothstein, Kass & Company, P.C.*
27 Financial Data Schedule*
- ----------------------
* Filed herewith.
** Incorporated by reference to the Registrant's Annual Report on Form
10-KSB as amended on Form 10-KSB/A for the fiscal year ended December
31, 1994.
*** Incorporated by reference to the Registrant's registration statement
on Form SB-2 (Registration No. 33-76422), Part II, Item. 27, filed
with the SEC on May 25, 1994.
**** Incorporated by reference to the Registrant's Annual Report on Form
10-KSB for the fiscal year ended December 31, 1995.
No reports on Form 8-K were filed by the registrant during the last quarter
of the period covered by this Report, ended December 31, 1996.
28
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Linda's Diversified Holdings, Inc.
and Subsidiaries
(Formerly Linda's Flame Roasted Chicken Incorporated)
Cranford, New Jersey
We have audited the accompanying consolidated balance sheets of Linda's
Diversified Holdings, Inc. and Subsidiaries (Formerly Linda's Flame Roasted
Chicken Incorporated), as of December 31, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years ended December 31, 1996 and 1995. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Linda's
Diversified Holdings, Inc. and Subsidiaries as of December 31, 1996, and the
results of their operations and their cash flows for the years ended December
31, 1996 and 1995 in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. As discussed in Note 14
to the consolidated financial statements, the Company has suffered recurring
losses from operations and has an accumulated deficit at December 31, 1996.
Management's plans in regard to these matters are also described in Note 14.
These conditions raise substantial doubt about the Company's ability to continue
as a going concern. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ Rothstein, Kass & Company, P.C.
Roseland, New Jersey
March 6, 1997
F-1
<PAGE>
LINDA'S DIVERSIFIED HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
--------------------------
ASSETS 1996 1995
----------- -----------
CURRENT ASSETS:
Cash and cash equivalents $ 1,331,582 $ 558,013
Short term cash investments -- 721,000
Inventories 15,065 19,078
Retail loans receivable 42,691 --
Notes receivable, current portion 10,000 167,313
Prepaid expenses and other current assets 84,049 110,814
----------- -----------
Total Current Assets 1,483,387 1,576,218
----------- -----------
PROPERTY AND EQUIPMENT 432,289 967,217
----------- -----------
OTHER ASSETS:
Restricted cash 162,500 --
Notes receivable, less current portion 150,155 113,204
Intangible assets 39,299 50,101
Deposits and other assets 19,923 34,439
----------- -----------
371,877 197,744
----------- -----------
$ 2,287,553 $ 2,741,179
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Long term debt, current portion $ 51,926 $ 45,387
Accounts payable and accrued expenses 295,119 191,526
Accrued payroll and payroll taxes 5,969 41,831
Sales tax payable 4,866 7,638
Deferred franchise fees 85,000 75,000
----------- -----------
Total Current Liabilities 442,880 361,382
----------- -----------
LONG TERM LIABILITIES:
Long term debt, less current portion 2,709 54,635
Deferred rent 42,519 63,123
----------- -----------
45,228 117,758
----------- -----------
COMMITMENTS
STOCKHOLDERS' EQUITY:
Preferred stock, Series A, $.001 par value;
2,500,000 shares authorized; 120,000
shares issued and outstanding 120 --
Common stock, Class A, $.001 par value;
15,000,000 shares authorized; 2,065,000
and 1,265,000 shares issued and outstanding 2,065 1,265
Common stock, Class B, $.001 par value;
800,000 shares authorized; 800,000
shares issued and outstanding 800 800
Capital in excess of par value 8,096,818 5,442,847
Accumulated deficit (6,300,358) (3,182,873)
----------- -----------
Total Stockholders' Equity 1,799,445 2,262,039
----------- -----------
$ 2,287,553 $ 2,741,179
=========== ===========
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
LINDA'S DIVERSIFIED HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended
December 31,
-----------
1996 1995
----------- -----------
REVENUES:
Restaurant sales, net $ 1,148,064 $ 2,366,015
Franchise royalties 30,123 709
Franchise fee income 65,000 20,000
Contract fee income 36,596 --
Loan origination fees 8,340 --
Loan participation premiums 11,877 --
----------- -----------
1,300,000 2,386,724
----------- -----------
COSTS AND EXPENSES:
Restaurant Operations:
Food and paper costs 473,355 1,030,633
Restaurant labor and related expenses 384,946 893,231
Operating expenses 65,009 166,879
Occupancy expenses 228,800 430,565
Depreciation and amortization 131,355 152,001
Impairment loss 335,061 --
Restructuring charge 266,987 113,877
Preopening costs -- 69,261
Loan Operations:
Payroll and related expenses 555,282 --
Media and advertising costs 763,944 --
Operating expenses 275,267 --
Corporate and Franchising:
General and administrative 991,231 1,656,812
----------- -----------
4,471,237 4,513,259
----------- -----------
LOSS FROM OPERATIONS (3,171,237) (2,126,535)
OTHER INCOME (EXPENSE):
Interest and other income 67,921 121,850
Loss on sale of assets -- (41,110)
Interest expense (14,169) (23,899)
----------- -----------
53,752 56,841
----------- -----------
NET LOSS $(3,117,485) $(2,069,694)
=========== ===========
NET LOSS PER COMMON SHARE $ (1.44) $ (1.28)
=========== ===========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 2,164,479 1,615,000
============ ============
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
LINDA'S DIVERSIFIED HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Class A Class B Series A
Common Stock Common Stock Preferred Stock Capital in
-------------- ----------- ----------- Excess of Accumulated
Shares Amount Shares Amount Shares Amount Par Value Deficit
---------- --------- --------- --------- ------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES,
January 1, 1995 1,265,000 $ 1,265 800,000 $ 800 -- $ -- $ 5,442,847 $(1,113,179)
Net loss -- -- -- -- -- -- -- (2,069,694)
BALANCES,
------------ ----------- ---------- -------- ------- ---------- ----------- -----------
December 31, 1995 1,265,000 1,265 800,000 800 -- -- 5,442,847 (3,182,873)
Proceeds from sale
of common stock,
net of expenses 800,000 800 -- -- -- -- 1,653,511 --
Proceeds from sale
of preferred stock,
net of expenses -- -- -- -- 120,000 120 1,000,460 --
Net loss -- -- -- -- -- -- -- (3,117,485)
BALANCES,
------------ ----------- ---------- -------- ------- ---------- ----------- -----------
December 31, 1996 2,065,000 $ 2,065 800,000 $ 800 120,000 $ 120 $ 8,096,818 $(6,300,358)
============ =========== ========== ======== ======= ========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
LINDA'S DIVERSIFIED HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended
December 31,
-----------
1996 1995
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(3,117,485) $(2,069,694)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 131,355 152,001
Restructuring charge 266,987 113,877
Impairment loss 335,061 --
Changes in operating assets and liabilities:
Decrease on interest accrued on investments -- 31,022
Decrease in inventories 4,013 2,926
Decrease in prepaid expenses and other current assets 26,765 48,792
Increase in restricted cash (162,500) --
Decrease (increase) in deposits and other assets 23,132 (17,114)
Increase (decrease) in accounts payable and accrued expenses 103,593 (111,959)
Increase (decrease) in accrued payroll and payroll taxes (35,862) 4,043
Decrease in sales tax payable (2,772) (1,889)
Increase in deferred franchise fees 10,000 75,000
Increase (decrease) in deferred rent (20,604) 18,546
----------- -----------
Net cash used in operating activities (2,438,317) (1,754,449)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from redemption of cash investments 721,000 2,929,000
Acquisition of cash investments -- (1,978,912)
Funds advanced under notes receivable (262,915) (155,517)
Proceeds from notes receivable 383,277 --
Disbursements for retail loans receivable (822,166) --
Proceeds from sale of retail loans receivable 779,475 --
Proceeds from sale of assets -- 77,832
Acquisition of property and equipment (187,673) (641,740)
Acquisition of intangible assets (8,616) (27,447)
----------- -----------
Net cash provided by investing activities 602,382 203,216
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of preferred stock, net of expenses 1,000,580 --
Proceeds from sale of common stock, net of expenses 1,654,311 --
Payments of long-term debt (45,387) (58,510)
----------- -----------
Net cash provided by (used in) financing activities 2,609,504 (58,510)
----------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS 773,569 (1,609,743)
CASH AND CASH EQUIVALENTS, Beginning of year 558,013 2,126,646
----------- -----------
CASH AND CASH EQUIVALENTS, End of year $ 1,331,582 $ 558,013
=========== ===========
SUPPLEMENTAL INFORMATION:
Interest paid $ 14,169 $ 23,598
=========== ===========
Income taxes paid $ -- $ --
=========== ===========
Noncash financing activity:
Discounted note payable issued as part of restaurant acquisition cost $ -- $ 52,144
=========== ===========
Equipment obtained under capitalized leases payable $ -- $ 46,037
=========== ===========
Notes receivable in exchange for sale of assets $ -- $ 136,580
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
LINDA'S DIVERSIFIED HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - Organization and Nature of Operations:
--------------------------------------
Linda's Diversified Holdings, Inc. (formerly Linda's Flame Roasted
Chicken, Inc.) and subsidiaries (the "Company") is a holding company
consisting of restaurant operations, restaurant franchising, and loan
operations. The Company has seven quick-service restaurants operating
under the name Linda's Rotisserie & Kitchen, (two company-owned and
five franchised all of which are located in New Jersey). The Company
through its wholly-owned subsidiary, National Home Guaranty, provides
financing for homeowners and lead-generation services for contractors
with respect to home-improvement services in the low-to-moderate
income housing markets.
