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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 12, 1997
REGISTRATION NO. 333-21575
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3 TO
FORM SB-2/A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
MIKE'S ORIGINAL, INC.
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
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<S> <C> <C>
DELAWARE 2024 11-3214529
(STATE OR JURISDICTION (PRIMARY STANDARD INDUSTRIAL (IRS EMPLOYER
OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
MICHAEL ROSEN
CHIEF EXECUTIVE OFFICER
MIKE'S ORIGINAL, INC.
131 JERICHO TURNPIKE 131 JERICHO TURNPIKE
JERICHO, NEW YORK 11753 JERICHO, NEW YORK 11753
(516) 334-8500 (516)334-8500
ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE (NAME, ADDRESS AND TELEPHONE NUMBER OF
OFFICES AND PRINCIPAL PLACE OF BUSINESS) AGENT FOR SERVICE)
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Copies to:
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<S> <C>
ADAM S. ROSENBERG, ESQ. MICHAEL BECKMAN, ESQ.
BLAU, KRAMER, WACTLAR & LIEBERMAN, P.C. BECKMAN & MILLMAN, P.C.
100 JERICHO QUADRANGLE, SUITE 225 116 JOHN STREET
JERICHO, NEW YORK 11753 NEW YORK, NEW YORK 10038
(516) 822-4820 (212) 227-6777
(516) 822-4824 FAX (212) 227-1486 FAX
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box [X].
CALCULATION OF REGISTRATION FEE
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================================================================================================================
PROPOSED MAXIMUM PROPOSED MAXIMUM
OFFERING PRICE AGGREGATE
TITLE OF EACH CLASS OF AMOUNT TO BE PER OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) SECURITY PRICE (1) REGISTRATION FEE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.001 par value(2)........ 776,250 $6.00 $4,657,500 $1,412
- ----------------------------------------------------------------------------------------------------------------
Class A Warrants(3)..................... 1,006,250 $.20 $201,250 $61
- ----------------------------------------------------------------------------------------------------------------
Common Stock, $.001 par value,
underlying Class A Warrants(4)(9)..... 1,006,250 $6.00 $6,037,500 $1,830
- ----------------------------------------------------------------------------------------------------------------
Representative's Securities............. 100,000 $.001 $250 --
- ----------------------------------------------------------------------------------------------------------------
Common Stock, $.001 par value contained
in Representative's
Securities(6)(9)...................... 67,500 $7.30 $492,750 $149
- ----------------------------------------------------------------------------------------------------------------
Class A Warrants contained in
Representative's Securities(6)(9)..... 87,500 $.26 $22,750 $7
- ----------------------------------------------------------------------------------------------------------------
Common Stock, $.001 par value underlying
Class A Warrants contained in
Representative's Securities(7)(9)..... 87,500 $7.30 $638,750 $194
- ----------------------------------------------------------------------------------------------------------------
Common Stock, $.001 par value, owned by
Selling Securityholders(8)(10)........ 1,735,275 $6.00 $10,411,650 $3,155
- ----------------------------------------------------------------------------------------------------------------
Total................................... -- $22,462,400 $6,807
================================================================================================================
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457 under the Securities Act of 1933, as amended. $6,836 has been
previously paid.
(2) Includes up to 101,250 shares of Common Stock which may be purchased by the
Representative to cover over-allotments, if any.
(3) Includes up to 131, 250 redeemable Common Stock Class A Purchase Warrants
which may be purchased by the Representative to cover over-allotments, if
any.
(4) Reserved for issuance upon exercise of the Common Stock Purchase Warrants.
(5) Issued to the Representative entitling the Representative to purchase one
share of Common Stock ("Representative's Stock Warrants") and one Common
Stock Class A Purchase Warrant ("Representative's Warrants") for each ten
of such securities sold in the offering.
(6) Reserved for issuance upon exercise of Representative's Securities.
(7) Reserved for issuance upon exercise of the Warrants underlying the
Representative's Warrants.
(8) Represents shares of Common Stock offered by Selling Securityholders.
(9) Pursuant to Rule 416, there is also being registered such additional
securities as may become issuable pursuant to the anti-dilution provisions
of the Warrants.
(10) Pursuant to Rule 415, these securities may be offered on a continuing or
delayed basis in the future.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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MIKE'S ORIGINAL, INC.
CROSS REFERENCE SHEET
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REGISTRATION STATEMENT
ITEM NUMBER AND HEADING LOCATION IN PROSPECTUS
---------------------------------------------------- ----------------------------------
<C> <S> <C>
1. Front of Registration Statement and Outside Front
Cover Page of Prospectus.......................... Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus........................................ Inside Front and Outside Cover
Pages
3. Summary Information and Risk Factors................ Prospectus Summary; The Company;
Risk Factors
4. Use of Proceeds..................................... Use of Proceeds
5. Determination of Offering Price..................... Cover Page; Risk Factors;
Underwriting
6. Dilution............................................ Dilution
7. Selling Security Holders............................ Selling Securityholders
8. Plan of Distribution................................ Underwriting; Risk Factors;
Selling Securityholders
9. Legal Proceedings................................... Business -- Legal Matters
10. Directors, Executive Officers, Promoters and Control
Persons........................................... Management
11. Security Ownership of Certain Beneficial Owners and
Management........................................ Principal Stockholders
12. Description of Securities........................... Description of Securities
13. Interests of Named Experts and Counsel.............. Legal Matters; Experts
14. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities.................... Management
15. Organization within Last Five Years................. Business; Certain Transactions
16. Description of Business............................. The Company; Business
17. Management's Discussion and Analysis or Plan of
Operation......................................... Management's Discussion and
Analysis of Financial Condition
and Results of Operations
18. Description of Property............................. Business -- Property
19. Certain Relationships and Related Transactions...... Certain Transactions
20. Market for Common Equity and Related Stockholder
Matters........................................... Cover Page; Principal
Stockholders; Description of
Securities; Risk Factors
21. Executive Compensation.............................. Management
22. Financial Statements................................ Financial Statements
23. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............... Change in Accountants
</TABLE>
<PAGE> 3
INFORMATION CONTAINED HEREIN IS SUBJECTED TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED MAY 12, 1997
PRELIMINARY PROSPECTUS
MIKE'S ORIGINAL, INC.
675,000 SHARES OF COMMON STOCK AND
875,000 REDEEMABLE COMMON STOCK PURCHASE WARRANTS
Mike's Original, Inc. (the "Company"), a Delaware corporation, is offering
675,000 shares of Common Stock, $.001 par value (the "Common Stock") at a price
of $6.00 per share, and 875,000 Redeemable Common Stock Class A Purchase
Warrants (the "Warrants or "Class A Warrants") at a price of $.20 per Warrant
each of which, upon exercise, entitles the owner thereof to purchase one share
of Common Stock during the three years following the date hereof at a price of
$6.00 per share. The Common Stock and the Warrants offered hereby (collectively
the "Securities") will be separately tradeable immediately upon issuance and may
be purchased separately. The Warrants are redeemable by the Company, for $.01
per Warrant, on not less than thirty (30) nor more than sixty (60) days' written
notice if the average closing price per share of Common Stock is at least $12.00
per share during a period of twenty (20) consecutive trading days ending not
earlier than three (3) days on the date the Warrants are called for redemption.
Any redemption of the Warrant during the one year period commencing on the date
of this Prospectus shall require the consent of IAR Securities Corp. (the
"Representative"), as representative of the underwriters (the "Underwriters").
See "Description of Securities."
Prior to this offering, there has been no public market for the Common Stock
or Warrants. The price of the Common Stock and exercise price of the Warrants
have been determined by negotiations between the Company and IAR Securities
Corp. For additional information regarding the factors considered in determining
the initial public offering prices, see "Underwriting."
The Company's Common Stock and the Warrants have been approved for listing
on the OTC Bulletin Board. There can be no assurance that an active trading
market will develop in these securities. See "Risk Factors."
The registration statement of which this Prospectus forms a part also covers
the offering of an aggregate of 461,250 shares of Common Stock (the "Second
Private Placement Shares") owned by certain private placement investors
(collectively referred to as the "Second Private Placement Lenders"), and an
aggregate of 1,274,025 shares of Common Stock which are owned by other selling
securityholders (the "Investors", and together with the Second Private Placement
Lenders the "Selling Securityholders"). See "Selling Securityholders." The
shares of Common Stock owned by certain of the Selling Security Holders and
registered hereunder may not be sold or transferred for twenty-four (24) months
from the date of this Prospectus, subject to earlier release at the sole
discretion of the Representative. Pursuant to Rule 415 of the Securities Act of
1933, as amended, the shares of Common Stock owned by the Selling
Securityholders may be offered on a continuing or delayed basis in the future.
See "Selling Securityholders" and "Description of Securities."
------------------------
AN INVESTMENT IN THE SECURITIES OFFERED HEREBY INVOLVES A HIGH DEGREE OF
RISK AND IMMEDIATE SUBSTANTIAL DILUTION IN THE SECURITIES OFFERED HEREBY. SEE
"RISK FACTORS" ON PAGE 8 AND "DILUTION" ON PAGE 15.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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=========================================================================================================
UNDERWRITING DISCOUNTS AND
PRICE TO PUBLIC COMMISSIONS(1) PROCEEDS TO COMPANY(2)
<S> <C> <C> <C>
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Per Share(3)............... $6.00 $.60 $5.40
- ---------------------------------------------------------------------------------------------------------
Per Warrant................ $.20 $.02 $.18
- ---------------------------------------------------------------------------------------------------------
Total...................... $4,225,000 $422,500 $3,802,500
=========================================================================================================
</TABLE>
(1) Does not include additional compensation to be received by the
Representative in the form of (a) a non-accountable expense allowance of
three percent of the gross proceeds of this offering ($.18 per share of
Common Stock and $.006 per Warrant) and (ii) a security, purchasable at a
nominal price, giving it the right to acquire 67,500 shares of Common Stock
at an initial exercise price of $7.30 per share (the "Representative's
Stock") and 87,500 Warrants at an initial exercise price of $.26 per Warrant
to purchase shares of Common Stock at $7.30 per share (the "Representative's
Warrants," and collectively with the Representative's Stock, the
"Representative's Securities"). In addition, the Company has agreed to
indemnify the Underwriters against certain liabilities, including
liabilities under the Securities Act of 1933, as amended (the "Act") See
"Underwriting."
(2) Before deducting other offering expenses payable by the Company estimated at
$430,000, including the Representative's non-accountable expense allowance
in the amount of $126,750. See "Use of Proceeds" and "Underwriting."
(3) For the purpose of covering over-allotments, if any, the Company has granted
to the Representative an option, exercisable within forty-five (45) days of
the date hereof, to purchase an additional 101,250 shares of Common Stock
and 131,250 Warrants upon the same terms and conditions as the securities
offered hereby. If such over-allotment option is exercised in full, the
total Price to Public will be $4,858,750, the total Underwriting Discounts
and Commissions will be $485,875 and the total Proceeds to Company will be
$4,372,875. See "Underwriting."
The securities are offered, subject to prior sale, when, as and if accepted
by the Representative named herein and subject to approval of certain legal
matters by counsel for the Representative. It is expected that the delivery of
the certificates representing Common Stock and Class A Warrants will be made on
or about , 1997 at the offices of IAR Securities Corp.
IAR SECURITIES CORP. MILLENNIUM SECURITIES CORP.
The date of this Prospectus is , 1997
<PAGE> 4
[PHOTOGRAPHS OF THE COMPANY'S PRODUCTS, PACKAGING AND ADVERTISING]
2
<PAGE> 5
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE EFFECT THE PRICE OF THE COMMON STOCK
AND/OR THE CLASS A WARRANTS, INCLUDING OVER-ALLOTMENT AND OTHER STABILIZING
TRANSACTIONS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
The Company holds the registered trademarks and service marks under the
names "Mike's Original(R)", "GRAMWICH(R)", and "Graham Cracker Delight(R)". The
Company has common law trademarks for "Strawberry Fantasy(TM)" and "Chocolate
Tidbits(TM)". All trademarks and service marks appearing herein that do not
relate to the Company's products are the property of their respective holders.
The Company intends to furnish its shareholders and holders of Class A
Warrants with annual reports containing audited financial statements, examined
by an independent public accounting firm, and such interim reports as it may
determine to furnish or as may be required by law.
3
<PAGE> 6
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. Unless otherwise indicated, the information in
this Prospectus does not give effect to the exercise of the over-allotment
option described under "Underwriting" or the exercise of any other options,
warrants or other convertible securities. All references herein to the Company
include its predecessor unless the context otherwise requires. Except where
otherwise indicated, this Prospectus gives effect to the .153846-for-1 reverse
stock split of the Common Stock effective in June 1996 and the .667-for-1
reverse stock split of the Common Stock effective in February 1997. Except for
historical information contained in this Prospectus, the matters discussed are
forward looking statements that involve risks and uncertainties. Among the
factors that could cause actual results to differ materially are the following:
the effect of business and economic conditions; the impact of competitive
products and pricing; capacity and supply constraints or difficulties; product
development, commercialization or technological difficulties; and the regulatory
and trade environment.
THE COMPANY
Mike's Original, Inc. (the "Company") markets, sells and distributes Mike's
Original(R) Cheesecake Ice Cream, an innovative all natural blend of
super-premium ice cream with cheesecake ingredients. This product line is
offered in a variety of flavors mainly to supermarkets and grocery stores and
also, to a lesser extent, to convenience stores, food service outlets and
warehouse clubs. The Company's products are presently sold in approximately
fifteen (15) states, including New York, California, Pennsylvania and New
Jersey, with sales generally concentrated on the East and West coasts of the
United States. The Company believes, based on an internal study, that it
incentivizes retailers to continue purchasing its products through a pricing
strategy designed to provide retailers with a higher retail profit per linear
foot as compared to other competitive products based on the suggested retail
price.
In October 1995, the Company entered into an agreement with the Kraft Pizza
Company ("Kraft-Pizza"), formerly Tombstone Pizza Corporation, a division of
Philip Morris Corporation, for the exclusive distribution of the Company's
products for the Northeastern and Western regions of the United States (the
"Kraft-Pizza Agreement"). The Kraft-Pizza Agreement provides the Company's
products with the opportunity to gain access to the thousands of existing retail
outlets already buying Tombstone Pizza, together with the use of Kraft-Pizza's
commission sales force to oversee the sales and in-store presentation of the
Company's products.
In April 1996, the Company entered into an agreement with Kraft Foods, Inc.
("Kraft Military"), also a division of Philip Morris Corporation, to represent
the Company in the sale of its products to military facilities throughout the
world (the "Kraft Military Agreement"). Military contracts exist with DeCA
(Defense Commissary Agency) and sales to the military commenced in the third
quarter of 1996.
Since October 1996, the Company has restructured its management. In this
regard, Michael Rosen has replaced Daniel Kelly as President, Mr. Kelly having
resigned in September 1996. The Company also has hired a Vice President of Sales
and Marketing and a Vice President -- Finance, and has retained two frozen food
and ice cream consultants with a combined fifty years of experience in the sales
and marketing of ice cream. These persons have redirected the Company's selling
efforts to substantially increase sales in the approximately 3,500 retail
outlets selling the Company's products and to expand market penetration on the
East and West coasts into the institutional and food service segments. By
concentrating on existing locations and segments requiring limited up-front
fees, the Company intends to substantially reduce one of the major costs
associated with its prior operations. The Company currently has six (6)
employees.
Net sales for the year ended December 31, 1996 were approximately
$2,392,000, an increase of 3% from the previous nine (9) month period ended
December 31, 1995 and a decrease of 8% from the twelve (12) month period ended
December 31, 1995. The increase as compared to the shorter period was
significantly reduced, and the decrease as compared to the prior twelve (12)
month period was, in each case, because of an initial build-up of inventory by
Kraft-Pizza in the fourth quarter of calendar 1995 which reduced sales to
Kraft-Pizza in 1996, an unusually cool summer in the Northeast during 1996, a
temporary work stoppage at
4
<PAGE> 7
the primary facility which manufactures the Company's products and the
withdrawal by the Company from certain test markets which proved to be
unprofitable. The Company's limited operating resources to date also has
prevented the Company's participation in certain discount promotions and
in-store programs which has caused continuing reduced sales by a reduction in
reorders throughout its distribution network. The proceeds from this offering
should enable the Company to substantially increase sales in its existing retail
outlets through participation in these programs. The Company's products are
currently manufactured by one independent facility located in Buffalo, New York,
which has exclusive East coast manufacturing rights for the Company's products.
Upon completion of this offering, the Company may use additional manufacturing
facilities as well as re-establish its relationships with former manufacturers
of its products on the West coast.
The Company was incorporated in New York in March 1993 and reincorporated
in Delaware in May 1994. It maintains its principal offices at 131 Jericho
Turnpike, Jericho, New York 11753 and its telephone number is (516) 334-8500.
SEE "RISK FACTORS", "MANAGEMENT" AND "CERTAIN TRANSACTIONS" FOR A
DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN EVALUATING THE
COMPANY AND ITS BUSINESS.
5
<PAGE> 8
THE OFFERING
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Securities Offered by the Company(1)
Common Stock............................... 675,000 shares
Class A Warrants........................... 875,000 warrants
Price Per Share of Common Stock.............. $6.00
Price Per Warrant............................ $0.20
Shares of Common Stock Outstanding After
Offering(2)(3)............................. 3,191,622 Shares
Use of Proceeds.............................. For repayment of notes issued in a private
placement and other indebtedness, marketing
expenses, and for working capital and
general corporate purposes. See "Use of
Proceeds."
Proposed OTC Bulletin Board Symbols(4)
Common Stock............................... MIKS
Warrants................................... MIKSW
Risk Factors................................. Purchase of securities being offered hereby
involves a significant degree of risk,
including intense competition, rapid
growth, and dependence on key personnel and
major distributors, among others. See "Risk
Factors."
</TABLE>
- ---------------
(1) Does not include (a) 461,250 Second Private Placement Shares offered by
Selling Securityholders, which securities were acquired in connection with a
private placement financing of the Company from June through September 1996
and (b) 1,274,025 shares of Common Stock owned by the Investors. See
"Selling Securityholders."
(2) Assumes no exercise of: (i) the Representative's over-allotment option to
purchase up to 101,250 shares of Common Stock and 131,250 Class A Warrants;
(ii) the Class A Warrants offered hereby; (iii) the Representative's
Purchase Option to purchase up to 67,500 shares of Common Stock and 87,500
Class A Warrants; (iv) the Class A Warrants purchasable by the
Representative upon exercise of the Representative's Purchase Option; (v)
outstanding options under the Company's 1995 Long Term Incentive Plan; and
(vi) outstanding options under the Company's 1996 Non-Qualified Stock Option
Plan. Gives effect to conversion of debt and accrued interest into an
aggregate of 306,981 shares of Common Stock, which occurred in April 1997
and the issuance of 317,000 shares of Common Stock in March, April and May
1997. See "Description of Securities", "Underwriting" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
(3) See "Dilution."
(4) Although the Company's Common Stock and Class A Warrants have been approved
for listing on the OTC Bulletin Board, there can be no assurance that the
Company will be able to continue to meet the requirements for continued
quotation or that a public trading market will develop or be sustained. See
"Risk Factors -- Absence of Public Market; Negotiated Offering Price."
6
<PAGE> 9
SUMMARY FINANCIAL INFORMATION
The following summary financial information concerning the Company has been
derived from the financial statements included elsewhere in this Prospectus and
should be read in conjunction with such financial statements and the notes
thereto. See "Financial Statements."