NOTE 2 - Summary of Significant Accounting Policies:
------------------------------------------
Principles of Consolidation - The consolidated financial statements
include the accounts of Linda's Diversified Holdings, Inc. and its
nine wholly-owned subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation.
Cash Equivalents - The Company considers financial instruments with
maturities of three months or less to be cash equivalents. The Company
maintains its cash in deposit accounts, which at times, may exceed
federal insured limits. The Company has not incurred any losses in
such accounts and believes it is not exposed to any significant credit
risk on cash and cash equivalents.
Restricted Cash - In connection with regulatory banking requirements
in certain states, the Company is required to post mortgage surety
bonds which are collateralized by irrevocable letters of credit. The
collateralization underlying these letters of credit is shown as
restricted cash at December 31, 1996.
Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Fair Value of Financial Instruments - The fair value of the Company's
assets and liabilities which qualify as financial instruments under
Statement of Financial Accounting Standards No. 107 (SFAS 107)
approximates the carrying amounts presented in the consolidated
balance sheets.
Inventories - Inventories are stated at the lower of cost, using the
first-in first-out method, or market, and consist of food, paper and
janitorial supplies used in the Company's company-owned restaurants.
Property and Equipment - Property and equipment are stated at cost.
The Company provides for depreciation and amortization under the
straight-line method based upon the estimated useful life of five to
twelve years for equipment. Leasehold improvements are amortized over
the life of the lease.
Intangible Assets - Intangible assets consist of organization and logo
costs, net of amortization, computed using the straight-line method
over three to five years.
Retail Loans Receivable - National Home Guaranty provides both
federally- guaranteed and conventional loans to low-to-moderate income
homeowners. These loans are subsequently sold at a premium to various
third-party lending institutions.
F - 6
<PAGE>
LINDA'S DIVERSIFIED HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - Summary of Significant Accounting Policies (continued):
------------------------------------------------------
Preopening Costs - Preopening costs, which represent costs relating to
the opening of new company-owned restaurants, including various
training, payroll, and promotion costs, are charged to operations when
incurred.
Impairment of Long-Lived Assets - The Company periodically assesses
the recoverability of the carrying amounts of long-lived assets. A
loss is recognized when expected undiscounted future cash flows are
less than the carrying amount of the asset. An impairment loss is the
difference by which the carrying amount of an asset exceeds its fair
value.
Income Taxes - The Company complies with Statement of Financial
Accounting Standards No. 109 (SFAS 109), "Accounting for Income
Taxes." which requires an asset and liability approach to financial
reporting for income taxes. Deferred income tax assets and liabilities
are computed annually for differences between financial statement and
tax bases of assets and liabilities, which will result in taxable or
deductible amounts in the future, based on enacted tax laws and rates
applicable to the periods in which the differences are expected to
effect taxable income. Valuation allowances are established, when
necessary, to reduce the deferred income tax assets to the amount
expected to be realized.
Loss per Common Share - Loss per share of common stock is based upon
the weighted average number of shares outstanding, including common
share equivalents (stock options and warrants), during each period,
and excludes the 450,000 escrow shares.
Leases - Substantially all of the Company's restaurant operating
leases provide for rent increases over the lease terms. Rent expense
is adjusted to the straight-line basis, where applicable, in
accordance with the provisions of SFAS 13. The difference between rent
reflected in operating expenses and rent actually paid was
approximately $7,000 and $18,000 for the years ended December 31, 1996
and 1995, respectively.
Advertising Costs - The Company expenses production and other related
costs of advertising on the first date the advertisement takes place.
Advertising costs for the year ended December 31, 1996 were
approximately $764,000 relating to loan operations and recorded as
media and advertisement costs. Advertising costs for the year ended
December 31, 1995 were approximately $143,000 relating to restaurant
operations and recorded in general and administrative expenses.
Franchise Related Income and Deferred Franchise Fees - In connection
with its franchising operations, the Company receives initial
franchise fees, royalties and advertising fees from its franchisees.
Initial fees are recognized when the franchisee commences operations.
Royalties and advertising fees are recognized in the period that the
related franchise store revenue is generated. The franchisee is
obligated to pay a percentage of net sales to the Company as royalties
and contribute an additional percentage to a regional advertising fund
maintained by the Company.
Loan Operations Revenue Recognition - The Company recognizes contract
fee income when the related contract is completed by the contractor.
In addition, the Company receives interest income and loan
participation premiums upon the sale of its loans to third-party
lending institutions.
F - 7
<PAGE>
LINDA'S DIVERSIFIED HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - Property and Equipment:
-----------------------
Property and equipment consist of the following:
December 31,
---------------------------------
1996 1995
--------------- --------------
Leasehold improvements $ 218,044 $ 609,346
Furniture and equipment 340,241 424,293
Capitalized lease equipment 48,945 87,122
--------------- --------------
607,230 1,120,761
Less: Accumulated depreciation
and amortization 174,941 153,544
=============== ==============
$ 432,289 $ 967,217
=============== ==============
Depreciation and amortization expense for the years ending December
31, 1996 and 1995 was $113,790 and $136,337, respectively, including
$12,877 and $18,091 relating to capital leases in 1996 and 1995,
respectively.
The Company recorded an impairment loss of approximately $335,000
representing a writedown on leasehold improvements and equipment from
one of the Company's restaurants and other related restaurant
equipment of approximately $389,000 and accumulated depreciation and
amortization of approximately $56,000.
NOTE 4 - Intangible Assets:
------------------
Intangible assets consist of the following:
December 31,
-------------------------------
1996 1995
--------------- ------------
Logo and design costs $77,548 $68,932
Organization costs 5,818
--------------- ------------
77,548 74,750
Less: Accumulated amortization 38,249 24,649
=============== ============
$39,299 $50,101
=============== ============
Amortization expense for the years ending December 31, 1996 and 1995
was $17,565 and $15,664, respectively.
NOTE 5 - Notes Receivable:
-----------------
Between August 1995 and April 1996, the Company provided interim
construction financing to a franchisee totalling approximately
$375,000. The Company was repaid in full on these advances in
September 1996.
In connection with the sale of assets of a former Company-owned store
in December 1995, the Company received a note which was restructured
in December 1996. The new note for $140,155, which includes additional
advances made to this franchisee, bears interest at 9.75%, and
provides for an initial principal payment of $10,000, followed by
monthly installments of interest-only through January 1998, and
monthly principal installments of $1,702 plus interest through January
2001, and a final payment in February 2001 of approximately $114,000.
This note is additionally personally guaranteed by the owners of the
franchisee.
In September 1996, the Company advanced $20,000 to a franchisee which
is to be repaid in 60 monthly installments beginning in September
1997.
F - 8
<PAGE>
LINDA'S DIVERSIFIED HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - Long-Term Debt:
---------------
Long-term debt consists of the following:
December 31,
--------------------------
1996 1995
------------- ---------
Note payable at 10% imputed interest,
due in quarterly installments through
December 1997 $ 18,800 $ 35,819
Note payable at 8.55% interest, in monthly
installments through January 1996,
collateralized by certain equipment 393
Capitalized lease obligations 40,481 79,639
----------- ----------
Total future aggregate payments 59,281 115,851
Less: Amount representing interest 4,646 15,829
----------- -----------
54,635 100,022
Less: current portion 51,926 45,387
----------- ----------
$ 2,709 $ 54,635
============ ============
Aggregate future principal payments are as follows:
Year Ending December 31,
------------------------
1997 $ 51,926
1998 2,709
------------
$ 54,635
============
The Company, through its home-equity loan subsidiary, has a $3,000,000
open warehouse line of credit to be used exclusively for the
disbursement of retail loans. Borrowings will bear interest at the
bank's prime rate plus 1%. At December 31, 1996, there were no
outstanding borrowings.