BALANCE SHEET DATA:
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<CAPTION>
DECEMBER 31, DECEMBER 31, MARCH 31,
1996 1995 1995
------------ ------------ ---------
<S> <C> <C> <C>
Total assets......................................... $ 443,232 $ 400,014 $ 555,132
Current liabilities.................................. 2,897,727 1,901,644 704,978
Long-term liabilities net of current portion(1)...... 541,916 255,722 288,333
Stockholders' deficit................................ (2,996,411) (1,757,352) (438,179)
</TABLE>
STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
FISCAL
FISCAL YEAR NINE MONTHS YEAR
ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1996 1995 1995
------------ ------------ ----------
<S> <C> <C> <C>
Net sales.......................................... $ 2,392,258 $ 2,312,144 $1,086,106
Net loss........................................... (4,050,547)(2) (1,614,858) (719,380)
Loss per Common Share(3)........................... $(1.64) $(0.74) $(0.43)
Weighted Average Common Shares Outstanding(3)...... 2,473,745 2,193,037 1,667,408
</TABLE>
- ---------------
(1) Includes long term portion of notes to related parties with the related
accrued interest, capital lease obligations and certain expense accruals not
currently due.
(2) Includes approximately $1,400,000 of non-cash compensation attributable to
the issuances of stock for professional services rendered to the Company and
consulting fees to related parties attributable to stock options and
contractual obligations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
(3) As adjusted to give effect to a .153846-for-1 reverse stock split effected
in June 1996 and a .667-for-1 reverse stock split effected in February 1997.
7
<PAGE> 10
RISK FACTORS
The securities offered hereby are speculative and involve a high degree of
risk. Only those persons able to lose their entire investment should purchase
these securities. Prospective investors, prior to making an investment decision,
should carefully read this prospectus and consider, along with other matters
referred to herein, the following risk factors:
Substantial Historical Operating Losses; No Assurance of
Profitability. The Company has been incurring losses from operations since its
inception in 1993 and at December 31, 1996 had an accumulated deficit,
stockholders' equity deficit and working capital deficit of $6,639,003,
$2,996,411 and $2,539,788, respectively. A significant portion of these amounts
were incurred during the fiscal year ended December 31, 1996 as a result of
intense marketing by the Company, including payment for introductory programs to
supermarket and other food chain retailers incurred in connection with entering
new markets and maintaining existing markets of approximately $622,000, and
product advertising, promotion and marketing expenses aggregating approximately
$1,526,000. Although the Company believes that its business expansion will be
successful, and that the Company will become profitable, no assurance can be
given in this regard. See "Business."
Going Concern Issues in Independent Auditor's Report. As a result of the
Company incurring losses since inception and its deficiency in working capital
at December 31, 1996, the Company's independent certified public accountants
have included an explanatory paragraph in their report on the Company's
financial statements, regarding having substantial doubt about the Company's
ability to continue as a going concern. Management's plans in this regard are
described in Note B of Notes to Financial Statements.
Limited Operating History. The Company has a limited operating history.
The Company is subject to all the general risks inherent in, and the problems,
expenses, difficulties, complications and delays frequently encountered in
connection with, establishing any new business and operations. The Company is
currently operating with inadequate working capital which, among other things,
has impaired its selling efforts, and is materially dependent on the proceeds of
this offering to maintain operations. There is still no assurance that the
Company, even with such funds, will successfully maintain operations at a level
sufficient for an investor to obtain a return on the Common Stock or Class A
Warrants.
Dependence on Kraft-Pizza Agreement. While the Company delivers products
through certain regional distributors in the Midwest and elsewhere, the major
portion of the Company's revenues are derived from the Kraft-Pizza Agreement.
Kraft-Pizza accounted for approximately 79% of the Company's sales for the year
ended December 31, 1996. The Kraft-Pizza Agreement is terminable by either party
on sixty (60) days' prior written notice. If the Kraft-Pizza Agreement is
terminated the Company may be unable to retain other comparable distributors
willing to distribute ice cream in the exclusive areas, and the operations of
the Company may be adversely affected. While the Company believes that the price
at which its ice cream is sold to Kraft-Pizza is competitive with the prices
generally paid by distributors for superpremium ice cream in the areas of
distribution, it cannot predict whether it will be able to secure and maintain
alternative satisfactory distribution in the marketplace. See
"Business -- Distribution and Marketing."
Security Interest by a Former Manufacturer in the Company's Assets. The
Company is presently indebted to one of its former manufacturers in the sum of
approximately $700,000. Pursuant to agreements, as amended, with this
manufacturer, the indebtedness is collateralized by all of the assets of the
Company and is payable in quarterly installments of $200,000 as well as monthly
payments of $12,000 plus accrued interest. Approximately $575,000 of this
indebtedness is payable from the proceeds of this offering and the balance is
payable in December 1998. Without this offering, it is unlikely that cash
generated from operations will be sufficient to fully repay this indebtedness.
If this debt is not paid, this secured party could foreclose on all of the
assets of the Company which would materially adversely affect the Company's
business plans and financial condition. See Note H of Notes to the Financial
Statements and "Use of Proceeds."
Substantial Introductory Program Expenses Required to Enter New, and
Maintain Existing, Markets. The Company has been required to incur substantial
promotional and advertising expenses to gain access to shelf space to enter new
markets, sell to new retail stores and maintain existing stores or markets.
While the
8
<PAGE> 11
Company believes, based on an internal study, that its products provide
retailers with a substantial profit per linear foot as compared to its
competitors' products, there is no assurance that even after incurring these
expenses, retail stores will continue to sell the Company's products.
Dependence on Single Ice Cream Manufacturer. The Company's products are
manufactured by one independent United States Food and Drug Administration
("FDA") approved facility located in Buffalo, New York, under an exclusive
manufacturing agreement through March 20, 1999 for distribution East of the
Mississippi River. Two facilities on the West coast have recently suspended
manufacturing the Company's products due to the financial position of the
Company; however, each such facility has informed the Company that it will
reconsider manufacturing the Company's products upon completion of this offering
and payment by the Company of all amounts owing to such manufacturer. Upon
completion of this offering, the Company may use additional facilities as well
as re-establish its relationships with former manufacturers located on the West
coast. See "Use of Proceeds." While the Company believes that other
manufacturers are available, the Company entered into an exclusive agreement
for, among other reasons, the fact that changing to a new facility would result
in manufacturing delays which could temporarily impair the Company's ability to
deliver products to its customers, and extended delivery delays could
substantially impair the Company's available shelf space in certain retail
establishments. See "Business -- Distribution and Marketing."
Possible Need for Additional Financing. The Company believes that its
existing capital resources, together with the proceeds of this offering, will
enable it to maintain its operations and working capital requirements for at
least the next twelve (12) months, without taking into account any internally
generated funds from operations. However, the Company may require additional
funds thereafter to maintain or expand its operations. Adequate funds for this
purpose on terms favorable to the Company, whether through equity financing,
debt financing, or other sources, may not be available when needed. The
Company's inability to obtain adequate financing could have a material adverse
effect on the Company. Furthermore, the Company has granted a security interest
on its assets to a third party, which could adversely impact its ability to so
finance its operations.
No Additional Credit Facility. The Company has no additional credit
facility or other access to debt financing. Accordingly, the Company's business
could be materially adversely affected in the event that it has a need for funds
that it may not be able to obtain through a debt or equity financing.
Uncertainties Regarding Marketing of the Company's Products. The Company
intends to market its cheesecake ice cream nationally and internationally. There
is no assurance that the Company's products will continue to be accepted by
consumers. Further, there is no assurance that the U.S. market will provide
sufficient revenue and earnings to permit on-going operations or that the
Company will be able to successfully penetrate existing non-U.S. markets for
these products.
Competition. The super-premium ice cream market is highly competitive and
the Company faces substantial competition in connection with the marketing and
sales of its products. Among its competitors are Haagen-Dazs, Inc.,
("Haagen-Dazs") owned by The Pillsbury Company, Ben & Jerry's Homemade, Inc.
("Ben & Jerry's") and other numerous regional ice cream companies. Many of these
competitors are well established and have substantially greater financial and
other resources than the Company. Additionally, Haagen-Dazs and Ben & Jerry's
manufacture their own ice cream. In the ice cream novelty segment, the Company
competes with several well-known brands including Haagen-Dazs and Dove Bars(R),
manufactured by a division of Mars, Inc.
Achieving wide distribution in the ice cream business is difficult due to
the substantial expenses of a national marketing program and the limitations on
available space in the freezer compartments of supermarkets and other retail
customers. The Company's products also may be considered to be in competition
with all ice cream and other frozen desserts for discretionary food dollars. The
ability of the Company to increase its market share will be dependent upon
several factors, among which are the quality and price of its products,
advertising and the availability of sufficient capital for product expansion.
Possible Adverse Impact of Higher Prices for Raw Materials. The primary
raw materials used in the Company's operations are dairy products, including
cream cheese and milk. The Company believes that such
9
<PAGE> 12
products are readily available from many sources, though the prices thereof may
fluctuate. In this regard, the Company's profit margins were reduced from May
1996 through November 1996 primarily as a result of an increase in the price for
dairy products, although at the end of 1996, these prices dropped significantly.
The Company believes that prices for dairy products are cyclical, and no
assurance can be given that prices for dairy products will not increase. In the
event that prices of raw materials increase and remain high indefinitely and if
the Company is unable to pass such prices on to its customers, the Company's
business operations and financial condition could be materially adversely
affected.
Seasonality. The ice cream industry generally experiences its highest
volume during the spring and summer months and the lowest volume in the winter
months. See "Business -- Seasonality."
Product Liability. The Company's business exposes it to potential
liability which is inherent in the marketing and distribution of food products.
The Company currently maintains $2,000,000 of product liability insurance. The
Company also maintains $1,000,000 of general and personal injury insurance per
occurrence and $5,000,000 in the aggregate. If any product liability claim is
made and sustained against the Company and is not covered by insurance, the
Company's business and prospects could be materially adversely affected. See
"Business -- Insurance."
Discretion In Application of Proceeds. Management of the Company has
certain discretion over the use and expenditure of $1,830,999 of the proceeds of
this offering, which represents 54.3% of the gross proceeds received by the
Company from this offering. The Company intends to use the funds raised in this
offering for repayment of indebtedness, promotion of its products, and for
working capital and general corporate purposes. Although the Company does not
contemplate changes in the allocated use of proceeds, to the extent the Company
finds changes are necessary or appropriate in order to address changed
circumstances and/or opportunities, management may find it necessary to adjust
the use of the Company's capital, including the proceeds of this offering. As a
result of the foregoing, the success of the Company may be substantially
dependent upon the discretion and judgment of the management of the Company with
respect to the application and allocation of the net proceeds hereof. See "Use
of Proceeds."
Control by Present Stockholders. As of the date of this Prospectus, the
current officers and directors (the "Management Stockholders") and 5%
stockholders own 66.2% of the outstanding shares of Common Stock and, after
completion of this offering, will own 53.9% of the outstanding shares of Common
Stock. Accordingly, although there are no relationships or agreements between
the non-officer 5% stockholders and the officers and directors of the Company,
these stockholders will be able to significantly influence the election of the
Company's directors, any increase in the Company's authorized and outstanding
capital stock and the other policies of the Company. See "Principal
Stockholders."
Dependence on Key Personnel. The Company's business expansion plans are
dependent in part upon the abilities of Michael Rosen, its Chairman, President
and Chief Executive Officer, and Martin Weiss, its newly appointed Vice
President of Sales and Marketing. Although each of Mr. Rosen and Mr. Weiss have
entered into employment agreements with the Company, there can be no assurance
that they will remain in the employ of or continue to provide services to the
Company. The loss of the services of such persons could have an adverse effect
on the Company. The Company maintains a $1,000,000 life insurance policy with
respect to the life of Michael Rosen, the proceeds of which are payable to the
Company. See "Management -- Employment Agreements."
Current Litigation against the Company. The Company is currently involved
in two legal matters with an aggregate potential liability of approximately
$185,000. Although the Company is currently negotiating a proposed settlement
with J.W. Messner, Inc. on a $125,000 claim, no assurance can be given that a
settlement can or will be reached. If decisions unfavorable to the Company
result from either of these matters, the Company's working capital will be
negatively impacted by the payment of judgments. See "Business -- Legal
Matters."
Lack of Independent Directors; No Audit and Compensation Committees. Two
of the four current members of the Company's Board of Directors, Michael Rosen
and Frederic D. Heller are executive officers of the Company. In addition,
another director, Martin Pilossoph, is the father-in-law of Michael Rosen. Upon
10
<PAGE> 13
completion of this offering, Myron Levy, a person who will be considered a
non-employee director, has agreed to serve as a member of the Board of
Directors. Thus, upon completion of this offering, two of the five directors of
the Company will be non-employee directors who have no family relationship with
any other directors. Accordingly, although there are no agreements or
understandings to do so, Messrs. Rosen, Heller and Pilossoph, if voting as a
group, will constitute a majority of the Board of Directors, and thus will be
able to exert substantial influence over the Company's policies. In addition,
the Company has no standing audit or compensation committee. Thus, the Board of
Directors performs the functions normally delegated to such committees. In this
regard, the Board of Directors has chosen, and in the future will choose, the
Company's independent auditors. Also, the Board of Directors has decided in the
past, and will continue in the future, to decide compensation matters such as
salaries, bonuses and stock option grants which are awarded to the Company's
employees. See "Management."
Absence of Public Market; Negotiated Offering Price. Prior to the
offering, there has been no market for the Common Stock or Class A Warrants.
Although the Company's Common Stock and Class A Warrants have been approved for
quotation on the OTC Bulletin Board, there can be no assurance that an active
market will develop for the Common Stock or the Class A Warrants or, if
developed, that it can be maintained. In addition, the Common Stock and Class A
Warrants will be separately traded immediately. The initial public offering
price of the Common Stock and the exercise price of the Class A Warrants have
been established by negotiations between the Company and the Representative and
will not necessarily bear any relationship to the Company's book value, assets,
past operating results, financial condition, or other established criteria of
value. See "Underwriting."
Dependence of Warrant Holders on Maintenance of Current Registration
Statement; Possible Loss of Value of Warrants. In order for holders of the
Class A Warrants to exercise such warrants there must be a current registration
statement (or an exemption therefrom) in effect with the Securities and Exchange
Commission ("Commission") and with the various state securities authorities in
the States where warrant holders reside. The Company has undertaken to use its
best efforts to keep (and intends to keep) the registration statement effective
with respect to the Class A Warrants for as long as the Class A Warrants remain
exercisable. However, maintenance of an effective registration statement will
subject the Company to substantial continuing expenses for legal and accounting
fees, and there can be no assurance that the Company will be able to maintain a
current registration statement through the period during which the Class A
Warrants remain exercisable. The Class A Warrants may become unexercisable and
deprived of value by the Company's inability to maintain an effective
registration statement (or an exemption therefrom) with respect to the
underlying shares or by the non-qualification of the underlying shares in the
jurisdiction of such holder's residence. See "Description of Securities -- Class
A Warrants."
Potential Adverse Effect of Redemption of Class A Warrants. The Class A
Warrants may be redeemed by the Company at a price of $.01 per warrant, at any
time, on not less than thirty (30) days' nor more than sixty (60) days' prior
written notice provided that the closing bid price of the Common Stock for all
twenty (20) consecutive trading days ending within three (3) days of the notice
of redemption has equaled or exceeded $12.00 and further provided that any
redemption during the one year period commencing on the date of this Prospectus
shall require the consent of the Representative. Redemption of the Class A
Warrants could force the warrant holders to exercise the warrants at a time when
it may be disadvantageous for the holders to do so or to sell the Class A
Warrants at their then current market price when the holders might otherwise
wish to hold the Class A Warrants for possible appreciation. Any holders who do
not exercise warrants prior to their expiration or redemption, as the case may
be, will forfeit the right to purchase the shares of Common Stock underlying the
Class A Warrants. See "Description of Securities -- Class A Warrants."
Substantial and Immediate Dilution. Purchasers of the Common Stock offered
hereby will incur immediate substantial dilution in the net tangible book value
of approximately $5.86 or 98% per share. The present shareholders of the Company
have acquired their respective equity interests at a cost substantially below
the offering price. Accordingly, the public investors will bear a
disproportionate risk of loss per share. See "Dilution."
11
<PAGE> 14
No Dividends on Common Stock. The Company has never declared or paid any
dividends on its shares of Common Stock. The Company intends to utilize its
earnings, if any, to facilitate the expansion of its business for the
foreseeable future. Accordingly, it has no intention of declaring or paying
dividends on its Common Stock for the foreseeable future. Further, pursuant to a
credit agreement with one of its former manufacturers, the Company is prohibited
from paying dividends until the full repayment of its indebtedness thereunder.
See "Dividend Policy."
Possible Dilutive Effect of the Issuance of Substantial Amounts of
Additional Shares Without Stockholder Approval. After this offering, the
Company will have an aggregate of approximately 14,466,695 shares of Common
Stock authorized but unissued and not reserved for specific purposes including
2,341,683 shares of Common Stock unissued but reserved for issuance pursuant to
(i) exercise of the Class A Warrants, (ii) the Company's Long Term Incentive
Plan, (iii) the Company's 1996 Non-Qualified Stock Option Plan, (iv) exercise of
the Representative's Purchase Option, (v) exercise of the Representative's
over-allotment option and (vi) the possible issuance of up to 105,850 shares to
the Company's former product manufacturers. All of such shares may be issued
without any action or approval by the Company's shareholders. Any shares issued
would further dilute the percentage ownership of the Company held by the
investors in this offering. The terms on which the Company could obtain
additional capital during the life of these securities may be adversely affected
because of such potential dilution and because the holders thereof might be
expected to convert or exercise them if the market price of the Common Stock
exceeds their conversion or exercise price. See "Description of Securities",
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "Underwriting."
Potential Anti-Takeover Effects of Delaware Law and Certificate of
Incorporation; Possible Issuances of Preferred Stock. Certain provisions of
Delaware law and the Company's Certificate of Incorporation and By-laws could
make more difficult a merger, tender offer or proxy contest involving the
Company, even if such events could be beneficial to the interests of the
stockholders. These provisions include Section 203 of the Delaware General
Corporation Law, the classification of the Company's Board of Directors into
three classes and the requirement that 66 2/3% of the stockholders of the
Company entitled to vote thereon approve certain transactions, including mergers
and sales or transfers of all or substantially all the assets of the Company.
Such provisions could limit the price that certain investors might be willing to
pay in the future for shares of the Company's Common Stock or preferred stock.
In addition, the Company's Certificate of Incorporation allows for the issuance
of up to 500,000 shares of preferred stock by the Board of Directors without
stockholder approval on such terms as the Board may determine. The rights of the
holders of Common Stock and preferred stock will be subject to, and may be
adversely affected by, the rights of the holders of additional or other classes
of preferred stock that may be issued in the future. Moreover, although the
ability to issue other classes of preferred stock may provide flexibility in
connection with possible acquisitions and other corporate purposes, such
issuance may make it more difficult for a third party to acquire, or may
discourage a third party from acquiring, a majority of the voting stock of the
Company. The Company has not issued any shares of preferred stock and has no
current plans to issue any shares of any classes of capital stock other than as
described herein. See "Description of Capital Stock."
Limitations on Personal Liability of Directors. The Company's Certificate
of Incorporation and By-laws contain provisions which reduce the potential
personal liability of directors for certain monetary damages and provide for
indemnity of directors and other persons. The Company is unaware of any pending
or threatened litigation against the Company or its directors that would result
in any liability for which such director would seek indemnification or similar
protection. The Company has entered into Indemnification Agreements with certain
of its officers and directors. The Indemnification Agreements provide for
reimbursement for all direct and indirect costs of any type or nature whatsoever
(including attorneys' fees and related disbursements) actually and reasonably
incurred in connection with either the investigation, defense or appeal of a
proceeding, (as defined) including amounts paid in settlement by or on behalf of
an indemnitee thereunder. See "Description of Securities -- Certain Provisions
of the Certificate of Incorporation."
Governmental Regulation. As a marketer and distributor of ice cream, the
Company's products are subject to regulation by the FDA and other government
agencies relating to the safety of its product. While the Company believes that
its marketing and distributing operations comply with all existing applicable
laws
12
<PAGE> 15
and regulations, no assurance can be given that compliance with such laws,
regulations or other restrictions, as well as any new laws or regulations, will
not impose additional costs on the Company which could adversely affect its
financial performance and results of operations. See "Business -- Government
Regulation."
Unspecified Acquisitions. After this offering, the Company will have
approximately $1,830,999 for working capital and general corporate purposes.
Although the Company has no present intention to do so, the Company has the
right to use these funds for possible unspecified acquisitions. Stockholders
will not vote upon any acquisition nor will stockholders have any opportunity to
review the financial status of any potential acquisition. See "Use of Proceeds."
Penny Stock Regulation. The Securities and Exchange Commission (the
"Commission") has adopted rules that regulate broker-dealer practices in
connection with transactions in "penny stocks." Penny stocks generally are
equity securities with a price of less than $5.00 (other than securities
registered on certain national securities exchanges or quoted on the NASDAQ
system, provided that current price and volume information with respect to
transactions in such securities is provided by the exchange or system). The
penny stock rules require a broker-dealer, prior to a transaction in a penny
stock not otherwise exempt from the rules, to deliver a standardized risk
disclosure document prepared by the Commission that provides information about
penny stocks and the nature and level of risks in the penny stock market. The
broker-dealer also must provide the customer with other information. In
addition, the penny stock rules require that prior to a transaction in a penny
stock not otherwise exempt from such rules, the broker-dealer must make a
special written determination that the penny stock is a suitable investment for
the purchaser and receive the purchaser's written agreement to the transaction.
These disclosure requirements may have the effect of reducing the level of
trading activity in the secondary market for a stock that becomes subject to the
penny stock rules. If the Company's Common Stock becomes subject to the penny
stock rules, investors in this offering may find it more difficult to sell their
Common Stock in the event it becomes otherwise freely resalable.
13
<PAGE> 16
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Common Stock and Class
A Warrants offered hereby (after deducting underwriting discounts and estimated
offering expenses) are estimated to be $3,372,500 ($3,942,875 if the
Representative's over-allotment option is exercised in full). These proceeds,
excluding the exercise price of any Warrants, are intended to be utilized
substantially as follows:
<TABLE>
<CAPTION>
APPROXIMATE APPROXIMATE
APPLICATION OF PROCEEDS AMOUNT PERCENTAGE
------------------------------------------------------------ ----------- -----------
<S> <C> <C>
Working capital and general corporate purposes(1)........... $ 1,830,999 54.3%
Repayment of Indebtedness(2)................................ $ 1,541,501 45.7%
---------- -----
$ 3,372,500 100.0%
========== =====
</TABLE>
- ---------------
(1) It is presently anticipated that the balance of the proceeds attributable to
working capital will be used to fund current operations through calendar
1997, at which time the Company anticipates being able to generate positive
cash flow from operations. See "Business" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
(2) Includes the repayment of various promissory notes with interest accrued to
February 28, 1997 and certain accounts payable as follows: (i) $478,235 for
open accounts payable, including payments to present product manufacturer;
(ii) $133,112 to Steven A. Cantor, the Company's largest stockholder
including interest at 8% per annum; (iii) $132,413 to holders of Second
Private Placement Notes including interest at 12% per annum; (iv) $4,605 in
payment of interest on the Convertible Notes; (v) $588,688 to a product
manufacturer including interest at 9.25% per annum; (vi) $138,830 to a
product manufacturer including interest at 10% per annum; (vii) $28,118 to a
product manufacturer including interest at 8% per annum; (viii) salaries to
a former employee of $12,500 accrued through February 28, 1997; and (ix)
$25,000 in payment of a short-term loan received in March 1997. See "Certain
Transactions."
The amounts set forth above, other than for repayment of indebtedness are
estimates. The actual amount expended to finance any category of expenses may be
increased or decreased by the Company's Board of Directors, in its discretion,
if required by the operating experience of the Company or if a reapportionment
or redirection of funds, including acquisitions consistent with the business
strategy of the Company, is deemed to be in the best interest of the Company.
The Company has no specific plans, arrangements, understandings or commitments
with respect to any such acquisition at the present time. See "Risk
Factors -- Discretion in Application of Proceeds."
All proceeds of debt incurred by the Company during the one year period
prior to the date of this Prospectus, which debt is being paid from these
proceeds (approximately $530,000), were used for working capital purposes,
including payment of then existing trade payables.
If the Representative exercises the over-allotment option in full, the
Company will realize additional net proceeds of approximately $570,375,
approximately $349,000 of which will be utilized to repay recent loans to the
Company as follows: (i) Steven A. Cantor, $130,000; (ii) Michael Rosen,
$111,375; (iii) Louis P. Solferino, $53,750; and (iv) Michael Jones, $53,750.
The balance will be used for working capital and general corporate purposes.
The net proceeds to the Company from this offering are expected to be
adequate to fund the Company's working capital needs for at least the next
twelve (12) months. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources." Pending
use of the proceeds from this offering as set forth above, the Company may
invest all or a portion of such proceeds in short-term, interest-bearing
securities, U.S. Government securities, money market investments and short-term,
interest-bearing deposits in major banks.
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<PAGE> 17
DILUTION
As of December 31, 1996, the net negative tangible book value of the
Company was ($3,048,135) or ($1.61) per share of Common Stock. Net negative
tangible book value per share represents the amount the liabilities exceed the
amount of total tangible assets divided by 1,892,641, the number of shares of
Common Stock outstanding on December 31, 1996, (after giving effect to a
.153846-for-1 reverse stock split in June 1996 and a .667-for-1 reverse stock
split in February 1997). See "Capitalization." Thus, as of December 31, 1996,
the net negative tangible book value per share of Common Stock owned by the
Company's current stockholders would have increased by $3,312,122 or $1.75 per
share after giving effect to this offering without any additional investment on
their part and the purchasers of the shares of Common Stock offered hereby would
have incurred an immediate dilution of $5.86 per share from the offering price.
The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Public offering price per share of Common Stock offered hereby....... $6.00
Net tangible book value per share before offering.................... (1.61)
Increase per share attributable to new investors................... 1.75
-----
Adjusted net tangible book value per share after this offering....... $ .14
-----
Dilution per share to new investors.................................. $5.86
=====
</TABLE>
The following table summarizes the relative investments of investors
pursuant to this offering and the current stockholders of the Company:
<TABLE>
<CAPTION>
CURRENT PUBLIC
STOCKHOLDERS INVESTORS TOTAL(1)
------------ ---------- ----------
<S> <C> <C> <C>
Number of Shares of Common Stock Purchased..... 1,892,641 675,000 2,567,641
Percentage of Outstanding Common Stock After
Offering..................................... 73.7% 26.3% 100%
Gross Consideration Paid....................... $ 4,066,360 $4,225,000 $8,291,360
Percentage of Consideration Paid............... 49.0% 51.0% 100%
Average Consideration Per Share of Common
Stock........................................ $2.15 $6.26 $3.23
</TABLE>
- ---------------
(1) Assumes no exercise of (i) the Representative's over-allotment option to
purchase up to 101,250 shares of Common Stock; (ii) the Class A Warrants
offered hereby; (iii) the Representative's Purchase Option to purchase up to
67,500 shares of Common Stock; (iv) the Class A Warrants purchasable by the
Representative upon exercise of the Representative's Purchase Option; or (v)
any options to purchase shares of Common Stock granted under the Company's
1995 Incentive Plan or the 1996 Non-Qualified Plan. See "Description of
Securities", "Management" and "Underwriting." Does not give effect to
conversion of debt and accrued interest into an aggregate of 306,981 shares
of Common Stock, which occurred in April 1997 and the issuance of 317,000
shares of Common Stock in March, April and May 1997. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."
If the over-allotment option is exercised in full, the new Common Stock
investors will have paid $4,858,750 and will hold 776,250 shares of Common
Stock, representing 54.4% of the total consideration and 29.1% of the total
number of outstanding shares of Common Stock. See "Description of Securities"
and "Underwriting."
15
<PAGE> 18
CAPITALIZATION
The following table sets forth the cash and capitalization of the Company
as of December 31, 1996 and the as adjusted capitalization which gives effect to
the consummation of this offering as if it occurred on December 31, 1996. This
table should be read in conjunction with the financial statements and related
notes included elsewhere in this prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------------
ACTUAL AS ADJUSTED(1)
----------- --------------
<S> <C> <C>
Cash and cash equivalents........................................ $ 32,523 2,086,562(2)
Short-term borrowings and current portion of capital lease
obligations
Accounts payable............................................... 1,104,336 786,101
Accrued Expenses............................................... 140,629 128,129
Convertible notes.............................................. 225,000 225,000
Notes payable to related parties............................... 407,500 160,000
Obligations under capital leases............................... 9,957 9,957
Notes payable trade............................................ 980,821 263,855
Line of credit................................................. 23,506 23,506
Accrued interest on notes...................................... 24,760 1,500
----------- -----------
Total short-term borrowings and current portion of capital
lease obligations........................................... 2,916,509 1,598,048
----------- -----------
Long term notes payable and capital lease obligations
Notes payable to related parties............................ 486,250 486,250
Accrued interest............................................ 52,055 52,055
Obligations under capital leases............................ 3,611 3,611
----------- -----------
Total long term notes payable and capital lease obligations.... $ 541,916 $ 541,916
----------- -----------
Stockholders' deficit:
Preferred stock, $.01 par value; 500,000 shares authorized, no
shares issued or outstanding (actual and as adjusted)
Common stock, $.001 par value; 20,000,000 shares authorized,
1,892,641 shares (actual) and 2,567,641 shares, as
adjusted(3)(4)(5)(6)........................................ 1,892 2,567
Additional paid-in capital....................................... 4,000,700 7,012,525
Deferred financing costs......................................... (360,000) 0
Accumulated deficit.............................................. (6,639,003) (6,639,003)
----------- -----------
Total stockholders' equity (deficit)........................ $(2,996,411) $ 376,089
----------- -----------
Total capitalization................................... $ 462,014 $ 2,516,053
=========== ===========
</TABLE>
- ---------------
(1) Adjusted to give effect to the consummation of this offering as if it
occurred on December 31, 1996.
(2) Does not include $180,000 of costs and expenses incurred in 1997 and $18,040
of interest accrued during January and February 1997 which have been
included under Use of Proceeds.
(3) Does not include (i) the receipt of a $100,000 Convertible Note in January
1997 which was converted into 78,431 shares of Common Stock in April 1997,
and (ii) the receipt of a $50,000 short-term loan in March 1997, one-half of
which was converted into 12,500 shares of Common Stock in April 1997.
(4) Does not include the conversion during April 1997 of (i) a $225,000
Convertible Note into 200,000 shares of Common Stock and (ii) $31,500 of
notes payable and accrued interest owed as of December 31, 1996 into 15,750
shares of Common Stock.
(5) Adjusted to give effect to a .153846-for-1 reverse stock split effected in
June 1996 and a .667-for-1 reverse stock split effected in February 1997.
(6) Does not include the issuance in April and May 1997 of (i) 150,000 shares of
Common Stock to Steven A. Cantor as consideration for the termination of his
consulting agreement, (ii) 65,000 shares of Common Stock to the Company's
current product manufacturer in connection with its manufacturing agreement
and (iii) 102,000 shares of Common Stock to the Company's legal counsel and
an investor.
16
<PAGE> 19
DIVIDEND POLICY
Holders of the Company's Common Stock are entitled to dividends when, as
and if declared by the Board of Directors out of funds legally available
therefor. The Company has never declared or paid any cash dividends and
currently does not intend to pay cash dividends in the foreseeable future on the
shares of Common Stock. Further, pursuant to a credit agreement with one of its
former manufacturers, the Company is prohibited from paying dividends on any of
its capital stock until the indebtedness to such manufacturer is repaid. The
Company intends to retain earnings, if any, to finance the development and
expansion of its business. Payment of future dividends on the Common Stock will
be subject to the discretion of the Board of Directors and will be contingent
upon future earnings, if any, the Company's financial condition, capital
requirements, general business conditions and other factors. Therefore, there
can be no assurance that any dividends on the Common Stock will ever be paid.
17
<PAGE> 20
SELECTED FINANCIAL DATA
The following selected financial information concerning the Company has
been derived from the financial statements included elsewhere in this Prospectus
and should be read in conjunction with such financial statements and the notes
thereto. See "Financial Statements."
The selected financial data should be read in conjunction with and is
qualified in its entirety by, the Company's financial statements, related notes
and other financial information included elsewhere in this Prospectus.
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, MARCH 31,
1996 1995 1995
------------ ------------ ---------
<S> <C> <C> <C>
Total assets................................. $ 443,232 $ 400,014 $ 555,132
Current liabilities.......................... 2,897,727 1,901,644 704,978
Long-term liabilities net of current
portion(1)................................. 541,916 255,722 288,333
Stockholders' deficit........................ (2,996,411) (1,757,352) (438,179)
</TABLE>
STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
FISCAL YEAR NINE MONTHS FISCAL YEAR
ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1996 1995 1995
------------ ------------ -----------
<S> <C> <C> <C>
Net sales.................................. $ 2,392,258 $ 2,312,144 $ 1,086,106
Net loss................................... (4,050,547)(2) (1,614,858) (719,380)
Loss per Common Share(3)................... $ (1.64) $ (0.74) $ (0.43)
Supplemental net loss per common
share(4)................................. $ (1.27) -- --
Weighted Average Common Shares
Outstanding(3)........................... 2,473,745 2,193,037 1,667,408
</TABLE>
- ---------------
(1) Includes long term portion of notes to related parties with the related
accrued interest, capital lease obligations and certain expense accruals not
currently due.
(2) Includes approximately $1,400,000 of non-cash compensation attributable to
the issuances of stock for professional services rendered to the Company and
consulting fees to related parties attributable to stock options and
contractual obligations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
(3) Gives effect to a .153846-for-1 reverse stock split effected in June 1996
and a .667-for-1 reverse stock split effected in February 1997.
(4) Supplemental net loss per common share is computed based on the weighted
average number of common and common equivalent shares outstanding during the
period, as if the shares issuable pursuant to this offering were outstanding
at the beginning of the period after giving retroactive effect to the
reduction of interest expense, net of income tax effect, applicable to the
reduction of the Company's indebtedness.
18
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the historical
financial statements of the Company included elsewhere in this Prospectus.
RESULTS OF OPERATIONS
The Company has incurred losses from operations since its inception in 1993
and at December 31, 1996 had an accumulated deficit and working capital deficit
of $6,639,003 and $2,539,788, respectively. A significant portion of these
amounts were incurred during the year ended December 31, 1996 as a result of
intense marketing by the Company, including payment of introductory programs in
connection with the entry by the Company into new markets and expansion of
existing markets of approximately $622,000 to supermarket and other food chain
retailers and product advertising, promotion and marketing expenses of
approximately $1,526,000. The Company will continue to sustain losses at least
until the closing of this offering since its limited working capital without the
proceeds of this offering has adversely impacted its ability to purchase
products from its manufacturer to fill customer orders.
Effective December 31, 1995, the Company changed its fiscal year end from
March 31 to December 31. Consequently, set forth below is a table illustrating
the Company's results of operations for its fiscal year ended December 31, 1996
compared to its nine month "fiscal year" ended December 31, 1995, as well as
compared to the twelve (12) month calendar year ended December 31, 1995, which
twelve (12) month comparison the Company believes more accurately reflects the
trends in, and seasonality of, the Company's business.
PROFIT AND LOSS ANALYSIS
Fiscal Year 1996 Compared With Calendar Year 1995
<TABLE>
<CAPTION>
AS PERCENT OF SALES
------------------------------------------
FISCAL NINE TWELVE FISCAL NINE TWELVE
YEAR ENDED MONTHS ENDED MONTHS ENDED YEAR ENDED MONTHS ENDED MONTHS ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1995 1996 1995 1995
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net Sales................ $ 2,392,258 $ 2,312,144 $ 2,593,077 100.00% 100.00% 100.00%
Cost of Sales............ 1,439,635 1,312,792 1,498,411 60.18% 56.78% 57.79%
------------ ------------ ------------ ------- ------ ------
Gross Profit............. 952,623 999,352 1,094,666 39.82% 43.22% 42.21%
Operating Expenses
Selling and Shipping... 2,596,500 1,864,890 2,175,619 108.54% 80.66% 83.90%
General and
Administrative....... 2,193,602 717,315 1,006,182 91.70% 31.02% 38.80%
Research and
Development.......... 70,632 19,529 19,529 2.95% 0.84% 0.75%
------------ ------------ ------------ ------- ------ ------
Total Operating
Expenses............... 4,860,734 2,601,734 3,201,330 203.19% 112.52% 123.46%
------------ ------------ ------------ ------- ------ ------
Loss from Operations..... (3,908,111) (1,602,382) (2,106,664) (163.36)% (69.30)% (81.24)%
Net Interest Expense..... 142,436 12,476 30,458 5.95% 0.54% 1.17%
------------ ------------ ------------ ------- ------ ------
Net Loss................. $(4,050,547) $(1,614,858) $(2,137,122) (169.32)% (69.84)% (82.42)%
============ ============ ============ ======= ====== ======
</TABLE>
Fiscal Year Ended December 31, 1996 Compared to Nine Months Ended December 31,
1995.
Net sales for the year ended December 31, 1996 were approximately
$2,392,000, an increase of 3% from the nine month period ended December 31,
1995. This increase was significantly reduced due to an initial build-up of
inventory by Kraft-Pizza in the fourth quarter of calendar 1995 which reduced
sales to Kraft-Pizza in 1996, an unusually cool summer in the Northeast during
calendar 1996, a temporary work stoppage at one of the facilities which
manufactures the Company's products during calendar 1996 and the withdrawal by
the Company from certain test markets which proved to be unprofitable. The
Company's limited operating resources to date also has prevented the Company's
participation in certain discount promotions and in-store
19
<PAGE> 22
programs which has caused a reduction in reorders throughout its distribution
network. The proceeds from this offering should enable the Company to
substantially increase sales in its existing retail outlets through
participation in these programs. The Company's products are currently
manufactured by one independent facility.
Gross profit for the year ended December 31, 1996 declined 5% to $953,000
from $999,000 for the nine months ended December 31, 1995. Gross profit as a
percentage of net sales for the year ended December 31, 1996 declined to 40% of
net sales compared to 43% for the year ended December 31, 1995. The decrease in
gross profit dollars was primarily attributable to the decline in net sales and
gross profit percentage. Gross profit as a percentage of net sales declined as a
result of higher dairy raw material costs associated with the manufacture of the
Company's ice cream products. However, as of the end of 1996, the prices of
these raw materials have dropped significantly.