NOTE 7 - Related Party Transaction:
--------------------------
National Home Guaranty has several approved contractors which are
recommended to homeowners. One such contractor's principal owner is a
director of the Company. The Company received from this contractor,
contract fee income of approximately $21,000 for the year ended
December 31, 1996.
NOTE 8 - Restructuring Charges:
----------------------
For the years ended December 31, 1996 and 1995, the Company recorded
in connection with the closings of one restaurant each year,
restructuring charges of approximately $267,000 and $114,000,
respectively. The principal items included in the charges are
abandonment of leasehold improvements, property and equipment, and the
reversal of deferred rent liabilities.
F - 9
<PAGE>
LINDA'S DIVERSIFIED HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - Income Taxes:
-------------
At December 31, 1996, the Company had federal and state net operating
loss carryforwards of approximately $6,000,000 and $6,500,000,
respectively, expiring between 2002 and 2011.
The deferred tax asset listed below represents the tax benefit
resulting from the utilization of net operating loss carryforwards.
The valuation allowance represents the portion of the deferred tax
asset, the benefits of which more than likely will not be realized by
the Company. As a result, the Company's effective income tax credit
differs from the statutory tax credit that would have been recorded
without such valuation allowance.
December 31,
------------------------------
1996 1995
--------------- -------------
Net operating loss carryforward $1,485,000 $ 782,000
Valuation allowance on deferred tax asset (1,485,000) (782,000)
------------ ------------
$ - $ -
=========== =============
NOTE 10 - Commitments:
Leases - The Company has operating leases on all of its locations with
terms expiring between 1997 and 2015. Substantially all of these
leases require the Company to pay for common area maintenance charges
and increases in real estate taxes, and include various renewal
options. The Company has further entered into sublease arrangements
with three franchisees with terms similar to those underlying leases.
Future aggregate minimum rental payments are as follows:
Minimum Sublease
Year Ending December 31, Total Rentals Income
------------------------ ----- ------- ------
1997 142,000 301,000 (159,000)
1998 117,000 277,000 (160,000)
1999 99,000 259,000 (160,000)
2000 80,000 244,000 (164,000)
2001 67,000 241,000 (174,000)
Thereafter - 1,226,000 (1,226,000)
----------------------------------------
505,000 2,548,000 (2,043,000)
========================================
Rent expense, including common area maintenance charges and real
estate taxes, net of sublease income, was approximately $229,000 and
$324,000 for 1996 and 1995, respectively, of which approximately
$10,000 was included in preopening costs in 1995.
Employment Contracts - The Company has employment contracts extending
through May 1997 with its Chief Executive Officer and Chief Operating
Officer providing for annual salaries of $110,000 and $99,000,
respectively. These contracts also provide for periodic increases as
approved by the Board of Directors.
F-10
<PAGE>
LINDA'S DIVERSIFIED HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - Stockholders' Equity:
---------------------
In June 1994, the Company completed its initial public offering for
the sale of 1,100,000 units at $5.00 per unit. The net proceeds to the
Company were approximately $4,359,000. Each unit consists of one share
of Class A common stock, one redeemable Class A warrant, and one
redeemable Class B warrant. Each Class A warrant entitles the holder
to purchase one share of Class A common stock and one Class B warrant
at an exercise price of $6.25, and each Class B warrant entitles the
holder to purchase one share of Class A common stock at an exercise
price of $8.50.
In July 1994, the Company sold an additional 165,000 units at $5.00
per unit upon exercise of the underwriter's over-allotment option. The
net proceeds to the Company were approximately $705,000. In addition,
the Company has agreed to sell to the underwriter and a finder,
options to purchase an aggregate of 110,000 units at an exercise price
of $6.00 per unit, expiring in May 1999.
In connection with the offering, 450,000 shares (the "Escrow Shares")
of the 800,000 shares of Class B common stock owned by certain
original stockholders are held in escrow and subject to contribution
to the Company, without consideration, if the Company does not attain
certain earnings levels or the market price of the Company's Class A
common stock does not attain certain targets by December 31, 1997. In
the event of the release of the Escrow Shares, the Company will
recognize compensation to the extent of the aggregate fair market
value of the shares released to officers, directors, employees or
consultants of the Company.
In May 1996, the Company completed a private placement for the sale of
40 units at $50,000 per unit. The net proceeds to the Company were
$1,654,511. Each unit consists of 20,000 shares of Class A common
stock and 20,000 redeemable Class C warrants. Each Class A warrant
entitles the holder to purchase one share of Class A common stock at
an exercise price of $5.25.
In December 1996, the Company completed a private placement for the
sale of 120,000 shares of Series A preferred stock at $10 per share
with a liquidating preference of $10 per share. The net proceeds to
the Company were $1,000,580. Each share provides for a dividend of
$.70 per annum for the first twelve months, and $1.00 per annum
thereafter, such dividends being payable on the 15th of March, June,
September and December. The shares are each further convertible into
3.64 Class A common shares after six months.
The Class A, Class B and Class C warrants, and certain Unit Purchase
and Private Placement Options, are subject to anti-dilution
adjustments. As a result of the securities issued in the private
placements, the number of these outstanding securities have increased
and the exercise prices have been adjusted.
NOTE 12 - Stock Options:
--------------
In February 1994, the Board of Directors approved the adoption of the
1994 stock option plan (the "Plan"). The plan provides for the
granting of an aggregate of 130,000 incentive stock options and
non-qualified stock options to directors, agents, consultants and
employees of the Company. The options are exercisable at prices
between $4.00 and $6.125 per share. The plan further provides that the
maximum term of a stock option may not exceed 10 years, and the period
that the stock option may be exersisable will be determined by the
Board of Directors. At December 31, 1996, options to purchase 59,800
shares of Class A common stock are outstanding, none of which have
been exercised.
F-11
<PAGE>
LINDA'S DIVERSIFIED HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - Stock Options (continued):
-------------------------
During 1995, the Board of Directors approved the adoption of the 1995
stock option plan (the "Plan"). The plan provides for the granting of
an aggregate of 600,000 incentive stock options and non-qualified
stock options to directors, agents, consultants and employees of the
Company. The options are exercisable at prices between $3.75 and
$6.00. The plan further provides that the maximum term of a stock
option may not exceed 10 years, and the period that the stock option
may be exercisable will be determined by the Board of Directors. At
December 31, 1996, options to purchase 384,035 shares of Class A
common stock are outstanding, none of which have been exercised.
The activity in the plans are as follows:
Exercise price per share
------------------------
Number of Weighted
Options Range Average
--------------------------------
Balance outstanding,
January 1, 1995 23,000 $4.25-$5.00 $4.61
Granted 200,500 3.75-6.125 4.07
Forfeited (2,100) 6.125 6.13
-------------------------------
Balance outstanding,
December 31, 1995 221,400 3.75-6.125 4.11
Granted 240,035 4.31-6.00 5.87
Forfeited (17,600) 4.25-6.125 4.85
-------------------------------
Balance outstanding,
December 31, 1996 443,835 3.75-6.125 5.02
===============================
The Company has adopted the disclosure requirements of SFAS 123,
"Accounting for Stock-Based Compensation." Accordingly, no
compensation cost has been recognized for the Company's two stock
option plans. Had compensation cost for the Company's two stock option
plans been determined based on the fair value at the grant date of
awards in 1996 and 1995 consistent with provisions of SFAS 123, the
Company's consolidated net loss and loss per common share would have
increased to the proforma amounts indicated below:
1996 1995
---- ----
Net loss applicable to common
stockholders, as reported $(3,117,485) $(2,069,694)
Net loss applicable to common
stockholders, proforma (3,415,242) (2,115,312)
Loss per common share, as reported (1.44) (1.28)
Loss per common share, proforma (1.57) (1.31)
Because the SFAS 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting proforma
compensation cost may not be representative of that to be expected in
future years.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following
weighted average assumptions used for grants in 1996 and 1995
respectively: risk-free interest rates of 6.0 percent; no dividend
yields of expected lives of 3 years; and expected volatility of 55
percent.
F - 12
<PAGE>
LINDA'S DIVERSIFIED HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - Segment Reporting:
-----------------
The Company's two business operating segments are restaurant
operations and franchising and loan operations (which commenced
operations in April 1996). The following financial data is presented
for the business segments of the Company for the year ended December
31, 1996. Operating loss by segment is total revenue less operating
expenses. In computing operating loss by business segment, none of the
following items have been added or deducted: interest income
(expense), income taxes and unusual items. Identifiable assets by
business segment are those assets used in Company operations in each
segment. The corporate assets are included in the restaurant and
franchising operations. Capital expenditures include acquisitions of
property and equipment.