General and administrative expenses ("G&A") for the year ended December 31,
1996 increased 206% from $717,000 for the nine months ended December 31, 1995 to
$2,193,000. The increase was primarily as a result of the following: increases
in salaries and payroll taxes from $289,000 to $361,000, increases in
professional fees from $93,000 to $457,000, increases in consulting fees from
$140,000 to $1,134,000, and increases in rent, telephone and other
administrative expenses from $195,000 to $241,000. $364,000 of the professional
fees incurred during the year ended December 31, 1996 was in the form of Common
Stock issued to professionals for services rendered to the Company. $1,013,000
of the consulting fees incurred during the year ended December 31, 1996
represented non-cash compensation attributable to stock options, shares of
Common Stock issued to a consultant, and the release of shares previously held
in escrow to the Company's largest stockholder, Steven A. Cantor. (See Notes K
and L to Notes to Financial Statements.) The Company continues to incur
significant general and administrative expenses in support of its efforts to
introduce its products in the retail marketplace and to gain market share.
Selling and shipping expenses for the year ended December 31, 1996
increased 39% from $1,865,000 for the nine months ended December 31, 1995 to
$2,597,000. The increase was primarily as a result of the following: increases
in advertising programs with store chains from $91,000 to $346,000, increases in
store and media price reduction coupons from $172,000 to $402,000, increases in
the cost of product demonstrations and media events from $163,000 to $299,000,
increases in brokerage commissions and freight from $218,000 to $350,000 and
increases in samples and other selling expenses from $153,000 to $276,000. The
Company continues to incur significant selling and shipping expenses in support
of its efforts to introduce products in the retail marketplace and to gain
market share.
Interest expense, net of interest income, for the year ended December 31,
1996 increased to $142,000 from $12,500 for the nine months ended December 31,
1995. The increase was primarily attributed to an additional borrowing from
related parties, and the conversion of open accounts payables due to two
principal product manufacturers into interest bearing notes.
Net loss for the year ended December 31, 1996 increased to $4,051,000 as
compared to a net loss of $1,615,000 for the nine months ended December 30,
1995. The net loss is attributed to the aforementioned increases in selling,
shipping, general and administrative expenses, as well as lower gross profits
and net sales and higher interest expense.
Impact of New Accounting Standards. The Financial Accounting Standards
Board has issued Statement of Financial Accounting Standards No. 128, Earnings
Per Share, which is effective for financial statements issued after December 15,
1997. Early adoption of the new standard is not permitted. The new standard
eliminates primary and fully diluted earnings per share and requires
presentation of basic and diluted earnings per share together with disclosure of
how the per share amounts were computed. The effect of adopting this new
standard has not been determined.
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 129 ("SFAS No. 129"), Disclosure of Information About
Capital Structure. The Company does not anticipate that SFAS No. 129 will have a
material impact on the financial statements.
20
<PAGE> 23
Fiscal Year Ended December 31, 1996 Compared to Twelve Months Ended December
31, 1995.
Net sales for the year ended December 31, 1996 were $2,392,000, a decrease
of 8% from the twelve month period ended December 31, 1995. This decrease was
due to an initial build-up of inventory by Kraft-Pizza in the fourth quarter of
calendar 1995 which reduced sales to Kraft-Pizza in 1996, an unusually cool
summer in the Northeast during calendar 1996, a temporary work stoppage at one
of the facilities which manufactures the Company's products during calendar 1996
and the withdrawal by the Company from certain test markets which proved to be
unprofitable. The Company's limited operating resources to date also has
prevented the Company's participation in certain discount promotions and
in-store programs which has caused a reduction in reorders throughout its
distribution network. The proceeds from this offering should enable the Company
to substantially increase sales in its existing retail outlets through
participation in these programs.
Gross profit for the year ended December 31, 1996 declined 13% to $953,000
from $1,095,000 for the twelve months ended December 31, 1995. Gross profit as a
percentage of net sales for the year ended December 31, 1996 declined to 40% of
net sales compared to 42% for the twelve months ended December 31, 1995. The
decrease in gross profit dollars was primarily attributable to the decline in
net sales and gross profit percentage. Gross profit as a percentage of net sales
declined as a result of higher dairy raw material costs associated with the
manufacture of the Company's ice cream products. However, as of the end of 1996,
the prices of these raw materials have dropped significantly.
G & A expenses for the year ended December 31, 1996 increased 118% from
$1,007,000 for the twelve months ended December 31, 1995 to $2,193,000. The
increase was primarily as a result of the following: increases in professional
fees from $209,000 to $457,000 and increases in consulting fees from $161,000 to
$1,134,000. $364,000 of the professional fees incurred during the year ended
December 31, 1996 was in the form of Common Stock issued to professionals for
services rendered to the Company. $1,013,000 of the consulting fees incurred
during the year ended December 31, 1996 represented non-cash compensation
attributable to stock options, shares of Common Stock issued to a consultant,
and the release of shares previously held in escrow to the Company's largest
stockholder, Steven A. Cantor. (See Notes K and L to Notes to Financial
Statements.) The Company continues to incur significant general and
administrative expenses in support of its efforts to introduce its products in
the retail marketplace and to gain market share.
Selling and shipping expenses for the year ended December 31, 1996
increased 19% from $2,176,000 for the twelve months ended December 31, 1995 to
$2,597,000. The increase was primarily as a result of the following: increases
in advertising programs with chain stores from $125,000 to $346,000, increases
in store and media price reduction coupons from $172,000 to $402,000, increases
in product demonstration and media events from $194,000 to $299,000, increases
in brokerage commissions and freight from $256,000 to $350,000 and increases in
samples and other selling expenses from $210,000 to $276,000. The Company
continues to incur significant selling and shipping expenses in support of its
efforts to introduce products in the retail marketplace and to gain market
share.
Interest expense, net of interest income, for the twelve months ended
December 31, 1996 increased to $142,000 from $30,000 for the twelve months ended
December 31, 1995. The increase was primarily attributed to an additional
borrowing from related parties, and the conversion of open accounts payables to
two principal product manufacturers into interest bearing notes.
Net loss for the year ended December 31, 1996 increased to $4,051,000 as
compared to a net loss of $2,137,000 for the twelve months ended December 30,
1995. The net loss is attributed to the aforementioned increases in selling,
general and administrative expenses, as well as lower gross profits and net
sales and higher interest expenses, reduced by an extraordinary credit to income
from the forgiveness by related parties of accrued salaries and consulting fees.
Nine Months Ended December 31, 1995 Compared to Year Ended March 31, 1995.
Net sales for the nine months ended December 31, 1995 increased 113% to
$2,312,000 as compared to $1,086,000 for the twelve months ended March 31, 1995.
The increase in net sales was primarily attributable to increased market
penetration and to a greater number of supermarket and food chain retailers
selling the
21
<PAGE> 24
Company's products as well as a material change in the way the Company
distributes is products. In October 1995, the Company entered into an agreement
with Kraft-Pizza for the exclusive distribution of the Company's products for
the northeastern and western regions of the United States. This agreement
provided the Company with access to thousands of existing retail outlets already
buying Tombstone Pizza, together with the use of Kraft-Pizza's commissioned
sales force to oversee the sales and store presentation of the Company's
products.
Gross profit for the nine months ended December 31, 1995 increased 102% to
$999,000 from $494,000 for the twelve months ended March 31, 1995. Gross profit
as a percentage of net sales for the nine months ended December 31, 1995
decreased to 43% of net sales compared to 45% for the twelve months ended March
31, 1995. The increase in gross profit was primarily attributable to the
increase in net sales. The decline in gross profit as a percentage of net sales
was the result of increases in certain dairy raw materials utilized in the
Company's products as well as the redesign to a higher quality of the Company's
retail packaging material.
Selling, shipping, general and administrative expenses increased 116% to
$2,582,000 for the nine months ended December 31, 1995 as compared to $1,198,000
for the twelve months ended March 31, 1995. The increase in selling, general and
administrative expenses was primarily attributable to increased net sales an
increased expenses associated with the Company's sales and marketing efforts,
which management believes will facilitate future growth.
Interest expense net of interest income for the nine months ended December
31, 1995 decreased to $12,000 from $15,000 for the twelve months ended March 31,
1995. The decrease in interest expenses was primarily attributable to a decrease
in average principal loan balances outstanding during the nine months ended
December 31, 1995 as compared to the twelve months ended March 31, 1995.
Net loss for the nine months ended December 31, 1995 increased to
$1,615,000 from $719,000 for the twelve months ended March 31, 1995. The
increase in net loss was attributable to the aforementioned increase in selling,
general and administrative expenses, offset by an increase in net sales and
gross profits, coupled with a decrease in interest expense.
Seasonality
The Company typically experiences more demand for its products during the
summer than during the winter. The ice cream industry generally experiences its
highest volume during the spring and summer months and the lowest volume in the
winter months. In this regard, according to statistics published by the
International Ice Cream Association, 35.5% of sales of novelty ice cream
products and 29.5% of sales of packaged ice cream products were made during the
third quarter (July -- September) of calendar 1996 while only 18.0% of sales of
novelty ice cream products and 22.4% of sales of packaged ice cream were made
during the first quarter (January -- March) of calendar 1996. Similarly, the
Company's quarterly sales for calendar year 1996 followed a seasonal pattern.
Sales were stronger in the second and third quarters of 1996 and weaker in the
cooler months of the first and fourth quarters.
Several factors negatively impacted sales on a quarterly basis. During the
first quarter of 1996 the Company's distribution was in transition to its new
distributor. In the second quarter, extensive marketing and initial product fill
at store level was occurring to boost sales. In third quarter the Company's East
coast manufacturer endured a work stoppage, limiting the quantities of product
available while simultaneously the Company halted much of its marketing efforts
due to its poor financial condition. In the fourth quarter the continued lack of
consumer marketing and the Company's decision to withdraw from certain test
markets caused a sharp decline in sales.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash requirements have been significantly exceeding its
resources due to the substantial promotional expenses incurred in connection
with the entry by the Company into new markets and expansion into new locations
in existing markets. As a result of the Company's limited operating resources,
the Company also has been unable to participate in certain programs which could
have increased sales. This offering is an
22
<PAGE> 25
integral part of the Company's plans to meet its cash requirements. Until the
Company completes this offering, the Company will be dependent on short-term
borrowings, to the extent available, and other sales of securities to continue
its operations. The Company assumes that based upon its current plans, its
resources, including the proceeds of this offering, will be sufficient to meet
its cash requirements for at least the next twelve (12) months. The Company also
believes that certain long-term indebtedness due on December 31, 1998
(approximately $345,000) will be payable from internally generated funds, if
any, or debt financing or from the sale of additional debt or equity securities.
Other than this offering, the Company has no commitments or arrangements for any
future financing and there can be no assurance that financing can otherwise be
obtained on satisfactory terms, if at all. In the event that the offering is
delayed, management recognizes that the Company must generate additional
resources to enable it to continue operations. Management's plans include
consideration of the additional sale of additional equity securities to private
investors under appropriate market conditions or other similar capital raising
transactions which would generate sufficient resources to assure continuation of
the Company's operations.
The Company has historically raised capital through the private equity
markets, and through debt financing and short-term loans, and will continue to
pursue these opportunities, if necessary. Prior transactions have involved
officers, directors, stockholders and affiliates of the Company, as may future
transactions.
In March 1997, the Company entered into a two-year exclusive manufacturing
agreement expiring in March 1999. The manufacturing agreement, dated as of March
20, 1997, provides that Fieldbrook shall be the exclusive supplier of all
products manufactured by Fieldbrook and distributed by the Company East of the
Mississippi River for a period of two years. As partial consideration for this
agreement, the Company has issued to Fieldbrook 35,000 shares of Common Stock.
While Fieldbrook is obligated to sell existing products to the Company, it is
not obligated to manufacture or sell new or different products. In the event
Fieldbrook declines to manufacture, sell or produce any new product, the Company
is free to obtain such product from another supplier. The manufacturing
agreement further provides for payment to Fieldbrook of $150,000 for open
accounts which, if not paid by April 30, 1997, shall cause the Company to issue
an additional 30,000 shares of Common Stock to Fieldbrook. The Company's present
credit line with Fieldbrook is $250,000, for which 21-day credit terms have been
provided. As of April 30, 1997, $189,500 of the credit line has been used. This
credit line shall be redetermined by the parties at the time of the Company's
initial public offering, based upon the Company's creditworthiness.
In March 1997, the Company received a $50,000 short-term loan which was
evidenced by a promissory note in the principal amount of $50,000 and in
connection therewith, the Company issued 2,000 shares of Common Stock to the
noteholder. In April 1997, one-half of this loan was converted into 12,500
shares of Common Stock.
In December 1996 and January 1997, the Company issued two convertible
promissory notes to two investors bearing interest at the rate of 8% per annum
in the principal amount of $225,000 and $100,000, respectively, (individually,
"Convertible Note" or collectively, the "Convertible Notes"). The Convertible
Notes were payable in full the earlier of five days after the closing date of an
initial public offering or December 31, 1997 and January 31, 1998, respectively.
In lieu of receiving payment, the investors had the right to convert the
Convertible Notes within five (5) days of the closing of such initial public
offering into 200,000 and 78,431 shares of Common Stock, respectively. In April
1997, the Convertible Notes were converted into 278,431 shares of Common Stock.
In December 1996, the Company issued two additional promissory notes in the
aggregate amount of $56,680 in exchange for certain trade accounts payable.
In October 1996, the Company issued 19,231 shares of Common Stock to two
consultants as payment for services rendered during the year ended December 31,
1996. These shares were valued at $3.00 per share, the estimated fair market
value of the Common Stock at the date of issuance.
On August 20, 1996, the Company issued a promissory note in the amount of
$289,482 in exchange for certain trade accounts payable and inventories. The
note, as amended, bears interest at the rate of 10% per
23
<PAGE> 26
annum. $134,283 with accrued interest is payable on or before June 1, 1997 or
from the proceeds of this offering and the balance is payable in December 1998.
On August 28, 1996, the founder of the Company was issued a promissory note
in the principal amount of $206,250. The funds that the founder loaned the
Company were the proceeds of a sale by the founder to an investor of 183,333
shares of his Common Stock at a price of $1.12 per share. This loan bears
interest at a rate of 8% and initially was payable the earlier of (i) thirteen
months from the date of the loan, or (ii) the date the Company successfully
consummates an initial public offering of securities of the Company, but only to
the extent that the over-allotment option is exercised in such offering and only
from the proceeds received by the Company from the exercise of the
over-allotment option. In September 1996, the maturity date of this promissory
note was revised to September 30, 1998. In addition, the revised promissory note
provides that one-half of the outstanding principal amount of the note will be
paid with accrued interest thereon in the event the Company successfully
consummates an initial public offering of securities of the Company, but only to
the extent that the over-allotment option is exercised in such offering and only
from the proceeds received by the Company from the exercise of the
over-allotment option.
In August, September and October 1996, the Company received three loans
from the Company's largest stockholder aggregating $253,750. A portion of the
funds that this stockholder loaned the Company was a result of the stockholder
selling shares of his Common Stock to an investor. In August 1996, this
shareholder sold 38,889 shares of his Common Stock at a price of $1.12 per
share. In September 1996, this shareholder sold 23,333 shares of his Common
Stock at a price of $1.50 per share. These loans, which were consolidated into
one note in September 1997, bear interest at a rate of 8% and are payable the
earlier of (i) June 1, 1997, or (ii) with respect to $130,000 of the principal
amount, the date the Company successfully consummates an initial public offering
of securities of the Company, but only to the extent that the over-allotment
option is either exercised in such offering, or ninety (90) days after the
Representative elects not to exercise the over-allotment option.
In September 1996, the Company completed a private placement offering
pursuant to Rule 506 of the Securities Act of 1933, as amended (the "Securities
Act") consisting of the sale of 61.5 units (the "Second Private Placement
Units"), with each Second Private Placement Unit consisting of $2,500 principal
amount of 12% promissory notes due on the earlier of July 31, 1997 or the
closing date of an initial public offering of securities of the Company
(provided that in the event of a default as defined therein, the entire sum will
be accelerated), and 7,500 shares of the Company's Common Stock at an offering
price of $25,000 per Second Private Placement Unit. As of September 30, 1996,
the Company issued a total of 461,250 shares of Common Stock and notes payable
of $153,750, for which it received proceeds of an aggregate $1,537,500. In April
1997, the holder of $30,000 of such notes converted the principal and accrued
interest into 16,050 shares of Common Stock.
On May 30, 1996, the Company received loans totaling $100,000 from two
stockholders. The loans bear interest at an annual rate of 10% and initially
were due on demand. In September 1996, the maturity date of these promissory
notes was revised to occur the earlier of (i) May 30, 1998 or (ii) the date the
Company successfully consummates an initial public offering of securities of the
Company, but only to the extent that the over-allotment option is exercised in
such offering and only from the proceeds received by the Company from the
exercise of the over-allotment option.
On May 30, 1996, the Company issued 50,000 shares of its Common Stock to
certain individuals for services rendered on behalf of the Company. These shares
were valued at $3.00 per share, the fair market value of the Common Stock at the
date of issuance.
In April 1996, the Company issued a promissory note (the "Penn Note") in
exchange for certain trade accounts payable of $830,275. As of March 31, 1997,
this outstanding balance was $710,275. $575,000 together with accrued interest
is payable from the proceeds of this offering and the balance is payable in
December 1997. If such initial public offering does not occur on or before June
1, 1997, the Penn Note is due in full on that date. Interest on the Penn Note
accrues at the prime rate plus 1% per annum. The Penn Note is collateralized by
all of the assets of the Company.
24
<PAGE> 27
In February 1996, the Company issued $325,000 of 12% convertible promissory
notes which were payable on the earlier of August 31, 1996 or upon the
consummation of an interim financing as contemplated by a Letter of Intent with
an investment banker for an initial public offering of the Company's securities.
In June 1996, in lieu of receiving payment in such event, the holders of the
notes exchanged the notes, based on a conversion price determined by the notes,
into Second Private Placement Units.
During November 1994 through May 1995, the Company completed a private
placement offering of the Company's Common Stock pursuant to Rule 504 of the
Securities Act. During the nine month period ended December 31, 1995 and the
year ended March 31, 1995 the Company issued a total of 27,487 and 62,824 units,
respectively, at $9.75 per unit, each unit consisting of two shares of Common
Stock and one warrant. All such warrants expired on January 10, 1997.
In April 1995, the Company issued 5,128 shares of its Common Stock to a
consultant in consideration of his efforts in assisting in various matters for
the Company during the fiscal years ended March 31, 1994 and 1995. These shares
were valued at $2.45 per share, the estimated fair market value of the Common
Stock at the date the Company committed to issue the shares.
In September 1995, the Company issued 7,179 shares of its Common Stock to
certain individuals for services rendered on behalf of the Company during the
nine month period ending December 31, 1995. These shares were valued at $4.88
per share, the estimated fair market value of the Common Stock at the date of
issuance.
During the fiscal year ended March 31, 1995, the Company issued two
promissory notes of $25,000 each to an investor, who is related to the founder
of the Company, which were originally due in November and December 1998,
respectively. The Company repaid one of these notes in April 1995. In September
1995, the maturity date of the outstanding promissory note was revised to occur
the earlier of the date on which the Company receives proceeds from a securities
offering or June 1, 1996. In April 1996, the maturity date of the outstanding
promissory note was revised to occur subsequent to the repayment of the Penn
Note issued in April 1996. In September 1996, the maturity date of this
promissory note was revised to occur the earlier of: (i) February 1, 1998 or
(ii) upon the occurrence of events defined by the note as a "Change in Control."
Interest accrues at an annual rate of 6% and is payable at the maturity of the
note.
In May 1994, the Company issued 30,769 and 5,128 shares of its Common Stock
to its legal counsel and an independent consultant, respectively, for services
rendered. These shares are valued at $.001 per share, the estimated fair market
value of the Common Stock as determined by the Company's Board of Directors at
the date of issuance.
During the fiscal year ended March 31, 1994, the Company borrowed $100,000
from a relative of the Company's largest stockholder. The loan, which was
originally due on demand, was formalized in the form of a promissory note during
September 1995. In April 1996, the maturity date of the $100,000 obligation was
revised to occur subsequent to the repayment of the Penn Note issued in April
1996. The loan was non-interest bearing through April 1994. From May 1994
through maturity interest accrues at an annual rate of 6% and is payable upon
maturity. In September 1996, the maturity date of this promissory note was
revised to occur the earlier of (i) February 1, 1998 or (ii) upon the occurrence
of events defined by the note as a "Change in Control." During the fiscal year
ended March 31, 1995, the Company borrowed an additional $100,000 from the same
relative of the Company's largest stockholder. The loan was due on demand with
interest at an annual rate of 6%. The Company repaid $50,000 of this loan in
March 1995, and repaid the remaining $50,000 during April 1995.
During the fiscal year ended March 31, 1994, the Company obtained loans
from the founder and issued promissory notes of $40,000 and $15,000 which are
payable in May and June 1998, respectively. Interest accrues at an annual rate
of 8% and is payable at the maturity date of the notes.
25
<PAGE> 28
The following schedule lists the principal and interest payments due during
the twelve month period immediately following the date of this Prospectus: (1)
<TABLE>
<CAPTION>
DUE DATE INTEREST PRINCIPAL BALANCE AT 3/31/97
OF NOTE RATE REPAYMENT TERMS NEXT 12 MONTHS
---------- -------- ----------------------------------------
<S> <C> <C> <C> <C>
Penn Traffic Company....... See Terms Prime +1% $710,275 $575,000 principal balance
with accrued interest is
payable on 6/1/97 or from
proceeds of offering;
balance, including
interest, is payable in
December 1998
Crystal Cream & Butter..... See Terms 10.00% $230,283 $134,283 principal balance
with accrued interest is
payable on June 1, 1997 or
from proceeds of offering;
balance, including
interest, is payable in
December 1998
DariGold, Inc.............. 5/1/97 8.00% $ 30,000 Payable $5,000 per month
including interest, balance
due April 1, 1997 or from
proceeds of offering
PIA Merchandising.......... See Terms 10.00% $ 10,997 Payable $1,000 per month
including interest until
paid in full (assumed
February 1998)
Demo Deluxe................ See Terms 10.00% $ 49,636 Payable $10,000 per month
until paid in full (assumed
August 1997) from proceeds
of offering
News America FSI, Inc...... See Terms 10.00% $ 60,000 $30,000 principal balance
with accrued interest is
payable from the proceeds
of this offering; balance,
including interest, is
payable in December 1998.
Annette Cantor............. 2/1/98 6.00% $100,000 Payable at due date
together with accrued
interest
Elizabeth Pilossoph........ 2/1/98 6.00% $ 25,000 Payable at due date
together with accrued
interest
Steven A. Cantor........... See Terms 8.00% $253,750 $123,750 is payable from
proceeds of offering. The
balance is due from net
proceeds of over-allotment
option, if any, or if not
exercised, ninety (90) days
after offering
</TABLE>
- ---------------
(1) Does not include indebtedness to three vendors which aggregates
approximately $2,500.
26
<PAGE> 29
BUSINESS
GENERAL
The Company markets, sells and distributes Mike's Original(R) Cheesecake
Ice Cream, an innovative all natural blend of super-premium ice cream with
cheesecake ingredients. This product line is offered in a variety of flavors
mainly to supermarkets and grocery stores and also, to a lesser extent, to
convenience stores, food service outlets and warehouse clubs. The Company's
products are presently sold in approximately fifteen (15) states, including New
York, California, Pennsylvania and New Jersey, with sales generally concentrated
on the East and West coasts of the United States. The Company believes, based on
an internal study, that it incentivizes retailers to continue purchasing its
products through a pricing strategy designed to provide retailers with a higher
retail profit per linear foot as compared to other competitive products based on
the suggested retail price.
In October 1995, the Company entered into the Kraft-Pizza Agreement for the
exclusive distribution of the Company's products for the Northeastern and
Western regions of the United States. The Kraft-Pizza Agreement provides the
Company's products with the opportunity to gain access to the thousands of
existing retail outlets already buying Tombstone Pizza, together with the use of
Kraft-Pizza's commission sales force to oversee the sales and in-store
presentation of the Company's products.
In April 1996, the Company entered into an agreement with Kraft Foods,
Inc., pursuant to which Kraft Foods, Inc. has agreed to represent the Company in
the sale of its products to military facilities throughout the world. Military
contracts exist with DeCA (Defense Commissary Agency) and sales to the military
commenced in the third quarter of 1996.
Since October 1996, the Company has restructured its management. In this
regard, Mr. Rosen has replaced Daniel Kelly as President, Mr. Kelly having
resigned in September 1996. The Company also has hired a Vice President of Sales
and Marketing and a Vice President -- Finance, and has retained two frozen food
and ice cream consultants with a combined fifty years of experience in the sales
and marketing of ice cream. These persons have redirected the Company's selling
efforts to substantially increase sales in the approximately 3,500 retail
outlets selling the Company's products and to expand market penetration on the
East and West coasts into the institutional and food service segments. By
concentrating on existing locations and segments requiring limited up-front
fees, the Company intends to substantially reduce one of the major costs
associated with its prior operations.
Net sales for the year ended December 31, 1996 were approximately
$2,392,000, an increase of 3% from the previous nine month period ended December
31, 1995 and a decrease of 8% from the twelve month period ended December 31,
1995. The increase as compared to the shorter period was significantly reduced,
and the decrease as compared to the prior twelve month period was, in each case,
because of an initial build-up of inventory by Kraft-Pizza in the fourth quarter
of calendar 1995 which reduced sales to Kraft-Pizza in 1996, an unusually cool
summer in the Northeast during 1996, a temporary work stoppage at the primary
facility which manufactures the Company's products and the withdrawal by the
Company from certain test markets which proved to be unprofitable. The Company's
limited operating resources to date also has prevented the Company's
participation in certain discount promotions and in-store programs which has
caused continuing reduced sales by a reduction in reorders throughout its
distribution network. The proceeds from this offering should enable the Company
to substantially increase sales through participation in these programs. The
Company's products are currently manufactured by one independent facility
located in Buffalo, New York, which has exclusive East coast manufacturing
rights for the Company's products. Upon completion of this offering, the Company
may use additional manufacturing facilities as well as to re-establish its
relationships with former manufacturers of its products on the West coast.
The Company was incorporated in New York in March 1993 and reincorporated
in Delaware in May 1994. It maintains its principal offices at 131 Jericho
Turnpike, Jericho, New York 11753 and its telephone number is (516) 334-8500.
27
<PAGE> 30
PRESENT AND FUTURE PRODUCTS
According to the International Ice Cream Association, ice cream was part of
a $10.5 billion nationwide frozen dessert industry in 1995 and has wide appeal,
with over 93% of households in the United States consuming these products. The
super-premium ice cream category in particular has grown dramatically in recent
years despite diet conscious consumers. This has been proven in the marketplace
by an increase in the market share of the super-premium ice cream segment of 94%
from 1985 to 1994. In 1995, sales of ice cream in pints increased by 4%, from
$282 million in 1994 to $293 million in 1995, in contrast to a 4% decrease in
the sales of frozen yogurt pints, which decreased from $115 million in 1994 to
$107 million in 1995. In the first six months of 1996, ice cream sales in pints
increased by 4.6% to $149 million, in contrast with sales of frozen yogurt sales
pints, which declined 7.1% to $51 million. With respect to novelty ice cream
products, premium ice cream bars represented the largest dollar market share
with sales approximating $270 million in 1995, of which 96% of these sales were
classified "regular" while only 4% were classified as reduced fat or diet
products. In the first six months of 1996, premium ice cream bars had sales of
$126 million of which 93.3% were classified as "regular" while only 6.7% were
classified as "reduced or nonfat." Premium ice cream bars were the second
largest dollar segment during this period. Ice cream sandwiches represented the
third largest market share of novelty products with sales of $210 million in
1995, of which 88.5% of these sales were classified "regular" compared to only
11.5% classified as reduced fat or diet. In the first six months of 1996, ice
cream sandwiches had sales of $121 million, an increase of 14%. 86.3% of these
sales remained classified as "regular" compared to 13.7% classified as "reduced
fat or nonfat."
Super-premium ice cream is generally characterized by a greater richness
and density than other kinds of ice cream with a butter fat content of at least
14%. This category of ice cream was created in 1959 by Ruben Mattus, founder of
Haagen-Dazs, and expanded by Ben & Jerry's. According to available information,
Haagen-Dazs had annual sales in 1994 exceeding $900 million with Ben & Jerry's
reporting sales in 1995 in excess of $155 million.
The Company competes in the packaged ice cream category with three flavors
of pints. The three flavors of cheesecake ice cream offered in pints are Graham
Cracker Delight(R), Strawberry Fantasy(TM) and Chocolate Tidbits(TM). The
Company also competes in the novelty category of premium ice cream bars and ice
cream sandwiches. Its premium ice cream bar products are all cheesecake ice
cream with either a graham cracker crunch coating or strawberry sorbet coating,
using high quality California strawberries. The Company's newest product is a
sandwich version trademarked GRAMWICH(R), which is cheesecake ice cream
surrounded by two specially made graham cracker wafers. The GRAMWICH(R) is
available in four-pack as well as twenty-four count "bulk" pack for retail
single serve sales. The Company also produces an eighteen (18) count "bulk" pack
of both the graham cracker crunch and strawberry sorbet bars for warehouse club
stores and single serve sales. The Company has four-ounce Dixie cups and 1.5
gallon drum containers of the three pint flavors for future expansion into food
service and ice cream parlor opportunities.
The Company plans to expand its product line to include additional
variations of its existing products, a variety of retail sizes and creative food
service applications. While the Company makes no representations that it will be
marketing and selling other products, the potential product types include:
- A deluxe line of pints featuring a broader variety of flavors
- "Lite" or reduced calorie extensions of existing products
- Additional fruit coatings for novelty sticks
- Additional GRAMWICH(R) flavors
- Bon-bon style products
- Premium novelty cone products
In this regard, the Company has recently created a new line of pint
products which it intends to market under the tradename "Sorbet Blends." The
"Sorbet Blends" will consist of a nearly equal mixture of sorbet and cheesecake
ice cream and are planned to be introduced in two flavors, "Raspberry Romance"
and "Lemon Lace". These products will have approximately half the calories and
fat content of the Company's other pint varieties, and are intended to be test
marketed in California and Florida.
28
<PAGE> 31
MANUFACTURING AGREEMENT
The Company's products are presently manufactured by Fieldbrook Farms
("Fieldbrook"), an independent FDA approved facility located in Buffalo, New
York, under a two-year exclusive manufacturing agreement expiring in March 1999.
The manufacturing agreement, dated as of March 20, 1997, provides that
Fieldbrook shall be the exclusive supplier of all products manufactured by
Fieldbrook and distributed by the Company East of the Mississippi River for a
period of two years. As partial consideration for this agreement, the Company
has issued to Fieldbrook 35,000 shares of Common Stock. While Fieldbrook is
obligated to sell existing products to the Company, it is not obligated to
manufacture or sell new or different products. In the event Fieldbrook declines
to manufacture, sell or produce any new product, the Company is free to obtain
such product from another supplier. The manufacturing agreement further provides
for payment to Fieldbrook of $150,000 for open accounts which, since not paid by
April 30, 1997, has caused the Company to issue an additional 30,000 shares of
Common Stock to Fieldbrook. The Company's present credit line with Fieldbrook is
$250,000, for which 21-day credit terms have been provided. As of April 30,
1997, $189,500 of the credit line has been used. This amount shall be
redetermined by the parties after the Company's initial public offering based
upon the Company's creditworthiness.
Two facilities on the West coast have recently suspended manufacturing the
Company's products due to the financial position of the Company, however, each
such facility has informed the Company that they will reconsider manufacturing
the Company's products upon completion of this offering and payment by the
Company of all amounts owing to such manufacturer. Upon completion of this
offering, the Company may use additional facilities as well as reestablish its
relationships with its former manufacturers on the West coast. See "Use of
Proceeds". The Company's products have been certified as Kosher by the Kuf-K,
the Company having adhered to strict standards for both its ingredients and
processing procedures.
DISTRIBUTION AND MARKETING
The Company, through its officers, consultants and other representatives,
currently markets the Company's products to supermarkets and grocery stores and
also, to a lesser extent, to convenience stores, food service outlets and
warehouse clubs in an effort to obtain authorization for sale in these various
retail outlets. The Company has incurred substantial promotional expenses for
freezer space in connection with entering new markets, maintaining existing
markets, entering new retailers and maintaining shelf space in existing
retailers. The Company receives no assurance that these retailers will continue
to allocate freezer space for the Company's products even after the payment of
these fees. Once the Company obtains authorization from retailers and satisfies
the substantial initial promotional expenses, the Company then directs
Kraft-Pizza to distribute the Company's products to the appropriate authorized
retailers.
In October 1995, the Company entered into the Kraft-Pizza Agreement
pursuant to which Kraft-Pizza serves as the Company's exclusive distributor in
nine northeastern states, including New York, New Jersey and Pennsylvania, in
California, Oregon and in parts of Washington and Nevada. The Kraft-Pizza
Agreement commenced on October 1, 1995, automatically renews, and is terminable
by either party on sixty (60) days' prior written notice. Under the terms of the
Kraft-Pizza Agreement, the Company will pay Kraft-Pizza 25% of a previously
agreed upon suggested wholesale price for all sales of the Company's products
sold by Kraft-Pizza. The Company believes that the Kraft-Pizza Agreement has
provided an opportunity for the Company to sell its products in thousands of
retail locations presently serviced by Kraft-Pizza as well as "hands on"
servicing of these locations by Kraft-Pizza employees. Additional distributors
may be retained as the Company continues to expand its market penetration.
In April 1996, the Company entered into the Kraft-Military Agreement with
Kraft Military pursuant to which Kraft Military acts as a broker with respect to
the Company's products for sales to the United States military facilities
throughout the world. Kraft Military is presently the largest worldwide supplier
of food products to military facilities. The Kraft Military Agreement commenced
on April 1, 1996, continues for a period of one year, and is renewable for
consecutive one year periods unless terminated by either party on thirty (30)
days prior written notice. The Company pays a commission of 5% of net sales, as
defined in the Kraft Military Agreement, for sales made by Kraft Military to
military customers.
29
<PAGE> 32
The Company promotes its products through trade and consumer advertising,
trade show participation, in-store demonstrations, circular advertisements and
special event sampling/couponing. Print advertising is the primary vehicle used
by the Company with its initial approach being to target regional areas of
distribution. The Company's products have also been promoted on the radio
through means such as the sponsorship of Shadow Traffic(R) reports on various
stations in the New York metropolitan area, Southern California and
Philadelphia.
In December 1996, Mike's Original(R) Cheesecake Ice Cream was featured in
New York magazine. In 1994, the Company's products were mentioned on CBS-TV's
"This Morning" show and America's Talking, a nationally syndicated show,
featured Mike's Original(R) products in their daily morning show called "What's
New?". The TV Food Network also invited the Company's founder, Mr. Rosen to
introduce the Company's product line on TVFN's "Food, News & Views" show. In
1995, Mr. Rosen was chosen by Dairy Field Magazine as one of the year's top
twenty "movers and shakers" in the industry. Mr. Rosen was also featured in the
November 1996 issue of Entrepreneur Magazine.
COMPETITION
The super-premium ice cream market is highly competitive and the Company
faces substantial competition in connection with the marketing and sales of its
products. Among its competitors are Haagen-Dazs, owned by The Pillsbury Company,
Ben & Jerry's and numerous other regional ice cream companies. Many of these
competitors are well established and have substantially greater financial and
other resources than the Company. Additionally, Haagen-Dazs and Ben & Jerry's
manufacture their own ice cream. In the ice cream novelty segment, the Company
competes with several wellknown brands including Haagen-Dazs and Dove Bars(R),
manufactured by a division of Mars, Inc.
Achieving wide distribution in the ice cream business is difficult due to
the substantial expense of a national marketing program and the limitations on
available space in the freezer compartments of retailers. The Company's products
also may be considered in competition with all ice cream and other frozen
desserts for discretionary food dollars.
The ability of the Company to increase its market share will be dependent
upon several factors, among which are consumer acceptance of the products, the
quality and price of its products, advertising and the availability of
sufficient capital for product expansion.
GOVERNMENT REGULATION
The Company is subject to regulation by various governmental agencies
regarding the distribution and sale of food products, including the FDA and
various state agencies. The Company believes that its marketing and distributing
operations comply with all existing applicable laws and regulations.
The Company cannot predict the impact of possible changes that may be
required in response to future legislation, rules or inquiries made from time to
time by governmental agencies. FDA regulations may, in certain circumstances,
affect the ability of the Company, as well as others in the industry, to develop
and market new products. However, the Company does not presently believe that
existing applicable legislative and administrative rules and regulations will
have a significant impact on its operations.
TRADEMARKS AND PATENTS
The Company owns registered trademarks and service marks under the names
"Mike's Original(R)", "GRAMWICH(R)" and "Graham Cracker Delight(R)". The Company
has common law trademarks for "Strawberry Fantasy(TM)" and "Chocolate
Tidbits(TM)". It also has filed a patent application on its formulated process
to manufacture cheesecake ice cream.
INSURANCE
The Company's business exposes it to potential liability which is inherent
in the marketing and distribution of food products. The Company currently
maintains $2,000,000 of product liability insurance. The
30
<PAGE> 33
Company also maintains $1,000,000 of general and personal injury insurance per
occurrence and $5,000,000 in the aggregate. If any product liability claim is
made and sustained against the Company and is not covered by insurance, the
Company's business and prospects could be materially adversely affected.
EMPLOYEES
The Company employs six full time employees, all of whom are located in the
Company's Jericho, New York headquarters and serve in selling and administrative
capacities. None of the Company's employees are represented by a labor union.
The Company has never had a work stoppage and considers its relationships with
its employees to be satisfactory.
SEASONALITY
The ice cream industry generally experiences its highest volume during the
spring and summer months and the lowest volume in the winter months. In this
regard, according to statistics published by the International Ice Cream
Association, 35.5% of sales of novelty ice cream products and 29.5% of sales of
packaged ice cream products were made during the third quarter
(July -- September) of calendar 1996 while only 18.0% of sales of novelty ice
cream products and 22.4% of sales of packaged ice cream were made during the
first quarter (January -- March) of calendar 1996. Similarly, the Company's
quarterly sales for calendar year 1996 followed a seasonal pattern. Sales were
stronger in the second and third quarters of 1996 and weaker in the cooler
months of the first and fourth quarters.
Several factors negatively impacted sales on a quarterly basis. During the
first quarter of 1996 the Company's distribution was in transition to its new
distributor. In the second quarter, extensive marketing and initial product fill
at store level was occurring to boost sales. In third quarter the Company's East
coast manufacturer endured a work stoppage, limiting the quantities of product
available while simultaneously the Company halted much of its marketing efforts
due to its poor financial condition. In the fourth quarter the continued lack of
consumer marketing and the Company's decision to withdraw from certain test
markets caused a sharp decline in sales.