Restaurant and
Franchising Loan
Operations Operations
-------------- -------------
Total revenue $ 1,243,187 $ 56,813 (1)
Operating loss (1,618,832) (1,552,405)
Identifiable assets 890,053 1,397,500
Depreciation and amortization 116,780 14,575
Capital expenditures 96,138 91,535
(1) Total loan operations revenue consists of $36,596 of contract fee
income, $8,340 of loan origination fees and $11,877 of loan
participation premiums. $21,000 of contract fee income (57%) was from
one customer, and 100% of the loan participation premiums was from one
third-party lending institution.
NOTE 14 - Continuing Operations:
---------------------
Management's plans in regard to the losses incurred include the
following strategies focusing primarily on increasing the volume of
business at its subsidiary, National Home Guaranty: (1) obtaining
additional equity-based financing through public and/or private
offerings, (2) broadening the types of marketing sources used to
obtain loan prospects. The Company expects to begin to use information
kiosks placed in malls as well as booths at consumer home shows as
additional means of marketing to its target audience, (3) seek
strategic alliances with retail home-improvement stores to provide
financing for consumers who are doing projects themselves, (4)
pursuing the direct loan market emphasizing debt-consolidation for
debt-laden consumers. The accompanying consolidated financial
statements have been prepared assuming that the Company will continue
as a going concern. The Company has suffered losses from operations
and an accumulated deficit of $6,300,358 at December 31, 1996 that
raise doubt about the Company's ability to continue as a going
concern. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
NOTE 15 - Subsequent Event:
----------------
In March 1997, the Company signed a master license agreement with a
licensee and received a $120,000 license fee. Under this agreement,
the licensee has acquired territory rights to develop a minimum of 20
restaurants in the Philippines over a ten year term. These restaurants
will operate under the proprietary trademark, trade names and standard
operating procedures of the Company, and will utilize the Company's
former operating name, Linda's Flame Roasted Chicken. The Company will
receive additional fees upon the opening of each restaurant, and
monthly royalties based upon a percentage of each restaurant's net
sales.
F - 13
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: April 14, 1997 LINDA'S DIVERSIFIED HOLDINGS INC.
(Registrant)
By: /s/
---------------------------------------------
Peter Weissbrod
President
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
Date: April 14, 1997 /s/
----------------------------------------------------
Peter Weissbrod, President, Chief Executive Officer
and Director
(Principal Executive and Financial Officer)
Date: April 14, 1997 /s/
----------------------------------------------------
Stuart Fuchsman, Vice President, Chief Operating
Officer and Director
Date: April 14, 1997 /s/
----------------------------------------------------
Richard Goldberger, Chairman of the Board of
Directors
Date: April 14, 1997 /s/
----------------------------------------------------
Lewis Levine, Director
Date:
----------------------------------------------------
William Ozzard, Director
Date:
----------------------------------------------------
Ivan Szathmary, Director
<PAGE>
EXHIBIT INDEX
(Only the Exhibits filed herewith are listed below)
No. Description
- --- -----------
3.1 Certificate of Incorporation of the Registrant and all
amendments thereof (including the Certificate of
Designations relating to Series A Preferred).
23.1 Consent of Rothstein, Kass & Company, P.C.
27 Financial Data Schedule
EXHIBIT 3.1
CERTIFICATE OF INCORPORATION
OF
LINDA'S FLAME ROASTED CHICKEN INCORPORATED
-----------------
The undersigned, a natural person, for the purpose of organizing a
corporation for conducting the business and promoting the purposes hereinafter
stated, under the provisions and subject to the requirements of the laws of the
State of Delaware, particularly the General Corporation Law of the State of
Delaware, hereby certifies that:
FIRST: The name of the corporation (hereinafter called the
-----
"Corporation") is LINDA'S FLAME ROASTED CHICKEN INCORPORATED.
SECOND: The address, including street, number, city, and county, of
------
the registered office of the Corporation in the State of Delaware is 32
Loockerman Square, Suite L-100, City of Dover 19901, County of Kent; and the
name of the registered agent of the corporation in the State of Delaware at such
address is The Prentice-Hall Corporation System, Inc.
THIRD: The purpose of the Corporation is to engage in any lawful act
-----
or activity for which corporations may be organized under the General
Corporation Law of the State of Delaware.
FOURTH: 1. The total number of shares of all classes of stock which
------
the corporation shall have authority to issue is thirteen million three hundred
thousand (13,300,000) consisting of two million five hundred thousand
(2,500,000) shares of Preferred Stock of a par value of one mill ($0.001) each,
ten million (10,000,000) shares of Class A Common Stock of a par value of one
mill ($0.001) each and eight hundred thousand (800,000) shares of Class B Common
Stock of a par value of one mill ($0.001) each.
2. The shares of Preferred Stock may be issued from time to time in
one or more series, in any manner permitted by law, as determined from time to
time by the Board of Directors, and stated in the resolution or resolutions
providing for the issuance of such shares adopted by the Board of Directors
pursuant to authority hereby vested in it. Without limiting the generality of
the foregoing, shares in such series shall have such voting powers, full or
limited, or no voting powers, and shall have such designations, preferences, and
relative, participating, optional, or other special rights, and qualifications,
limitations, or restrictions thereof, permitted by law, as shall be stated in
the resolution or resolutions providing for the issuance of such shares adopted
by the Board of Directors pursuant to authority hereby vested in it. The number
of shares of any such series so set forth in such resolution or resolutions may
be increased (but not above the total number of authorized shares of Preferred
Stock) or decreased (but not below the number of shares thereof then
outstanding) by further resolution or resolutions adopted by the Board of
Directors pursuant to authority hereby vested in it.
<PAGE>
3. The Class A Common Stock and Class B Common Stock shall be
identical in all respects, subject to the following:
(a) Each share of Class A Common Stock shall entitle the holder to one
vote and each share of Class B Common Stock shall entitle the holder to five
votes on all matters on which holders of Class A and Class B Common Stock shall
be entitled to vote.
(b) The Class A and Class B Common Stock shall be treated as one class
with respect to dividends, and accordingly, have identical rights with respect
thereto except that whenever a stock dividend is paid, the holders of Class A
Common Stock shall be entitled to receive the amount of the dividend solely in
shares of Class A Common Stock and holders of Class B Common Stock shall be
entitled to receive the amount of the dividend solely in shares of Class B
Common Stock. Whenever a combination or subdivision of the shares of either
class of common stock is made, the same combination or subdivision shall be made
with respect to the other class of common stock.
(c) (i) All outstanding shares of Class B Common Stock shall be
convertible at all times, at the election of the holder thereof, into an equal
number of fully paid and nonassessable shares of Class A Common Stock by
delivery of written notice by the holder of such shares of Class B Common Stock
to the Corporation, or its transfer agent, of such holder's election together
with the certificate(s) representing the shares to be converted. Thereupon, the
Corporation, or its transfer agent, as the case may be, shall exchange such
certificate(s) for a certificate or certificates representing an equal number of
shares of Class A Common Stock. Shares of Class B Common Stock shall be deemed
to have been converted, and the person entitled to receive the Class A Common
Stock issuable upon such conversion shall be treated for all purposes as the
record holder of such Class A Common Stock, immediately prior to the close of
business on the day upon which the Corporation, or its transfer agent, receives
such shares for conversion.
(ii) Except as provided in subparagraph (iii) below, upon the
sale, assignment, transfer, conveyance, or other disposition, whether voluntary,
by operation of law or otherwise (a "Transfer", which, for the purpose hereof,
shall not include a pledge where the pledgor retains all voting rights) of
shares of Class B Common Stock, other than a transfer to another holder of Class
B Common Stock, the shares so transferred shall, by virtue of such Transfer,
automatically be converted into an equal number of fully paid and nonassessable
shares of Class A Common Stock. Upon surrender to the Corporation, or its
transfer agent, for cancellation of the certificate or certificates representing
the shares of Class B Common Stock so converted, the holder thereof shall be
entitled to receive a certificate or certificates representing the same number
of shares of Class A Common Stock to which such holder is entitled. Until such
surrender, the certificate or certificates representing the shares of converted
Class B Common Stock shall for all purposes evidence ownership of the shares
Class A Common Stock into which the Class B Common Stock has been converted.
2
<PAGE>
(iii) A Transfer of shares of Class B Common Stock to a parent,
sibling, spouse or lineal descendant of the transferee or a person who,
immediately after the initial issuance of eight hundred thousand (800,000)
shares of Class B Common Stock, is the record owner of at least 40,000 shares of
Class B Common Stock (each a "Principal Stockholder") shall not result in a
conversion of the Class B Common Stock transferred into Class A Common Stock
provided the power to vote shares of Class B Common Stock so transferred is
retained by the transferor and/or one or more Principal Stockholders.