LEGAL MATTERS
In September 1996, J. W. Messner, Inc. ("Messner") commenced an action
against the Company in the United States District Court for the Eastern District
of New York. Messner seeks damages of $125,935, plus interest, arising from
advertising and marketing services that Messner claims to have performed for the
Company. The Company has filed an answer asserting a number of affirmative
defenses to the claims asserted by Messner and the matter has been scheduled for
arbitration in June 1997.
In December 1996, Suiza Dairy Corp. ("Suiza") commenced an action in the
United States District Court for the District of Puerto Rico. Suiza seeks
damages in the amount of $61,510 plus interest accrued, costs and attorneys fees
arising from advertising and promotion services which Suiza claims to have
performed for the Company. The Company has not been formally served with a
summons and complaint. When, and if, the Company is served, the Company intends
to file an answer denying the allegations of the complaint, claiming, among
other things, that any services performed by Suiza were without authorization
from the Company.
Except as set forth above, the Company is not involved in any material
pending legal proceedings.
31
<PAGE> 34
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The By-Laws of the Company provide for a Board of Directors of between
three and nine members classified into three classes as nearly equal in number
as possible, whose terms expire in successive years.
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION(S) WITH THE COMPANY
- --------------------------------- --- ---------------------------------------------
<S> <C> <C>
Michael Rosen.................... 39 Chairman of the Board, Chief Executive
Officer, President and Director
Martin Weiss..................... 43 Vice-President of Sales and Marketing
Frederic D. Heller............... 59 Vice President-Finance, Chief Financial
Officer and Director
Rachelle Rosen................... 37 Secretary and Treasurer
Martin Pilossoph................. 66 Director
Arthur G. Rosenberg.............. 57 Director
Myron Levy....................... 56 Director nominee
</TABLE>
Michael Rosen has been the Chief Executive Officer of the Company and a
director since its inception in March 1993 and President since September 1996.
For six years prior to the formation of the Company, Mr. Rosen was President and
sole shareholder of Progressive Personnel, Inc., a career search firm in New
York City. Mr. Rosen graduated from the State University of New York, Brockport
with a Bachelor of Science degree in Business and Sports Administration. Mr.
Rosen is the husband of Rachelle Rosen and the son-in-law of Martin Pilossoph.
Martin Weiss has been Vice-President of Sales and Marketing of the Company
since October 1996. Prior to joining the Company, from September 1994 to October
1996, Mr. Weiss was the Eastern Regional Sales Manager for Old Fashioned
Kitchens, Inc., a specialty frozen foods company. From October 1990 to October
1993, Mr. Weiss was District Sales Manager of Kraft General Foods, Dairy
Division and became Regional Sales Manager of the Thomas J. Lipton Company, Good
Humor/Breyers Division, upon such Company's acquisition of the Kraft Dairy
Division in October 1993. Mr. Weiss has over 15 years experience in the food
industry, having been employed by Ferolie Corporation from January 1980 to
October 1990 in such positions as Vice President of Sales and Vice President
Dairy Sales. Mr. Weiss received a Bachelor of Arts Degree in Marketing from
Montclair State College and was a member of the Board of Directors of the
Eastern Frosted Foods Association from 1990 to 1994.
Frederic D. Heller has been Vice President of Finance and director of the
Company since January 1997. Mr. Heller is a CPA licensed in the State of New
York for over the last ten years. Prior to joining the Company, from November
1994 through January 1997, he practiced as an independent financial consultant
including rendering such services to the Company in that capacity from August
1996 to January 1997. From September 1992 through October 1994, Mr. Heller was
Vice President of Finance and director of Vasomedical, Inc., formerly Future
Medical Products, Inc., a publicly owned business involved in the merchandising
of certain medical technology. From October 1990 through September 1992, Mr.
Heller was president and chief operating officer of FDH Enterprises, Inc., a
company rendering financial consulting services to business clients.
Martin Pilossoph has been a director of the Company since September 1995.
For the past five years, Mr. Pilossoph has been a Senior Sales Executive of the
Ingram Companies, a national video wholesaler. Mr. Pilossoph is the father of
Rachelle Rosen and the father-in-law of Michael Rosen.
Arthur G. Rosenberg has been a director of the Company since September
1995. Mr. Rosenberg has been a practicing attorney for more than the past ten
years. Since June 1, 1987, he has been Vice President of Acquisitions of The
Associated Companies, a residential land and commercial developer located in
Bethesda,
32
<PAGE> 35
Maryland. Mr. Rosenberg also is a director of EcoTyre Technologies, Inc., a
publicly owned manufacturer of remolded tires.
Myron Levy has been elected a director of the Company to take office upon
the closing of this offering. Since June 1993, Mr. Levy has been President of
Herley Industries, Inc., a publicly owned designer and manufacturer of flight
instrumentation products. From May 1991 to June 1993, Mr. Levy served as
Executive Vice President and Treasurer of Herley Industries, Inc. Mr. Levy also
has been a director of Herley since 1992.
Rachelle Rosen has been Secretary and Treasurer of the Company since its
formation in 1993. Ms. Rosen served as a director of the Company from 1993 until
January 1997. It was Ms. Rosen's cheesecake that gave her husband, Mike, the
idea and concept for Mike's Original(R) Cheesecake Ice Cream. She received a
Bachelor of Science degree from Queens College. Ms. Rosen is the daughter of
Martin Pilossoph and the wife of Michael Rosen.
The Company's Board of Directors is classified into three classes. The
directors in each class serve for three year terms. Arthur Rosenberg is a member
of Class I which serves until the Company's 1997 Annual Meeting of Stockholders.
Martin Pilossoph is a member of Class II which serves until the Company's 1998
Annual Meeting of Stockholders and Myron Levy has been elected to serve as a
member of Class II upon completion of this offering. Michael Rosen and Frederic
D. Heller are members of Class III which serves until the Company's 1999 Annual
Meeting of Stockholders. Directors who are not employees of the Company, of
which there are presently two, and upon consummation of this offering will be
three, receive no cash compensation for their services to the Company as
directors, but are reimbursed for expenses actually incurred in connection with
attending meetings of the Board of Directors. All members of the Board of
Directors are eligible to participate in the Company's stock option plans. Each
director attended or participated in at least 75% of the meetings of the Board
of Directors during his or her tenure in fiscal 1996.
Pursuant to the terms of the Underwriting Agreement relating to this
offering, the Representative has the right to nominate either one member of the
Board of Directors or a non-voting observer for the year after the Closing Date
of this offering. The Representative has informed the Company that it does not
intend to exercise this right upon consummation of this offering or in the near
future. See "Underwriting."
EXECUTIVE COMPENSATION
The following table sets forth the cash and other compensation paid or
accrued by the Company during the year ended December 31, 1996, the nine months
ended December 31, 1995 and the fiscal year ended March 31, 1995 to the
Company's Chief Executive Officer and former president. No other executive
officer earned over $100,000 in any fiscal year.
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION ------------
------------------------------------------------ SECURITIES
NAME AND PRINCIPAL OTHER ANNUAL UNDERLYING ALL OTHER
POSITION YEAR SALARY BONUS COMPENSATION(2) OPTIONS COMPENSATION
- ------------------------- ------- -------- ----- --------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Michael Rosen............ 1996 $112,250(1) -- -- 200,000(3) --
Chairman of the Board, 9/30/95(4) 81,000(1) -- -- -- --
President, Chief 3/31/95(5) 9,000(1) -- -- -- --
Executive Officer
Daniel B. Kelly(6)....... 1996 $104,166 -- -- 29,530(6) --
Former President 9/30/95(4) 93,750 -- -- -- --
3/31/95(5) 25,833 -- -- -- --
</TABLE>
- ---------------
(1) Does not include an aggregate of $62,648 of salary which was accrued and not
paid to Mr. Rosen during the period from inception through September 30,
1996, to which Mr. Rosen has waived all rights.
(2) The value of all perquisites provided to the Company's officers did not
exceed the lesser of $50,000 or 10% of the officer's salary and bonus.
33
<PAGE> 36
(3) Represents ten-year options granted in May 1996 and September 1996 pursuant
to the Company's 1995 Long Term Incentive Plan.
(4) Represents the nine month period ended December 31,1995.
(5) Represents the fiscal year ended March 31, 1995.
(6) Mr. Kelly resigned as an officer and director of the Company on September
16, 1996. His long-term compensation represents ten year options granted in
February 1995 which were terminated due to his resignation.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table sets forth all stock options granted to the executive
officers named in the Executive Compensation table during the fiscal year ended
December 31, 1996.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------------------------------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO
OPTIONS/SARS EMPLOYEES IN EXERCISE OR BASE
NAME GRANTED(#) FISCAL YEAR PRICE ($/SH) EXPIRATION DATE
- -------------------------- ------------ ------------ ---------------- ------------------
<S> <C> <C> <C> <C>
Michael Rosen............. 33,333 12.5% $ 3.00 May 31, 2006(1)
166,667 62.5% $ 1.50 September 11, 2006(2)
</TABLE>
- ---------------
(1) Represents ten year options granted in May 1996, pursuant to the Company's
1995 Long Term Incentive Plan. Options became fully vested on November 30,
1996.
(2) Represents ten year options granted in September 1996, pursuant to the
Company's 1995 Long Term Incentive Plan. Options vest on March 12, 1997.
EMPLOYMENT AGREEMENTS
Michael Rosen
The Company has entered into an employment agreement with Michael Rosen
pursuant to which Mr. Rosen has agreed to serve as Chairman of the Board and
Chief Executive Officer of the Company, at an annual base salary of $100,000 for
the first year of the agreement and an annual base salary of $125,000 for each
of the remaining five years of the agreement. Mr. Rosen is also entitled to a
$50,000 bonus for each of the third through sixth years of the Agreement in the
event the Company's pretax income for such year exceeds $1,000,000. Mr. Rosen's
employment agreement is for six (6) years, which commenced on June 1, 1995. The
employment agreement provides that Mr. Rosen may be terminated only for a
material breach of the terms of the agreement which is not cured after he
receives five (5) days written notice.
Mr. Rosen's employment agreement restricts him from engaging in competition
with the Company for the term thereof and contains provisions protecting the
Company's proprietary rights and information, including the use of the name
"Mike's Original(R)". The agreement also provides for the payment to Mr. Rosen
of three times his previous year's total compensation, less $1.00, upon the
termination of his employment in the event of a change in control of the
Company. For those purposes, a change in control is defined to mean (a) change
in control as such term is defined on Regulation 240.12b-2 of the Securities
Exchange Act of 1934, as amended or (b) if during the term of the agreement,
individuals who at the beginning of such agreement constitute the board of
directors of the Company cease for any reason to constitute at least a majority
thereof, unless the election of each director who is not a director at the
beginning of such period has been approved in advance by the directors
representing at least two-thirds of the directors then in office who were
directors at the beginning of the term of the agreement.
Martin Weiss
The Company also has entered into an employment agreement with Martin
Weiss. This agreement provides that Mr. Weiss will serve as Vice President of
Sales and Marketing of the Company, and will receive
34
<PAGE> 37
as compensation therefor an annual base salary of $100,000 per year, plus an
incentive bonus equal to 3% of the Company's pre-tax income, as defined. This
agreement is for an initial term which terminates on the earlier of one year
from the effective date of this offering or February 28, 1998, and provides that
if Mr. Weiss is terminated after the initial term other than for "cause" (as
defined), or dies or becomes permanently disabled, the Company will pay to him
certain severance. This agreement contains the same change of control provision
as set forth in Mr. Rosen's employment agreement and also restricts Mr. Weiss
from engaging in competition with the Company for the term thereof and for one
year thereafter and contains provisions protecting the Company's proprietary
rights and information.
Frederic D. Heller
The Company has entered into an employment agreement with Frederic D.
Heller pursuant to which Mr. Heller has agreed to serve as Vice
President -- Finance of the Company, at an annual base salary of $95,000 for the
first year of the agreement and an annual base salary of $105,000 for the
remaining year of the agreement. In addition, pursuant to this agreement, Mr.
Heller received options to purchase 25,000 shares of Common Stock with an
exercise price of $1.50 per share. Mr. Heller's employment agreement is for two
years, which commenced on March 1, 1997. The employment agreement provides that
Mr. Heller may be terminated only for a material breach of the terms of the
agreement which is not cured after he receives thirty (30) days written notice.
Mr. Heller's employment agreement restricts him from engaging in
competition with the Company for the term thereof and contains provisions
protecting the Company's proprietary rights and information. The agreement also
provides for the payment to Mr. Heller of three times his previous year's total
compensation, less $1.00, upon the termination of his employment in the event of
a change in control of the Company. For those purposes, a change in control is
defined to mean (a) change in control as such term is defined on Regulation
240.12b-2 of the Securities Exchange Act of 1934, as amended or (b) if during
the term of the agreement, individuals who at the beginning of such agreement
constitute the board of directors of the Company cease for any reason to
constitute at least a majority thereof, unless the election of each director who
is not a director at the beginning of such period has been approved in advance
by the directors representing at least two-thirds of the directors then in
office who were directors at the beginning of the term of the agreement.
CONSULTING AGREEMENTS
The Company has entered into a consulting agreement with Alma Management
Corp. ("Alma"), as of November 1, 1996. Under this agreement, which is for an
initial term of one year, Alma has agreed to cause its two principals (the
"Principals"), to provide sales and marketing advisory and consulting services
to the Company. Alma receives an annual consulting fee of $50,000 payable in
equal installments over the term of the agreement. In addition, Alma has
received options to purchase 133,333 shares of Common Stock at an exercise price
of $1.50 per share. One-third of the options vest on May 1, 1997, one-third six
months thereafter and the balance vest on May 1, 1998. The Company may terminate
the services of either Principal under the consulting agreement with Alma if
such Principal cannot adequately perform his duties thereunder because of mental
or physical disability, death or for "Just Cause" (as defined). The consulting
agreement provides that if one of the Principals is terminated by the Company,
the consulting fee paid to Alma will be reduced by one half and if both
Principals are terminated by the Company, no further compensation will be paid
to Alma. The consulting agreement with Alma expires in May 1998 and restricts
Alma and the Principals from engaging in competition with the Company for the
term thereof and for one year thereafter and contains provisions protecting the
Company's trade secrets and proprietary rights and information.
1995 LONG TERM INCENTIVE PLAN
In August 1995, the Company adopted The Mike's Original, Inc. 1995 Long
Term Incentive Plan (the "1995 Incentive Plan") in order to motivate qualified
employees of the Company, to assist the Company in attracting employees and to
align the interests of such persons with those of the Company's stockholders.
35
<PAGE> 38
The 1995 Incentive Plan provides for the grant of "incentive stock options"
within the meaning of the Section 422 of the Internal Revenue Code of 1986, as
amended, "non-qualified stock options," restricted stock, performance grants and
other types of awards to officers, key employees, consultants and independent
contractors of the Company and its affiliates.
The 1995 Incentive Plan, which is administered by the Board of Directors,
authorizes the issuance of a maximum of 433,333 shares of Common Stock. If any
award under the 1995 Incentive Plan terminates, expires unexercised, or is
canceled, the Common Stock that would otherwise have been issuable pursuant
thereto will be available for issuance pursuant to the grant of new awards. To
date, the Company has granted an aggregate of 306,667 options to purchase Common
Stock under the 1995 Incentive Plan, of which 250,000 options have been granted
to Michael Rosen, the Company's Chairman of the Board and Chief Executive
Officer. 33,333 of these options are exercisable for ten years from the date of
grant at a price of $3.00 per share and 216,667 of these options are exercisable
for ten years from the date of grant at a price of $1.50 per share. Another
56,667 options have been granted to Steven A. Cantor. Each of the options
granted to Mr. Cantor are exercisable for a ten year term at a price of $1.50
per share. As of the date of this Prospectus, none of these options had been
exercised.
1996 NON-QUALIFIED STOCK OPTION PLAN
In October 1996, the Company's Board of Directors approved a 1996
Non-Qualified Stock Option Plan (the "Non-Qualified Plan") which covers 500,000
shares of the Company's Common Stock. The options become exercisable in
installments as determined at the time of grant by the Board of Directors. As of
the date of this Prospectus, the Company had granted 478,333 options to purchase
shares of Common Stock under the Non-Qualified Plan at an exercise price of
$1.50 per share. Arthur G. Rosenberg, Martin Pilossoph and Myron Levy have been
granted options to purchase 23,333 shares of Common Stock each at the exercise
price of $1.50 per share pursuant to the Non-Qualified Plan. Frederic D. Heller
has been granted options to purchase 58,333 shares of Common Stock at the
exercise price of $1.50 per share pursuant to the Non-Qualified Plan. Martin
Weiss has been granted options to purchase 66,667 shares of Common Stock at an
exercise price of $1.50 per share pursuant to the Non-Qualified Plan. Alma has
been granted options to purchase 133,333 shares of Common Stock at an exercise
price of $1.50 per share pursuant to the Non-Qualified Plan. Steven A. Cantor
has been granted options to purchase 76,667 shares of Common Stock at an
exercise price of $1.50 per share. As of the date of this Prospectus, none of
these options had been exercised.
PERSONAL LIABILITY AND INDEMNIFICATION OF DIRECTORS
The Company's Certificate of Incorporation and By-laws contain provisions
which reduce the potential personal liability of directors for certain monetary
damages and provide for indemnity of directors and other persons. The Company is
unaware of any pending or threatened litigation against the Company or its
directors that would result in any liability for which such director would seek
indemnification or similar protection.
Such indemnification provisions are intended to increase the protection
provided directors and, thus, increase the Company's ability to attract and
retain qualified persons to serve as directors. Because directors liability
insurance is only available at considerable cost and with low dollar limits of
coverage and broad policy exclusions, the Company does not currently maintain a
liability insurance policy for the benefit of its directors, although the
Company may attempt to acquire such insurance in the future. The Company
believes that the substantial increase in the number of lawsuits being
threatened or filed against corporations and their directors and the general
unavailability of directors liability insurance to provide protection against
the increased risk of personal liability resulting from such lawsuits have
combined to result in a growing reluctance on the part of capable persons to
serve as members of boards of directors of companies, particularly of companies
which intend to become public companies. The Company also believes that the
increased risk of personal liability without adequate insurance or other
indemnity protection for its directors could result in overcautious and less
effective direction and management of the Company. Although no directors have
resigned or have threatened to resign as a result of the Company's failure to
provide insurance or other indemnity protection from liability, it is uncertain
whether the Company's directors would continue to serve in such capacities if
improved protection from liability were not provided.
36
<PAGE> 39
The provisions affecting personal liability do not abrogate a director's
fiduciary duty to the Company and its stockholders, but eliminate personal
liability for monetary damages for breach of that duty. The provisions do not,
however, eliminate or limit the liability of a director for failing to act in
good faith, for engaging in intentional misconduct or knowingly violating a law,
for authorizing the illegal payment of a dividend or repurchase of stock, for
obtaining an improper personal benefit, for breaching a director's duty of
loyalty (which is generally described as the duty not to engage in any
transaction which involves a conflict between the interests of the Company and
those of the director) or for violations of the federal securities laws. The
provisions also limit or indemnify against liability resulting from grossly
negligent decisions including grossly negligent business decisions relating to
attempts to change control of the Company.
The provisions regarding indemnification provide, in essence, that the
Company will indemnify its directors against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred in connection with any action, suit or proceeding arising out of the
director's status as a director of the Company, including actions brought by or
on behalf of the Company (stockholder derivative actions). The provisions do not
require a showing of good faith. Moreover, they do not provide indemnification
for liability arising out of willful misconduct, fraud, or dishonesty, for
"short-swing" profits violations under the federal securities laws, or for the
receipt of illegal remuneration. The provisions also do not provide
indemnification for any liability to the extent such liability is covered by
insurance. One purpose of the provisions is to supplement the coverage provided
by such insurance. However, as mentioned above, the Company does not currently
provide such insurance to its directors, and there is no guarantee that the
Company will provide such insurance to its directors in the near future,
although the Company may attempt to obtain such insurance.
These provisions diminish the potential rights of action which might
otherwise be available to stockholders by limiting the liability of officers and
directors to the maximum extent allowable under Delaware law and by affording
indemnification against most damages and settlement amounts paid by a director
of the Company in connection with any stockholders derivative action. However,
the provisions do not have the effect of limiting the right of a stockholder to
enjoin a director from taking actions in breach of his fiduciary duty, or to
cause the Company to rescind actions already taken, although as a practical
matter courts may be unwilling to grant such equitable remedies in circumstances
in which such actions have already been taken. Also, because the Company does
not presently have directors liability insurance and because there is no
assurance that the Company will procure such insurance or that if such insurance
is procured it will provide coverage to the extent directors would be
indemnified under the provisions, the Company may be forced to bear a portion or
all of the cost of the director's claims for indemnification under such
provisions. If the Company is forced to bear the costs for indemnification, the
value of the Company's stock may be adversely affected.
The Company has entered into Indemnification Agreements with certain of its
officers and directors. The Indemnification Agreements provide for reimbursement
for all direct and indirect costs of any type or nature whatsoever (including
attorneys' fees and related disbursements) actually and reasonably incurred in
connection with either the investigation, defense or appeal of a Proceeding, (as
defined) including amounts paid in settlement by or on behalf of an indemnitee
thereunder.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the Company has been advised
that such indemnification, in the opinion of the Commission, is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
37
<PAGE> 40
PRINCIPAL STOCKHOLDERS
The following table sets forth the beneficial ownership of the Company's
Common Stock as of May 1, 1997 (taking into effect a .153846-for-1 reverse stock
split effected in June 1996 and a .667-for-1 reverse stock split effected in
February 1997) of (i) each person known by the Company to beneficially own 5% or
more of the Company's outstanding Common Stock, (ii) each of the Company's
executive officers, directors and director nominees, and (iii) all of the
Company's executive officers and directors as a group. Except as otherwise
indicated, all shares of Common Stock are beneficially owned, and investment and
voting power is held, by the persons named as owners.
<TABLE>
<CAPTION>
PERCENTAGE
OWNERSHIP(8)
AMOUNT AND ---------------------
NATURE OF SHARES BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED* OFFERING OFFERING
- --------------------------------------------------------- ------------------- -------- --------
<S> <C> <C> <C>
Michael Rosen(1)......................................... 283,333(2) 10.4% 8.4%
Rachelle Rosen(1)........................................ 283,333(3) 10.4% 8.4%
Steven A. Cantor(1)...................................... 432,295(4) 16.3% 13.0%
Annette Cantor........................................... 298,650 11.9% 9.4%
Martin Weiss(1).......................................... 66,667(5) 2.6% 2.0%
Frederic D. Heller(1).................................... 16,667 * *
Arthur G. Rosenberg(1)................................... 23,333(6) * *
Martin Pilossoph(1)...................................... 23,333(6) * *
Myron Levy(1)............................................ 24,167 1.0% *
Louis P. Solferino(9).................................... 180,034 7.2% 5.6%
Michael Jones(10)........................................ 146,342 5.8% 4.6%
The Moshe Isaac Foundation(11)........................... 200,000 7.9% 6.3%
Food Commodities Limited(12)............................. 266,667 10.6% 8.4%
All officers and directors as a group (7 persons)........ 437,500(7) 15.5% 12.5%
</TABLE>
- ---------------
* less than one percent (1%) unless otherwise indicated.
(1) The address for each of these persons is 131 Jericho Turnpike, Jericho, New
York 11753.
(2) Includes options to purchase 33,333 shares of Common Stock granted under
the 1995 Incentive Plan in May 1996 and options to purchase 166,667 shares
of Common Stock granted under the 1995 Incentive Plan in October 1996. Does
not include options to purchase 50,000 shares of Common Stock granted under
the 1995 Incentive Plan in May 1997, which are not exercisable within sixty
(60) days from the date hereof.
(3) Represents Common Stock and options to purchase Common Stock owned by
Michael Rosen, Ms. Rosen's husband. Rachelle Rosen otherwise owns no shares
of Common Stock.
(4) Includes options to purchase 56,667 shares of Common Stock granted under
the 1995 Incentive Plan and options to purchase 76,666 shares of Common
Stock granted under the Non-Qualified Plan.
(5) Includes options to purchase 66,667 shares of Common Stock granted under
the Non-Qualified Plan.
(6) Includes options to purchase 23,333 shares of Common Stock granted under
the Non-Qualified Plan.
(7) Includes 313,333 shares issuable upon the exercise of options granted
pursuant to the Company's stock option plans.
(8) Assumes no exercise of the over-allotment option.
(9) The address for Mr. Solferino is 115 Blue Spruce Road, Levittown, New York
11756.
(10) The address for Mr. Jones is 86 West Main Street, East Islip, New York
11730.
(11) The address for The Moshe Isaac Foundation is c/o Teaneck Nursing Center,
1104 Teaneck Road, Teaneck, New Jersey 07666. The principal of this entity
is Michael Koenig.
(12) The address for Food Commodities Limited is Bel Royal House, Hilgrove
Street, St. Helier, Jersey JE24WG, British Isles. The principal of this
entity is Robert S. Fraley.
38
<PAGE> 41
CERTAIN TRANSACTIONS
In April 1997, the Company issued 150,000 shares of Common Stock to Steven
A. Cantor, the Company's largest stockholder, as consideration for the
termination of his three year consulting agreement providing for payments of
$125,000 annually, which would have commenced on the closing of this offering.
In December 1996, the Company issued a convertible promissory note to The
Moshe Isaac Foundation bearing interest at the rate of 8% per annum in the
principal amount of $225,000 (the "Convertible Note"). The Convertible Note was
to paid in full the earlier of five days after the closing date of an initial
public offering or December 31, 1997. In lieu of receiving payment, the holder
of the Convertible Note has the right to convert within five (5) days of the
closing of such initial public offering into 200,000 shares of Common Stock. In
April 1997, such note was converted into 200,000 shares of Common Stock.
In October 1996, the Company issued 16,667 shares of Common Stock to
Frederic D. Heller, the Company's Vice President-Finance, Treasurer and a
director, as payment for services rendered during the year ended December 31,
1996. These shares were valued at $3.00 per share, the estimated fair market
value of the Common Stock at the date of issuance.
On August 28, 1996, Michael Rosen, the Company's Chairman of the Board,
President and Chief Executive Officer was issued a promissory note in the
principal amount of $206,250. The funds that Mr. Rosen loaned the Company were
the proceeds of a sale by Mr. Rosen to investors of 183,333 shares of his Common
Stock at a price of $1.12 per share. This loan bears interest at a rate of 8%
and initially was payable the earlier of (i) thirteen (13) months from the date
of the loan, or (ii) the date the Company successfully consummates an initial
public offering of securities of the Company, but only to the extent that the
over-allotment option is exercised in such offering and only from the proceeds
received by the Company from the exercise of the over-allotment option. In
September 1996, the maturity date of this promissory note was revised to
September 30, 1998. In addition, the revised promissory note provides that
one-half of the outstanding principal amount of the note will be paid with
accrued interest thereon in the event the Company successfully consummates an
initial public offering of securities of the Company, but only to the extent
that the over-allotment option is exercised in such offering and only from the
proceeds received by the Company from the exercise of the over-allotment option.
In August, September and October 1996, the Company received three loans
from Steven A. Cantor aggregating $253,750. A portion of the funds that this
stockholder loaned the Company was a result of the stockholder selling shares of
his Common Stock to an investor. In August 1996, this shareholder sold 38,889
shares of his Common Stock at a price of $1.12 per share. In September 1996,
this shareholder sold 23,333 shares of his Common Stock at a price of $1.50 per
share. These loans, which were consolidated into one note in September 1997,
bear interest at a rate of 8% and are payable the earlier of (i) June 1, 1997,
or (ii) with respect to $123,750 of the principal amount, the date the Company
successfully consummates an initial public offering of securities of the
Company, but only to the extent that either the over-allotment option is
exercised in such offering or within ninety (90) days after the underwriter
elects not to exercise the over-allotment option.
On May 30, 1996, the Company received loans of $50,000 each from Louis P.
Solferino and Michael P. Jones. The loans bear interest at an annual rate of 10%
and initially were due on demand. In September 1996, the maturity date of these
promissory notes was revised to occur the earlier of (i) May 30, 1998 or (ii)
the date the Company successfully consummates an initial public offering of
securities of the Company, but only to the extent that the over-allotment option
is exercised in such offering and only from the proceeds received by the Company
from the exercise of the over-allotment option. In addition, the Company issued
6,667 shares of its Common Stock to each of Mr. Solferino and Mr. Jones. These
shares were valued at $3.00 per share, the fair market value of the Common Stock
at the date of issuance.
In February 1996, the Company issued $150,000 and $75,000 of 12%
convertible promissory notes to Mr. Solferino and Mr. Jones, respectively, which
were payable on the earlier of August 31, 1996 or upon the consummation of an
interim financing as contemplated by a letter of intent with an investment
banker for an initial public offering of the Company's securities. In June 1996,
in lieu of receiving payment in such event,
39
<PAGE> 42
the holders of the notes exchanged the notes, based on a conversion price
determined by the notes, into Second Private Placement Units. In April 1997, Mr.
Solferino and Mr. Jones converted $16,050 and $8,025 of the principal and
accrued interest into 8,025 and 4,013 shares of Common Stock, respectively.
During the fiscal year ended March 31, 1995, the Company issued two
promissory notes of $25,000 each to Elizabeth Pilossoph, who is the mother of
Rachelle Rosen, the mother-in-law of Michael Rosen, and the wife of Martin
Pilossoph. See "Management". These notes were originally due in November and
December 1998, respectively. The Company repaid one of these notes in April
1995. In September 1995, the maturity date of the outstanding promissory note
was revised to occur the earlier of the Company receiving proceeds from a
securities offering or June 1, 1996. In April 1996, the maturity date of the
outstanding promissory note was revised to occur subsequent to the repayment of
the Penn Note issued in April 1996. In September 1996, the maturity date of this
promissory note was revised to occur the earlier of (i) February 1, 1998 or (ii)
upon the occurrence of events defined by the note as a "Change in Control."
Interest accrues at an annual rate of 6% and is payable at the maturity of the
note.
During the fiscal year ended March 31, 1994, the Company borrowed $100,000
from the mother of Steven A. Cantor. See "Principal Stockholders". The loan,
which was originally due on demand, was formalized in the form a promissory note
during September 1995. In April 1996, the maturity date of the $100,000
obligation was revised to occur subsequent to the repayment of the Penn Note
issued in April 1996. The loan was non-interest bearing through April 1994. From
May 1994 through maturity interest accrues at an annual rate of 6% and is
payable upon maturity. In September 1996, the maturity date of this promissory
note was revised to occur the earlier of: (i) February 1, 1998 or (ii) upon the
occurrence of events defined by the note as a "Change in Control." During the
fiscal year ended March 31, 1995, the Company borrowed an additional $100,000
from Ms. Cantor. The loan was due on demand with interest at an annual rate of
6%. The Company repaid $50,000 of this loan in March 1995, and repaid the
remaining $50,000 during April 1995.
During the fiscal year ended March 31, 1994, the Company obtained loans
from Rachelle Rosen and issued promissory notes of $40,000 and $15,000 which are
payable in May and June 1998, respectively. Interest accrues at an annual rate
of 8% and is payable at the maturity date of the notes.
As a general rule, all transactions among the Company and its officers,
directors or stockholders have been, and in the future will be, made on terms no
less favorable to the Company than those available from unaffiliated parties.
40
<PAGE> 43
SELLING SECURITYHOLDERS
This Prospectus may also be used for the possible offering of additional
shares of Common Stock owned by the Selling Securityholders. Certain other
Selling Securityholders have agreed that the shares of Common Stock owned by
such persons registered for resale hereunder under may not be sold for
twenty-four (24) months from the date of this Prospectus without the prior
written consent of the Representative. The Company will not receive any proceeds
from such sales. The Representative may release such restriction at any time
after completion of this offering, although there are no understandings or
arrangements in this regard. The resale of the securities by the Selling
Securityholders is subject to Prospectus delivery and other requirements of the
Securities Act.
The Shares are being offered by the following persons in the amounts set
forth below:
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP NUMBER OF SHARES BENEFICIAL OWNERSHIP
STOCKHOLDER PRIOR TO OFFERING OFFERED AFTER OFFERING*
- ---------------------------------------- -------------------- ---------------- --------------------
<S> <C> <C> <C>
Dental Investment Study Group........... 52,500 52,500 --
James C. LaVigne........................ 30,000 30,000 --
Paul Greenstein......................... 30,000 30,000 --
Ashok Chaudhari......................... 15,000 15,000 --
Paul A. Kaye, Family Trust.............. 15,000 15,000 --
Gregory J. and Toni Marie Shottenkirk... 15,000 15,000 --
Achyut Sahasra.......................... 15,000 15,000 --
Bruce Evanter........................... 7,500 7,500 --
Steven Watson........................... 7,500 7,500 --
Marvin and Ellen Ochs................... 7,500 7,500 --
Lawrence A. Rosenstadt.................. 7,500 7,500 --
Richard Rubenstein...................... 7,500 7,500 --
Marvin and Linda Watsky................. 7,500 7,500 --
Michael Ring............................ 7,500 7,500 --
Grahm de la Garza Grahm Limited
Family Partnership.................... 7,500 7,500 --
Robert G. Morris, DDS, Inc. Pension..... 7,500 7,500 --
Marque of Distinction, Inc. Retirement
Trust................................. 7,500 7,500 --
Gulfstream Asset Management Corp.
Retirement Trust...................... 7,500 7,500 --
Ted Cohen............................... 7,500 7,500 --
Paul E. Gavin........................... 7,500 7,500 --
Michael Jones........................... 146,342 137,624 8,718
Louis Solferino......................... 180,034 164,136 15,898
Four L Realty Corp...................... 43,564 41,513 2,051
Richard Satin........................... 23,333 23,333 --
Alan Bush............................... 33,333 33,333 --
Sally Miglio............................ 15,000 15,000 --
David H. Lieberman (including profit
sharing plan)(1)...................... 125,577 99,167 26,410
Paul Rubin.............................. 7,500 7,500 --
Barry Weintraub......................... 7,500 7,500 --
Myron Levy(2)........................... 24,167 24,167 --
Gerald Klein............................ 6,667 6,667 --
Vosavu Pty. Ltd......................... 91,059 91,059 --
J. Scott Murphy......................... 7,500 7,500 --
Raymond Hancock......................... 7,500 7,500 --
</TABLE>
41
<PAGE> 44
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP NUMBER OF SHARES BENEFICIAL OWNERSHIP
STOCKHOLDER PRIOR TO OFFERING OFFERED AFTER OFFERING*
- ---------------------------------------- -------------------- ---------------- --------------------
<S> <C> <C> <C>
Jane Kirschner.......................... 3,750 3,750 --
David and Elaine Johnson................ 3,750 3,750 --
Donald and Alice Elstein................ 3,750 3,750 --
Glenn Koebel............................ 3,750 3,750 --
Irving Wagner........................... 3,750 3,750 --
Edward I. Kramer(1)..................... 24,718 24,718 --
Edward S. Wactlar(1).................... 15,333 15,333 --
Lonnie Coleman(1)....................... 15,333 15,333 --
Adam S. Rosenberg(1).................... 6,218 6,218 --
Melinda O'Donnell(1).................... 6,090 6,090 --
Frederic D. Heller(2)................... 16,667 16,667 --
Steven A. Cantor(3)..................... 298,961 150,000 148,961(4.7%)
Food Commodities Limited................ 266,667 266,667 --
The Moshe Isaac Foundation(3)........... 200,000 200,000 --
Fieldbrook Farms........................ 65,000 65,000 --
Suzanne Frank........................... 14,500 14,500 --
</TABLE>
- ---------------
* less than 1% unless otherwise indicated
(1) See "Legal Matters."
(2) See "Management" and "Principal Stockholders."
(3) See "Principal Stockholders" and "Certain Transactions."
The securities offered hereby may be sold from time to time directly by the
Selling Securityholders. Alternatively, the Selling Securityholders may from
time to time offer such securities through underwriters, dealers or agents. The
distribution of securities by the Selling Securityholders may be effected in one
or more transactions that may take place on the over-the-counter market,
including ordinary broker's transactions, privately-negotiated transactions or
through sales to one or more broker-dealers for resale of such shares as
principals, at market prices prevailing at the time of sale, at prices related
to such prevailing market prices or at negotiated prices. Usual and customary or
specifically negotiated brokerage fees or commissions may be paid by the Selling
Securityholders in connection with such sales of securities. The Selling
Securityholders and intermediaries through whom such securities are sold may be
deemed "underwriters" within the meaning of the Securities Act with respect to
the securities offered, and any profits realized or commissions received may be
deemed underwriting compensation. The Company is not aware of any present
intentions of any Selling Stockholders to engage in any transactions with either
of the Representatives of this offering.
At the time a particular offer of securities is made by or on behalf of a
Selling Securityholder, to the extent required, a prospectus will be distributed
which will set forth the number of shares being offered and the terms of the
offering, including the name or names of any underwriters, dealers or agents, if
any, the purchase price paid by any underwriter for shares purchased from the
Selling Securityholder and any discounts, commissions or concessions allowed or
reallowed or paid to dealers, and the proposed selling price to the public.
Under the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
and the regulations thereunder, any person participating in a distribution of
the securities of the Company offered by this Prospectus may not simultaneously
engage in market-making activities with respect to such securities of the
Company during the applicable restricted period (one or five business days)
before the day of pricing of this offering, and until the distribution is over.
In addition, and without limiting the foregoing, the Selling Securityholders
will be subject to applicable provisions of the Exchange Act and the rules and
regulations thereunder, including without limitation, Regulation M, and Rules
100 through 105 thereunder, in connection
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<PAGE> 45
with transactions in such securities, which provisions may limit the time of
purchases and sales of such securities by the Selling Securityholders.
Sales of securities by the Selling Securityholders or even the potential of
such sales would likely have an adverse effect on the market prices of the
securities offered hereby. As of the date of this Prospectus, the freely
tradeable securities of the Company (the "public float") will be (i) 675,000
shares of Common Stock, and (ii) 875,000 Class A Warrants.
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<PAGE> 46
DESCRIPTION OF SECURITIES
CAPITAL STOCK
The Company's authorized capital stock consists of 20,000,000 shares of
Common Stock, $.001 par value per share and 500,000 shares of Preferred Stock,
$.01 par value per share.
Common Stock
General. The Company has 20,000,000 authorized shares of Common Stock,
2,516,622 of which were issued and outstanding prior to the offering. All shares
of Common Stock currently outstanding are validly issued, fully paid and
non-assessable, and all shares which are the subject of this Prospectus, when
issued and paid for pursuant to this offering, will be validly issued, fully
paid and non-assessable.