(iv) Any shares of Class B Common Stock converted into Class A
Common Stock pursuant to paragraphs 3(c)(i) or (ii) shall, from and after the
date of conversion, have the status of authorized and unissued shares of Class B
Common Stock and may only be reissued as shares of Class B Common Stock in
connection with any transaction contemplated by paragraph 3(b) of this Article
FOURTH.
FIFTH: The name and the mailing address of the incorporator are as
-----
follows:
Joseph D. Alperin
Fischbein Badillo Wagner Itzler
909 Third Avenue
New York, New York 10022
SIXTH: Whenever a compromise or arrangement is proposed between this
- ----- corporation and its creditors or any class of them and/or between this
corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of this corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for this corporation under
the provisions of ss. 291 of Title 8 of the Delaware Code or on the application
of trustees in dissolution or of any receiver or receivers appointed for this
corporation under the provisions of ss. 279 of Title 8 of the Delaware Code
order a meeting of the creditors or class of creditors, and/or of the
stockholders or class of stockholders of this corporation, as the case may be,
to be summoned in such manner as the said court directs. If a majority in number
representing three fourths in value of the creditors or class of creditors,
and/or of the stockholders or class of stockholders of this corporation, as the
case may be, agree to any compromise or arrangement and to any reorganization of
this corporation as a consequence of such compromise or arrangement, the said
compromise or arrangement and the said reorganization shall, if sanctioned by
the court to which the said application has been made, be binding on all the
creditors or class of creditors, and/or on all the stockholders or class of
stockholders, of this corporation, as the case may be, and also on this
corporation.
3
<PAGE>
SEVENTH: The Board of Directors is expressed authorized to adopt,
-------
amend and repeal the Bylaws of the Corporation.
EIGHTH: The personal liability of the directors of the Corporation is
------
hereby eliminated to the fullest extent permitted by the provisions of paragraph
(7) of subsection (b) of ss. 102 of the General Corporation Law of the State of
Delaware, as the same may be amended and supplemented.
NINTH: The Corporation shall, to the fullest extent permitted by the
-----
provisions of ss.145 of the General Corporation Law of the State of Delaware, as
the same may be amended and supplemented, indemnify any and all persons whom it
shall have power to indemnify under said section from and against any and all of
the expenses, liabilities, or other matters referred to in or covered by said
section, and the indemnification provided for herein shall not be deemed
exclusive of any other rights to which those indemnified may be entitled under
any Bylaw, agreement, vote of stockholders or disinterested directors or
otherwise, both as to action in his official capacity and as to action in
another capacity while holding such office, and shall continue as to a person
who has ceased to be a director, officer, employee, or agent and shall inure to
the benefit of the heirs, executors, and administrators of such a person.
Signed on February 8, 1994
/S/
--------------------------------------
Joseph D. Alperin, Incorporator
4
<PAGE>
CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION
OF
LINDA'S FLAME ROASTED CHICKEN INCORPORATED
(Pursuant to Section 242)
It is hereby certified that:
(i) The name of the corporation (hereinafter called the "corporation")
is LINDA'S FLAME ROASTED CHICKEN INCORPORATED.
(ii) Article FOURTH of the Certificate of Incorporation of the
corporation is hereby amended:
(a) Paragraph 1 of Article FOURTH is amended in full to read:
1. The total number of shares of all classes of stock which the
corporation shall have authority to issue is eighteen million three hundred
thousand (18,300,000) consisting of two million five hundred thousand
(2,500,000) shares of Preferred Stock of a par value of one mill ($0.001) each,
fifteen million (15,000,000) shares of Class A Common Stock of a par value of
one mill ($0.001) each and eight hundred thousand (800,000) shares of Class B
Common Stock of a par value of one mill ($0.001) each.
(b) Paragraph 3 (a) of Article FOURTH is amended in full to read:
(a) Each share of Class A Common Stock shall entitle the
holder to one vote and each share of Class B Common Stock shall entitle the
holder to six votes on all matters on which holders of Class A and Class B
Common Stock shall be entitled to vote.
3. The amendment of the Certificate of Incorporation herein certified
has been duly adopted in accordance with the provisions of Section 228 of the
General Corporation Law of the State of Delaware.
Signed and attested to on May 18, 1994
/S/
-------------------------------------
Peter Weissbrod, President
Attest:
/S/
- ---------------------------------
Stuart Fuchsman, Secretary
<PAGE>
CERTIFICATE OF AMENDMENT
TO
CERTIFICATE OF INCORPORATION
OF
LINDA'S FLAME ROASTED CHICKEN INCORPORATED
It is hereby certified that:
(i) The name of the corporation (hereinafter called the "Corporation")
is LINDA'S FLAME ROASTED CHICKEN INCORPORATED.
(ii) The Certificate of Incorporation of the Corporation is hereby
amended by striking out Article FIRST thereof and by substituting in lieu of
said Article FIRST the following new Article:
" FIRST: The name of the corporation (hereinafter called the
-----
"corporation") is Linda's Diversified Holdings Inc."
IN WITNESS WHEREOF, the Amendment of the Certificate of Incorporation
herein certified has been duly adopted in accordance with the provisions of
Sections 228 and 242 of the General Corporation Law of the State of Delaware.
Prompt written notice of the adoption of the amendment herein certified has been
given to those stockholders who have not consented in writing thereto, as
provided in Section 228 of the General Corporation Law of the State of Delaware.
Signed and attested to on
July 9th, 1996
/S/
-------------------------------------
Peter Weissbrod, President
and Chief Executive Officer
Attest:
/S/
- ------------------------------
Richard Goldberger
Chairman of the Board
<PAGE>
CERTIFICATE OF DESIGNATIONS
OF
SERIES A CONVERTIBLE PREFERRED STOCK
(Pursuant to Section 151(g) of the General
Corporation Law of the State of Delaware)
LINDA'S DIVERSIFIED HOLDINGS INC., a corporation organized and
existing under the laws of the State of Delaware (the "Corporation"), does
hereby certify that:
FIRST: The Corporation was incorporated in the State of Delaware on
February 14, 1994.
SECOND: Pursuant to authority conferred upon the Board of Directors of
the Corporation (the "Board") by the Certificate of Incorporation of the
Corporation (the "Certificate of Incorporation") and Section 151(g) of the
General Corporation Law of the State of Delaware, the Board has duly adopted the
following resolutions, which are still in full force and effect and are not in
conflict with any provisions of the Corporation's Certificate of Incorporation
or its By-Laws:
RESOLVED, that the Board hereby fixes and determines the designation
of, the number of shares constituting, and the rights, preferences, privileges,
and restrictions relating to, a series of Preferred Stock, as follows:
1. Designation Amount; Stated Value. From the Corporation's two
-----------------------------------
million five hundred thousand (2,500,000) authorized shares of Preferred Stock,
par value one mill ($0.001) per share, one hundred twenty thousand (120,000)
shares are hereby designated Series A Convertible Preferred Stock ("Series A
Preferred") with the rights, preferences, privileges and restrictions specified
herein. Each share of Series A Preferred shall have a stated value of $10.00
(the "Stated Value").
2. Dividends.
---------
(a) The holders of record of the Series A Preferred, as of a date
fixed by the Board, shall be entitled to receive dividends, out of funds legally
available therefor, at the rate of $.70 per share per annum from the date of
issuance (the "Original Issue Date") until the first anniversary of the Original
Issue Date and thereafter at the rate of $1.00 per share per annum, payable
quarterly in arrears on the 15th day of March, June, September and December of
each year (each, a "dividend payment date") commencing March 15, 1997. If a
dividend payment date is not a business day, then the dividend shall be payable
on the next succeeding business day. Such dividends shall be cumulative and
shall accrue on each share of Series A Preferred from the Original Issue Date.
Dividends payable for any partial dividend period shall be computed on the basis
of a 360-day year or twelve 30-day months.
<PAGE>
(b) Shares of Series A Preferred that are converted into the
Corporation's Class A Common Stock, par value $0.001 per share ("Class A Common
Stock"), as provided herein shall not accrue dividends following the date the
conversion is deemed effected and all accrued and unpaid dividends as of such
date shall, at the time of conversion, be paid in shares of Class A Common Stock
determined by adding the amount of such dividends to the numerator in clause (x)
of Section 5(a).
(c) No dividends or other distributions, other than dividends
payable solely in shares of Common Stock of the Corporation ("Common Stock") or
other capital stock of the Corporation ranking junior as to dividends or rights
upon dissolution or liquidation to the Series A Preferred (the "Junior Dividend
Stock"), shall be paid or set apart for payment on any shares of Common Stock or
Junior Dividend Stock unless and until all accrued and unpaid dividends on the
Series A Preferred shall have been paid or set apart for payment.
3. Liquidation Preference. In the event of a liquidation, dissolution
----------------------
or winding-up of the Corporation, whether voluntary or involuntary, the holders
of record of the Series A Preferred shall be entitled to receive ratably in
full, out of lawfully available assets of the Corporation, whether such assets
are stated capital or surplus of any nature, an amount in cash per outstanding
share of Series A Preferred equal to the sum of the Stated Value and all
dividends (whether or not declared) accrued and unpaid thereon as of the date of
final distribution to such holders, without interest, before any payment shall
be made or any assets distributed to the holders of Common Stock or any other
class or series of the Corporation's capital stock ranking junior as to
liquidation rights to the Series A Preferred; provided, however, that, such
rights shall accrue to the holders of the Series A Preferred only in the event
the Corporation's payments with respect to the liquidation preferences of any
holders of capital stock of the Corporation ranking senior as to liquidation
rights to the Series A Preferred are fully met. If, upon any liquidation,
dissolution and winding up, the amount available for such payment to the holders
of Series A Preferred shall not be sufficient to pay in full the amounts payable
on the Series A Preferred, the holders of the Series A Preferred and any other
class or series of the Corporation's capital stock which may hereafter be
created having parity as to liquidation rights with the Series A Preferred shall
share in the distribution of the amount available in proportion to the
respective preferential amounts to which each is entitled. None of a
consolidation or merger of the Corporation with another corporation, a sale or
transfer of all or part of the Corporation's assets for cash, securities or
other property, or a reorganization of the Corporation shall be considered a
liquidation, dissolution or winding-up of the Corporation.
2
<PAGE>
4. Voting Rights. The holders of record of the Series A Preferred
--------------
shall not have any voting rights, except as otherwise provided herein or
required by law. So long as shares of Series A Preferred are outstanding,
without the approval (by vote or written consent, as provided by law) of the
holders of record of at least a majority of the then outstanding shares of
Series A Preferred, voting separately as a class, the Corporation shall not:
(a) alter or change the rights, preferences, privileges or
restrictions of shares of Series A Preferred so as to affect them adversely, or
(b) increase the authorized number of shares of Series A
Preferred or increase or decrease the par value of the Series A Preferred.
In the event the Corporation has failed to make any four
quarterly dividend payments on the Series A Preferred, the majority in interest
of the holders of record of the Series A Preferred shall have the right to elect
the minimum number of directors to the Board as would constitute a majority of
the Board at such time, to serve as directors until such accrued and unpaid
dividends shall have been paid in full.
5. Conversion Rights.
-----------------
(a) Following the expiration of six months after the Original
Issue Date, each share of Series A Preferred shall be convertible, at the option
of the holder of record thereof, into fully paid and nonassessable shares of the
Class A Common Stock. Each share of Series A Preferred shall be convertible into
the number of shares of Class A Common Stock determined by dividing (x) $10.00,
subject to Section 2(b), by (y) a divisor equal to $2.75, subject to adjustment
as provided in Section 6, (such divisor as so adjusted being, the "Conversion
Price").
(b) In order to exercise the conversion rights set forth herein,
a holder of record of Series A Preferred shall surrender the certificates or
certificates representing such shares, duly endorsed to the Corporation or in
blank, at the principal office of the Corporation or the Corporation's transfer
agent for its Class A Common Stock, or at such other office as the Corporation
may designate, and shall give written notice to the Corporation, in form
reasonably satisfactory to the Corporation, that states such holder elects to
convert the Series A Preferred or a specified portion thereof, and sets forth
the name or names in which the certificate or certificates for shares of Class A
Common Stock are to be issued (the "Conversion Notice"); provided, however,
nothing in this Certificate of Designations shall be deemed to permit any holder
of Series A Preferred to designate another person to be the holder of Class A
Common Stock issuable upon conversion of the Series A Preferred if the issuance
to such other person would violate Federal or state securities laws or any
agreement a holder of Series A Preferred has with the Corporation regarding
restrictions on transferability of any securities of the Corporation held by
such holder. As promptly as practicable after receipt of the Conversion Notice,
surrender of the certificate or certificates representing the Series A Preferred
3
<PAGE>
and payment by the holder of any applicable transfer or similar taxes, the
Corporation shall issue and deliver (i) a certificate or certificates for the
number of full shares of Class A Common Stock issuable upon conversion, in the
name or names and to the address or addresses specified in the Conversion
Notice, subject to any such restrictions on transferability, and (ii) a check in
payment for any fractional shares pursuant to Section 10. The Corporation shall
cancel the certificate or certificates for Series A Preferred upon the surrender
thereof and shall execute and deliver a new certificate for Series A Preferred,
representing the balance, if any, of the number of shares evidenced by such
certificate or certificates not so converted. Each Conversion Notice shall
constitute a contract between the holder of shares of Series A Preferred and the
Corporation, whereby the holder of such shares shall be deemed to subscribe for
the amount of Class A Common Stock which he shall be entitled to receive upon
such conversion and whereby the Corporation shall be deemed to agree that the
surrender of the certificate or certificates therefor shall constitute full
payment of such subscription for Class A Common Stock to be issued upon such
conversion.
(c) A conversion shall be deemed to have been effected at the
close of business on the date on which the Conversion Notice shall have been
received by the Corporation and the certificate or certificates for Series A
Preferred shall have been surrendered, whereupon the holder thereof shall cease
to be a stockholder with respect thereto and all rights whatsoever with respect
to such shares shall terminate (except the rights of the holder to receive
shares of Class A Common Stock and cash in respect of fractional shares and to
receive accrued and unpaid dividends under Section 2(b)), and the person or
persons in whose name any certificate or certificates for Class A Common Stock
are issuable upon such conversion shall be deemed to have become the holder of
record of the shares represented thereby on such date.
6. Adjustment of Conversion Price.
------------------------------
(a) Subject to the exceptions referred to in Section 6(g), in the
event the Corporation shall, at any time or from time to time after the date
hereof, sell any shares of Common Stock for a consideration per share less than
the Market Price of the Class A Common Stock (as defined in this Section 6(a))
on the date of the sale or issue any shares of Common Stock as a stock dividend
to the holders of Common Stock, or subdivide or combine the outstanding shares
of Common Stock into a greater or lesser number of shares (any such sale,
issuance, subdivision or combination being herein call a "Change of Shares"),
then, and thereafter upon each further Change of Shares, the Conversion Price in
effect immediately prior to such Change of Shares shall be changed to a price
(including any applicable fraction of a cent) determined by multiplying the
Conversion Price in effect immediately prior thereto by a fraction, the
numerator of which shall be the sum of the number of shares of Common Stock
outstanding immediately prior to the issuance of such additional shares and the
number of shares of Class A Common Stock which the aggregate consideration
received (determined as provided in subsection 6(e)(F) below) for the issuance
of such additional shares would purchase at the Market Price, and the
denominator of which shall be the sum of the number of shares of Common Stock
outstanding immediately after the issuance of such additional shares. Such
adjustment shall be made successively whenever such as issuance is made.
4
<PAGE>
Market Price of the Class A Common Stock shall mean (i) the
average closing bid price for 30 consecutive business days, ending within 15
days of the date of the event giving rise to and adjustment of the Conversion
Price (the "Event Date") of the Class A Common Stock as reported by the Nasdaq
Stock Market or (ii) the last reported sales price for 30 consecutive business
days, ending within 15 days of the Event Date on the primary exchange on which
the Class A Common Stock is traded, if the Class A Common Stock is traded on a
national securities exchange, including the Nasdaq National Market. If not so
traded, the Market Price shall mean the price determined in good faith by the
Board.
(b) In case of any reclassification, capital reorganization or
other change of outstanding shares of Common Stock, or in case of any
consolidation or merger of the Corporation with or into any other corporation
(other than a consolidation or merger in which the Corporation is the continuing
corporation and which does not result in any reclassification, capital
reorganization or other change of outstanding shares of Common Stock), or in
case of any sale or conveyance to another corporation of the property of the
Corporation as, or substantially as, an entirety (other than a sale/leaseback,
mortgage or other financing transaction), the Corporation shall cause effective
provision to be made so that each holder of Series A Preferred then outstanding
shall have the right thereafter, upon conversion of such Series A Preferred, to
purchase the kind and number of shares of stock or other securities or property
(including cash) receivable upon such reclassification, capital reorganization
or other change, consolidation, merger, sale or conveyance by a holder of the
number of shares of Common Stock that might have been purchased upon conversion
of such Series A Preferred immediately prior to such reclassification, capital
reorganization or other change, consolidation, merger, sale or conveyance. Any
such provision shall include provision for adjustments that shall be as nearly
equivalent as may be practicable to the adjustments provided for in this Section
6. The Corporation shall not effect any such consolidation, merger, sale or
conveyance unless prior to or simultaneously with the consummation thereof, the
successor (if other than the Corporation) resulting from such consolidation or
merger or the corporation purchasing assets or other appropriate corporation or
entity shall assume, by written instrument executed and delivered to each
registered holder of the Series A Preferred, the obligation to deliver to such
holder such shares of stock, securities or assets as, in accordance with the
foregoing provisions, such holder may be entitled to purchase and the other
obligations under this Agreement. The foregoing provisions shall similarly apply
to successive reclassifications, capital reorganizations and other changes of
outstanding shares of Common Stock and to successive consolidations, mergers,
sales or conveyances.
(c) Irrespective of any adjustments or changes in the Conversion
Price, the certificates representing the Series A Preferred theretofore and
thereafter issued shall continue to be in the same form as when the same were
originally issued.
5
<PAGE>
(d) After each adjustment of the Conversion Price pursuant to
this Section 6, the Corporation will promptly prepare a certificate signed by
the Chairman or President, and by the Treasurer or an Assistant Treasurer or the
Secretary or an Assistant Secretary, of the Corporation setting forth the
Conversion Price as so adjusted, and a brief statement of the facts accounting
for such adjustment. The Company will promptly cause a brief summary thereof to
be sent by ordinary first class mail to D.H. Blair Investment Banking Corp. and
to each registered holder of Series A Preferred at his last address as it shall
appear on the registry books of the Corporation or its transfer agent. No
failure to mail such notice nor any defect therein or in the mailing thereof
shall affect the validity thereof except as to the holder to whom the
Corporation failed to mail such notice, or except as to the holder whose notice
was defective. The affidavit of the Secretary or an Assistant Secretary of the
Corporation that such notice has been mailed shall, in the absence of fraud, be
prima facie evidence of the facts stated therein.
(e) For purposes of Section 6(a) hereof, the following provisions
A. to F. shall also be applicable.
A. The number of shares of Common Stock outstanding at any given
time shall include shares of Common Stock owned or held by or for the account of
the Corporation and the sale or issuance of such treasury shares or the
distribution of any such treasury shares shall not be considered a Change of
Shares for purposes of said section.
B. No adjustment of the Conversion Price shall be made unless
such adjustment would require an increase or decrease of at least $.10 in such
price; provided that any adjustments, which by reason of this clause B. are not
required to be made, shall be carried forward and shall be made at the time of
and together with the next subsequent adjustment, which, together with any
adjustment(s) so carried forward, shall require an increase or decrease of at
least $.10 in the Conversion Price then in effect hereunder.
C. In case of (1) the sale by the Corporation for cash or any
rights or warrants to subscribe for or purchase or any options for the purchase
of Common Stock or any securities convertible into or exchangeable for Common
Stock without the payment of any further consideration other than cash, if any
(such convertible or exchangeable securities being herein called "Convertible
Securities"), or (2) the issuance by the Corporation, without the receipt by the
Corporation of any consideration therefor, of any rights or warrants to
subscribe for or purchase, or any options for the purchase of, Common Stock or
Convertible Securities, in each case, if (and only if) the consideration payable
to the Corporation upon the exercise of such rights, warrants or options shall
consist of cash, whether or not such rights, warrants or options, or the right
to convert or exchange such Convertible Securities, are immediately exercisable,
and the price per share for which Common Stock is issuable upon the exercise of
such rights, warrants or options or upon the conversion or exchange of such
Convertible Securities (determined by dividing (x) the minimum aggregate
consideration payable to the Corporation upon the exercise of such rights,
warrants or options, plus the consideration received by the Corporation for the
issuance or sale of such rights, warrants or options, plus, in the case of such
Convertible Securities, the minimum aggregate amount of
6
<PAGE>
Convertible Securities, the minimum aggregate amount of additional
consideration, if any, other than such Convertible Securities, payable upon the
conversion or exchange thereof, by (y) the total maximum number of shares of
Common Stock issuable upon the exercise of such rights, warrants or options or
upon the conversion or exchange of such Convertible Securities issuable upon the
exercise of such rights, warrants or options) is less than the Market Price of
the Class A Common stock on the date of the issuance or sale of such rights,
warrants or options, then the total maximum number of shares of Common Stock
issuable upon the exercise of such rights, warrants or options or upon the
conversion or exchange of such Convertible Securities (as of the date of the
issuance or sale of such rights, warrants or options) shall be deemed to be
outstanding shares of Common Stock for purposes of Section 6(a) hereof and shall
be deemed to have been sold for cash in an amount equal to such price per share.
D. In case of the sale by the Corporation for cash of any
Convertible Securities, whether or not the right of conversion or exchange
thereunder is immediately exercisable, and the price per share for which Common
Stock is issuable upon the conversion or exchange of such Convertible Securities
(determined by dividing (x) the total amount of consideration received by the
Corporation for the sale of such Convertible Securities, plus the minimum
aggregate amount of additional consideration, if any, other than such
Convertible Securities, payable upon the conversion or exchange thereof, by (y)
the total maximum number of shares of Common Stock issuable upon the conversion
or exchange or such Convertible Securities) is less than the Market Price of the
Class A Common Stock on the date of the sale of such Convertible Securities,
then the total maximum number of shares of Common Stock issuable upon the
conversion or exchange of such Convertible Securities (as of the date of the
sale of such Convertible Securities) shall be deemed to be outstanding shares of
Common Stock for purposes of Section 6(a) hereof, and shall be deemed to have
been sold for cash in an amount equal to such price per share.
E. In case the Corporation shall modify the rights of conversion,
exchange or exercise of any of the securities referred to in C. above, or any
other securities of the Corporation convertible, exchangeable or exercisable for
shares of Common Stock, for any reason other than an event that would require
adjustment to prevent dilution, so that the consideration per share received by
the Corporation after such modification is less than the Market Price of the
Class A Common Stock on the date prior to such modification, the Conversion
Price to be in effect after such modification shall be determined by multiplying
the Conversion Price in effect immediately prior to such event by a fraction, of
which the numerator shall be the sum of the number of shares of Common Stock
outstanding on the date immediately prior to such modification plus the number
of shares of Common Stock which the aggregate consideration receivable by the
Corporation for the securities affected by the modification would purchase at
the Market Price of the Class A Common Stock and of which the denominator shall
be the number of shares of Common Stock outstanding on such date plus the number
of shares of Common Stock to be issued upon conversion, exchange or exercise of
the modified securities at the modified rate. Such adjustment shall become
effective as of the date upon which such modification shall take effect. On the
expiration of any such right, warrant or option or the termination of any such
right to convert or exchange any such Convertible Securities referred to in
7
<PAGE>
Paragraph C or D above, the Conversion Price then in effect hereunder shall
forthwith be readjusted to such Conversion Price as would have obtained (a) had
the adjustments made upon the issuance or sale of such rights, warrants, options
or Convertible Securities been made upon the basis of the issuance of only the
number of shares of Common Stock theretofore actually delivered (and the total
consideration received therefor) upon the exercise of such rights, warrants or
options or upon the conversion or exchange of such Convertible Securities and
(b) had adjustments been made on the basis of the Conversion Price as adjusted
under clause (a) for all transactions (which would have affected such adjusted
Conversion Price) made after the issuance or sale of such rights, warrants,
options or Convertible Securities.
F. In case of the sale for cash or any shares of Common Stock,
any Convertible Securities, any rights or warrants to subscribe for or purchase
or any options for the purchase of Common Stock or Convertible Securities, the
consideration received by the Corporation therefore shall be deemed to be the
gross sales price therefor without deducting therefrom any expense paid or
incurred by the Corporation or any underwriting discounts or commissions or
concessions paid or allowed by the Corporation in connection therewith.
(f) No adjustment to the Conversion Price will be made, however,
(i) upon the exercise of any of the options presently outstanding
under the Corporation's Stock Option Plans (the "Plans") for officers,
directors, consultants and certain other key personnel of the Corporation; or
(ii) upon the issuance or exercise of any other securities which
may hereafter be granted or exercised under the Plans or under any other
employee benefit plan of the Corporation; or
(iii) upon the sale or conversion of the Series A Preferred; or
(iv) upon the issuance or sale of Common Stock or Convertible
Securities upon the exercise of any rights or warrants to subscribe for or
purchase or any options for the purchase of Common Stock or Convertible
Securities, whether or not such rights, warrants or options were outstanding on
the date of the original sale of the conversion of the Series A Preferred or
were thereafter issued or sold; or
(v) upon the issuance or sale of Common Stock upon conversion or
exchange of any Convertible Securities, whether or not any adjustment in the
Purchase Price was made or required to be made upon the issuance or sale of such
Convertible Securities and whether or not such Convertible Securities were
outstanding on the date of the original sale of the Series A Preferred or were
thereafter issued or sold.
(g) As used in this Section 6, the term "Common Stock" shall mean
and include the Corporation's Common Stock authorized on the Original Issue Date
and shall also include any capital stock of any class of the Corporation
thereafter authorized which shall not be limited to a fixed sum or percentage in
8
<PAGE>
respect of the rights of the holders thereof to participate in dividends and in
the distribution of assets upon the voluntary liquidation, dissolution or
winding up of the Corporation; provided, however, that the shares issuable upon
conversion of the Series A Preferred shall include only shares of such class
designated in the Corporation's Certificate of Incorporation as Class A Common
Stock on the Original Issue Date or (i) in the case of any reclassification,
change, consolidation, merger, sale or conveyance of the character referred to
in Section 6(b) hereof, the stock, securities or property provided for in such
section or (ii) in the case of any reclassification or change in the outstanding
shares of Class A Common Stock issuable upon the conversion of the Series A
Preferred as a result of a subdivision or combination or consisting of a change
in par value, or from par value to no par value, or from no par value to par
value, such shares of Common Stock as so reclassified or changed.
(h) Any determination as to whether an adjustment in the
Conversion Price in effect is required pursuant to this Section 6, or as to the
amount of any such adjustment, if required, shall be binding upon the holders of
the Series A Preferred and the Corporation if made in good faith by the Board.
(i) If and whenever the Corporation shall grant to the holders of
Common Stock, as such, rights or warrants to subscribe for or to purchase, or
any options for the purchase of, Common Stock or securities convertible into or
exchangeable for or carrying a right, warrant or option to purchase Common
Stock, the Corporation shall concurrently therewith grant to each registered
holder as of the record date for such transaction of the Series A Preferred then
outstanding, the rights, warrants or options to which each such registered
holder would have been entitled if, on the record date used to determine the
stockholders entitled to the rights, warrants or options being granted by the
Corporation, the registered holder was the holder of record of the number of
whole shares of Class A Common Stock then issuable upon conversion of the Series
A Preferred (assuming, for purposes of this Section 6(i), that conversion of the
Series A Preferred is permissible during periods prior to the expiration of six
months after the Original Issue Date). Such grant by the Corporation to the
holders of the Series A Preferred shall be in lieu of any adjustment which
otherwise might be called for pursuant to this Section 6.
7. Reservation of Shares; Payment of Taxes.
---------------------------------------
(a) The Corporation covenants that it will at all times reserve
and keep available out of its authorized Common Stock, solely for the purpose of
issue upon conversion of the Series A Preferred, such number of shares of Common
Stock as shall then be issuable upon the conversion of all outstanding Series A
Preferred. The Corporation covenants that all shares of Common Stock which shall
be issuable upon conversion of the Series A Preferred shall, at the time of
delivery, be duly and validly issued, fully paid, nonassessable and free from
all taxes, liens and charges with respect to the issue thereof (other than those
which the Corporation shall promptly pay or discharge, subject to Section 7(b)
below).
9
<PAGE>
(b) The Corporation shall pay all documentary, stamp or similar
taxes and other governmental charges that may be imposed with respect to the
issuance of the Series A Preferred, or the issuance or delivery of any shares of
Common Stock upon conversion of the Series A Preferred; provided, however, that,
if the shares of Common Stock are to be delivered in a name other than the name
of the holder of record of the certificate representing any Series A Preferred
being converted, then no such delivery shall be made unless the person
requesting the same has paid to the Corporation the amount of transfer taxes or
charges incident thereto, if any.
8. Redemption.
----------
(a) The Series A Preferred shall be subject to redemption, in
whole or in part, on any date specified by the Company (the "Redemption Date")
after the fifth anniversary of the Original Issue Date at a price per share
equal to the Stated Value plus accrued but unpaid dividends (the "Redemption
Price") provided that, as of the Redemption Date, the Market Price of the Class
A Common Stock is at least 200% of the Market Price of the Class A Common Stock
as of the Original Issue Date. If a dividend payment on the Series A Preferred
is past due, the Corporation may redeem not less than all of the Series A
Preferred outstanding.
(b) Notice of redemption (the "Redemption Notice") shall be given
by the Corporation to the holders of record of the shares to be redeemed, at
their respective addresses on the books of the Corporation, not less than 10 nor
more than 60 days prior to the Redemption Date. If the Redemption Notice shall
have been duly mailed and if, on or before the Redemption Date, all funds
necessary for such redemption shall have been set aside by the Corporation in
trust for the account of the holders of the Series A Preferred to be redeemed,
so as to be available therefor, then, from and after the giving of the
Redemption Notice, notwithstanding that any certificate for shares of Series A
Preferred so called for redemption shall not have been surrendered for
cancellation, all rights in or with respect to such shares shall terminate
except the right of the holder to (i) receive the Redemption Price, without
interest, upon compliance with the procedures specified in the Redemption
Notice, or (ii) convert such shares of Series A Preferred into Class A Common
Stock pursuant to Section 6 hereof, not later than the fourth business day
preceding the Redemption Date.
9. Status of Reacquired Shares. The shares of Series A Preferred which
---------------------------
have been issued and reacquired in any manner by the Corporation shall have the
status of authorized and unissued shares of Preferred Stock and may be
reclassified and reissued as a part of a new series of Preferred Stock to be
created by resolution or resolutions of the Board.
10. No Fractional Shares. The Corporation shall not be required to
---------------------
issue fractional shares of Common Stock upon any conversion of Series A
Preferred but shall pay in lieu thereof, as soon as practicable after the date
the Series A Preferred is surrendered for conversion in accordance with the
provisions of this Certificate of Designations, an amount in cash equal to the
same fraction of the Market Price of a full share of Common Stock.
10
<PAGE>
11. Determination of the Board. Whenever this Certificate of
-----------------------------
Designations requires determination to be made by the Board, such determination
shall be conclusive and shall be set forth in Board resolution.
12. Notices. Any notice required by these provisions to be given to
-------
the holders of Series A Preferred shall be deemed given on the second business
day after mailing, first class mail, postage prepaid, or on the day of delivery
if sent by overnight courier, in each instance in an envelope address to each
holder of record of Series A Preferred at such holder's address appearing on the
books of the Corporation.
RESOLVED, FURTHER, that the President and the Secretary of the
Corporation be, and they hereby are, authorized and directed to prepare and file
a Certificate of Designations in accordance with this resolution and as required
by law.
IN WITNESS WHEREOF, the undersigned has executed this Certificate of
Designations on behalf of Linda's Diversified Holdings Inc. and does affirm the
foregoing as true under the penalties of perjury this 16th day of December,
1996.
LINDA'S DIVERSIFIED HOLDINGS INC.
By: /S/
-----------------------------
Richard Goldberger
Chairman of the Board
11
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration Statement
of Linda's Diversified Holdings Inc. on Form S-3 (File No. 33-76422), Form S-3
(File No. 333-08711), Form S-8 (File No. 333-14095), and Form S-8 (File No. 333-
14099) of our report dated March 6, 1997 on the consolidated financial
statements of Linda's Diversified Holdings Inc. and Subsidiaries, which report
is included in this Annual Report on Form 10-KSB.
/s/ ROTHSTEIN, KASS & COMPANY, P.C.
Roseland, New Jersey
April 15, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996 AND THE BALANCE
SHEET FOR THE YEAR THEN ENDED, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,331,582
<SECURITIES> 0
<RECEIVABLES> 42,691
<ALLOWANCES> 0
<INVENTORY> 15,065
<CURRENT-ASSETS> 1,483,387
<PP&E> 607,230
<DEPRECIATION> 174,941
<TOTAL-ASSETS> 2,287,553
<CURRENT-LIABILITIES> 442,880
<BONDS> 0
0
120
<COMMON> 2,865
<OTHER-SE> 1,796,460
<TOTAL-LIABILITY-AND-EQUITY> 1,799,445
<SALES> 1,148,064
<TOTAL-REVENUES> 1,300,000
<CGS> 473,355
<TOTAL-COSTS> 3,997,882
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,169
<INCOME-PRETAX> (3,117,485)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,117,485)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,117,485)
<EPS-PRIMARY> (1.44)
<EPS-DILUTED> (1.44)
</TABLE>