Voting Rights. Each share of Common Stock entitles the holder thereof to
one vote, either in person or by proxy, at meetings of stockholders. The
Company's Board consists of three classes each of which serves for a term of
three years. At each annual meeting of the stockholders the directors in only
one class will be elected. The holders are not permitted to vote their shares
cumulatively. Accordingly, the holders of more than fifty percent (50%) of the
issued and outstanding shares of Common Stock can elect all of the directors of
the Company. See "Principal Stockholders."
Dividend Policy. All shares of Common Stock are entitled to participate
ratably in dividends when and as declared by the Company's Board of Directors
out of the funds legally available therefor. Any such dividends may be paid in
cash, property or additional shares of Common Stock. The Company has not paid
any dividends since its inception and presently anticipates that all earnings,
if any, will be retained for development of the Company's business and that no
dividends on the shares of Common Stock will be declared in the foreseeable
future. Further, pursuant to a credit agreement with one of its former
manufacturers, the Company is prohibited from paying dividends on any of its
capital stock until the repayment of the indebtedness thereunder. Payment of
future dividends will be subject to the discretion of the Company's Board of
Directors and will depend upon, among other things, future earnings, the
operating and financial condition of the Company, its capital requirements,
general business conditions and other pertinent facts. Therefore there can be no
assurance that any dividends on the Common Stock will be paid in the future. See
"Dividend Policy."
Miscellaneous Rights and Provisions. Holders of Common Stock have no
preemptive or other subscription rights, conversion rights, redemption or
sinking fund provisions. In the event of the liquidation or dissolution, whether
voluntary or involuntary, of the Company, each share of Common Stock is entitled
to share ratably in any assets available for distribution to holders of the
equity of the Company after satisfaction of all liabilities, subject to the
rights of holders of Preferred Stock.
Shares Eligible for Future Sale. Upon completion of this offering, the
Company will have 3,191,622 shares of Common Stock outstanding (3,292,872 shares
if the Representative's over-allotment option is exercised in full). Of these
shares, the 675,000 shares sold in this offering (776,250 shares if the
Representative's over-allotment option is exercised in full) will be freely
tradeable without restriction or further registration under the Securities Act,
except for any shares purchased by an "affiliate" of the Company (in general, a
person who has a control relationship with the Company) which will be subject to
the limitations of Rule 144 adopted under the Securities Act. Another 1,735,275
shares are registered under the registration statement of which this Prospectus
forms a part and are freely saleable under the Securities Act, but may not be
transferred for twenty-four (24) months from the date of this prospectus or at
such earlier date as may be permitted by the Representative. All of the
remaining shares are deemed to be "restricted securities," as that term is
defined under Rule 144 promulgated under the Securities Act.
In general, under Rule 144 as effective on April 29, 1997, subject to the
satisfaction of certain other conditions, commencing ninety (90) days after the
effective date of the registration statement of which this prospectus is a part,
a person, including an affiliate of the Company (or persons whose shares are
aggregated), who has owned restricted shares of Common Stock beneficially for at
least one year is entitled to sell, within
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<PAGE> 47
any three-month period, a number of shares that does not exceed the greater of
1% of the total number of outstanding shares of the same class or the average
weekly trading volume of the Company's Common Stock on all exchanges and/or
reported through the automated quotation system of a registered securities
association during the four calendar weeks preceding the date on which notice of
the sale is filed with the Commission. Sales under Rule 144 are also subject to
certain manner of sale provisions, notice requirements and the availability of
current public information about the Company. A person who has not been an
affiliate of the Company for at least the three months immediately preceding the
sale and who has beneficially owned shares of Common Stock for at least two
years is entitled to sell such shares under Rule 144 without regard to any of
the limitations described above.
759,772 of the shares of restricted stock presently outstanding have been
held at least one year. Accordingly, commencing following the completion of the
offering these shares would be eligible for resale pursuant to Rule 144.
However, pursuant to the terms of the Underwriting Agreement, certain Selling
Securityholders owning an aggregate of 1,735,275 shares of Common Stock have
agreed not to sell any of their shares for a period of twenty-four (24) months
following the date of this prospectus without the prior written consent of the
Representative. The sale of any substantial number of these shares in the public
market could adversely affect prevailing market prices following the offering.
No predictions can be made as to the effect, if any, that sales of shares
under Rule 144 or otherwise or the availability of shares for sale will have on
the market, if any, prevailing from time to time. Sales of substantial amounts
of the Common Stock pursuant to Rule 144 or otherwise may adversely affect the
market price of the Common Stock or the Warrants offered hereby.
Class A Warrants
The Class A Warrants offered hereby will be issued in registered form under
a warrant agreement (the "Warrant Agreement") between the Company and American
Stock Transfer & Trust Company, as Warrant Agent (the "Warrant Agent"). The
following summary of the provisions of the Warrants is qualified in its entirety
by reference to the Warrant Agreement, a copy of which is filed as an exhibit to
the registration statement of which this Prospectus is a part.
Rights to Purchase Common Stock. Each Class A Warrant will be separately
tradeable and will entitle the registered holder thereof to purchase one share
of Common Stock (subject to adjustment as described below) for a period of three
years commencing on the effective date of this Prospectus at a price of $6.00
per share of Common Stock. A holder of Class A Warrants may exercise such
warrants by surrendering the certificate evidencing such warrants to the Warrant
Agent, together with the form of election to purchase on the reverse side of
such certificate properly completed and executed and the payment of the exercise
price and any transfer tax. If less than all of the warrants evidenced by a
warrant certificate are exercised, a new certificate will be issued for the
remaining number of warrants. Holders of the Class A Warrants may sell the Class
A Warrants if a market exists rather than exercise them. However, there can be
no assurance that a market will develop or continue as to such Class A Warrants.
For a holder of a warrant to exercise the Class A Warrants, there must be a
current registration statement on file with the Commission and various state
securities commissions. The Company will be required to file post-effective
amendments to the registration statement when events require such amendments.
While it is the Company's intention to file post-effective amendments when
necessary, there is no assurance that the registration statement will be kept
effective. If the registration statement is not kept current for any reason, the
Class A Warrants will not be exercisable, and holders thereof may be deprived of
value. Moreover, if the shares of Common Stock underlying the Class A Warrants
are not registered or qualified for sale in the state in which a Class A Warrant
holder resides, such holder might not be permitted to exercise the Class A
Warrants. If the Company is unable to qualify the Common Stock underlying such
Class A Warrants for sale in certain states, holders of the Company's Class A
Warrants in those states will have no choice but to either sell such Class A
Warrants or allow them to expire.
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<PAGE> 48
The Company has authorized and reserved for issuance a number of underlying
shares of Common Stock sufficient to provide for the exercise of the Class A
Warrants. When issued, each share of Common Stock will be fully paid and
nonassessable.
Class A Warrant holders will not have any voting or other rights as
shareholders of the Company unless and until Class A Warrants are exercised and
shares issued pursuant thereto.
Redemption Rights. Any or all of the Class A Warrants may be redeemed by
the Company at a price of $.01 per warrant, upon the giving of not less than
thirty (30) days' nor more than sixty (60) days' written notice at any time
after the date of this Prospectus, provided that the closing bid price of the
Common Stock for all twenty (20) consecutive trading days ending three (3) days
of the notice of redemption has equaled or exceeded $12.00 per share. The right
to purchase the Common Stock represented by the Class A Warrants so called for
redemption will be forfeited unless the Class A Warrants are exercised prior to
the date specified in the foregoing notice of redemption. Any redemption of the
Class A Warrants during the one year period commencing on the date of this
Prospectus shall require the consent of the Representative.
Adjustments. The exercise price and the number of shares of Common Stock
issuable upon the exercise of each Class A Warrant are subject to adjustment in
the event of a stock dividend, recapitalization, merger, consolidation or
certain other events.
For the life of the Class A Warrants, the holders thereof are given the
opportunity, at nominal cost, to profit from a rise in the market price of the
Common Stock of the Company. The exercise of the Class A Warrants will result in
the dilution of the then book value of the Common Stock of the Company held by
the public investors and would result in a dilution of their percentage
ownership of the Company. The terms upon which the Company may obtain additional
capital may be adversely affected through the period that the Class A Warrants
remain exercisable. The holders of these Class A Warrants may be expected to
exercise them at a time when the Company would, in all likelihood, be able to
obtain equity capital on terms more favorable than those provided for by the
Class A Warrants.
Second Private Placement
From June through September 1996, the Company issued an aggregate of 61.5
Second Private Placement Units, each Second Private Placement Unit consisting of
a $2,500 principal amount of Second Private Placement Notes and 7,500 Second
Private Placement Shares. The proceeds from the sale of the Second Private
Placement Units were used to pay promotional expenses incurred in connection
with entering new markets and maintaining existing markets and to fund working
capital. The Company has registered under the registration statement of which
this prospectus forms a part all of the 461,250 Second Private Placement Shares
included in the Second Private Placement Units. The Second Private Placement
Shares are not transferable until the earlier of twenty-four (24) months
following the date of this prospectus or at such earlier date as may be
permitted by the Representative. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Underwriting."
The Second Private Placement Notes bear interest at a rate equal to 12% per
annum, payable one year after the issuance of the Second Private Placement Notes
and monthly in arrears thereafter. The Second Private Placement Notes mature on
the earlier of (i) July 31, 1997, or (ii) the closing date of this offering;
provided, that the maturity of the Second Private Placement Notes will be
accelerated upon an Event of Default (as defined therein).
The purchasers of the Second Private Placement Units also received 7,500
shares of Common Stock for each $2,500 principal amount of Second Private
Placement Units purchased. These shares of Common Stock are registered for
resale hereunder and also have piggyback registration rights with respect to all
other registration statements filed by the Company with the SEC (other than on
forms S-4 or S-8), subject to customary underwriter's or board of director's
rights to limit such participation. However, all holders of Second Private
Placement Shares are prohibited from selling these Second Private Placement
Shares for twenty-four (24) months after the date of this prospectus, subject to
the prior consent of the Representative.
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<PAGE> 49
Preferred Stock
The Company's Certificate of Incorporation, as amended, authorizes the
issuance of up to 500,000 shares of preferred stock, par value $.01 per share.
Currently there are no shares of preferred stock issued or outstanding.
The issuance of Preferred Stock by the Board of Directors could adversely
affect the rights of holders of shares of Common Stock by, among other things,
establishing preferential dividends, liquidation rights or voting power. The
issuance of Preferred Stock could be used to discourage or prevent efforts to
acquire control of the Company through the acquisition of shares of Common
Stock.
CERTAIN PROVISIONS OF THE CERTIFICATE OF INCORPORATION
The Company's Certificate of Incorporation contains certain provisions
which may be deemed to be "anti-takeover" in nature in that such provisions may
deter, discourage or make more difficult the assumption of control of the
Company by another entity or person. In addition to the ability to issue
Preferred Stock, these provisions are as follows:
A vote of 66 2/3% of the stockholders is required by the Certificate of
Incorporation in order to approve certain transactions including mergers and
sales or transfers of all or substantially all of the assets of the Company.
The Company's By-laws provide that the members of the Board of Directors of
the Company be classified into three classes: Class I (which consists of Arthur
G. Rosenberg) will serve until the Company's 1997 Annual Meeting of
Stockholders. Class II (which consists of Martin Pilossoph) will serve until the
Company's 1998 Annual Meeting of Stockholders. Class III (which consists of
Michael Rosen and Frederic D. Heller) will serve until the Company's 1999 Annual
Meeting of Stockholders. After their initial staggered terms, the term of each
class will run for three years and expire at successive annual meetings of
stockholders. Accordingly, it is expected that it would take a minimum of two
annual meetings of stockholders to change a majority of the Board of Directors.
Further, directors may only be removed for cause prior to the expiration of
their term of office. Upon completion of this offering, Myron Levy will be a
director in Class II, to serve until the Company's 1998 Annual Meeting of
Stockholders.
The Delaware General Corporation Law further contains certain anti-takeover
provisions. Section 203 of the Delaware General Corporation Law provides, with
certain exceptions, that a Delaware corporation may not engage in any of a broad
range of business combinations with a person who owns 15% or more of the
corporation's outstanding voting stock (an "interested stockholder") for a
period of three years from the date that such person became an interested
stockholder unless: (i) the transaction resulting in a person's becoming an
interested stockholder, or the business combination is approved by the board of
directors of the corporation before the person becomes an interested
stockholder; (ii) the interested stockholder acquires 85% or more of the
outstanding voting stock of the corporation (excluding shares owned by persons
who are both officers and directors of the corporation, and shares held by
certain employee stock ownership plans); or (iii) the business combination is
approved by the corporation's board of directors and by the holders of at least
66 2/3% of the corporation's outstanding voting stock at an annual or special
meeting, excluding shares owned by the interested stockholder.
Transfer Agent
The transfer agent and registrar for the Company's Common Stock is American
Stock Transfer and Trust Company, 6201 15th Avenue, Brooklyn, New York 11219.
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<PAGE> 50
UNDERWRITING
Subject to the terms and conditions contained in the underwriting agreement
between the Company and the underwriters named below (the "Underwriters"), for
which IAR Securities Corp. is acting as Representative (a copy of which
agreement is filed as an exhibit to the Registration Statement of which this
Prospectus forms a part), the Company has agreed to sell to each of the
Underwriters named below, and each of such Underwriters has severally agreed to
purchase the number of shares of Common Stock and Warrants set forth opposite
its name. All 675,000 shares of Common Stock and 875,000 Warrants offered must
be purchased by the several Underwriters if any are purchased. The shares of
Common Stock and Warrants are being offered by the Underwriters subject to prior
sale, when, as and if delivered to and accepted by the Underwriters and subject
to approval of certain legal matters by counsel and to certain other conditions.
<TABLE>
<CAPTION>
NUMBER NUMBER
UNDERWRITER OF SHARES OF WARRANTS
--------------------------------------------------------------- --------- -----------
<S> <C> <C>
IAR Secutities Corp............................................
Millennium Securities Corp.....................................
------- -------
Total................................................ 675,000 875,000
======= =======
</TABLE>
The Representative has advised the Company that the Underwriters propose to
offer the shares of Common Stock and the Warrants to the public at the offering
prices set forth on the cover page of this Prospectus. The Representative has
further advised the Company that the Underwriters propose to offer the
Securities through members of the National Association of Securities Dealers,
Inc. ("NASD"), and may allow a concession, in their discretion to certain
dealers who are members of the NASD and who agree to sell the Securities in
conformity with the NASD Conduct Rules. Such concessions shall not exceed the
amount of the underwriting discount that the Underwriters are to receive. After
the completion of the offering, the public offering price, the concession to
selected dealers, and the reallowance may be changed by the Representative.
The Company has granted the Underwriters an option, exercisable for
forty-five (45) days from the date of this Prospectus, to purchase up to 101,250
shares of Common Stock and 131,250 Warrants, at the public offering prices less
the underwriting discounts set forth on the cover page of this Prospectus. The
Underwriters may exercise this option solely to cover over-allotments in the
sale of the shares of Common Stock and Warrants offered hereby.
The Company has agreed to indemnify the Representative against certain
liabilities, including liabilities under the Securities Act, or to contribute to
payments it may be required to make in respect thereof. It is the position of
the Commission that indemnification for liabilities under the Securities Act is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable.
The Company has agreed to pay the Representative a non-accountable expense
allowance of 3% of the aggregate offering price (of which $50,000 has already
been received) with respect to the Common Stock and Class A Warrants offered
hereby.
The Company has also agreed to pay the Representative a consulting fee of
$40,000 for financial consulting services to be performed over a period of four
(4) years.
Upon the exercise after one year following the date of this offering of any
Warrant included in the Units, the Company has agreed to pay the Representative
a fee of % of the aggregate exercise price of such warrant if (i) the market
price of the Company's Common Stock is greater than the exercise price of such
Warrant on the date of exercise; (ii) the exercise of such Warrant was solicited
by the Representative and the holder of such Warrant so states in writing and
designates in writing that the Representative is entitled to receive such
compensation, (iii) such Warrant is not held in a discretionary account; and
(iv) the solicitation of such Warrant was not in violation of Regulation M, and
Rules 100 through 105 thereunder promulgated under the Exchange Act.
The Company has agreed to sell to the Representative or its designees, at a
price of $250, warrants (the "Representative's Warrants") to purchase 67,500
shares of Common Stock of the Company at an exercise price of $7.30 per share
and 87,500 Warrants at an exercise price of $.26 per warrant. Other than a
higher
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<PAGE> 51
exercise price and the redemption feature, the Warrants offered to the public
hereby, as to which they will be treated pari passu with the public Warrants.
The Warrants issuable upon exercise of the Representative's Warrants will
entitle the holder to purchase shares of Common Stock at a price of $7.30 per
share or 130% of the then exercise price of the Warrants offered to the pubic
hereby, for a period of three years commencing on the date hereof. The
Representative's Warrants will not be transferable for one year from the date
hereof except to officers and partners of the Underwriters or members of the
selling group and are exercisable during the four year period commencing one
year from the date of this Prospectus. Any profit realized upon any resale of
the Representative's Warrants or upon the sale of the underlying securities
thereof may be deemed to be an additional underwriter's compensation. The
Company has agreed to register (or file a post-effective registration amendment
with respect to any registration statement registering) the Representative's
Warrant and the underlying securities under the Securities Act at its expense on
one occasion during the five years following the date of this Prospectus and at
the expense of the holders thereof. The Company has also agreed to "piggy-back"
registration rights for the holders of the Representative's Stock Warrants and
the Representative's Warrants and the underlying securities at the Company's
expense during the six (6) years following the date of this Prospectus.
The Company has also agreed, for a period of not less than two years
commencing on the date of this offering, at the request of the Representative,
to nominate and use its best efforts to elect a designee of the Representative
to the Board of Directors of the Company or to appoint a designee of the
Representative as a non-voting observer of the Board of Directors. The
Representative has informed the Company that it does not intend to exercise this
right upon consummation of this offering or in the near future.
The foregoing does not purport to be a complete statement of the terms and
conditions of the Underwriting Agreement and related documents, copies of which
are on file at the offices of the Representative, the Company and the
Commission, and forms of which have been filed as an exhibit to the Registration
Statement of which this Prospectus is a part.
The Representative has informed the Company that the Representative does
not intend to confirm sales to any accounts over which it exercises
discretionary authority.
The Company, and its officers and directors, have agreed not to offer,
pledge, sell, contract to sell, grant any option for the sale of, or otherwise
dispose of, directly or indirectly, any securities of the Company for a period
of twenty-four (24) months after the date of this Prospectus, without the prior
written consent of the Representative, except pursuant to the exercise of the
Representative's over-allotment option, or the exercise of the Warrants or
currently outstanding stock options.
Prior to this offering, there has been no market for the Common Stock or
the Warrants. Although the Company will apply to list the Common Stock and the
Warrants on the OTC Bulletin Board, there can be no assurance that an active
trading market will develop for the Common Stock or the Warrants, or, if
developed, that it will be maintained. In addition, the Common Stock and the
Warrants will be separately transferable immediately.
The initial public offering price has been arbitrarily determined by
negotiations between the Company and the Representative. Among the factors
contained in determining the initial public offering price, in addition to
prevailing market conditions, were the Company's capital structure, estimates of
its business potential and earnings prospects, an assessment of its management,
and the consideration of the above factors in relation to market valuation of
companies in related businesses.
In connection with the Second Private Placement, the Company paid
Millennium Securities Corp., one of the underwriters, as Placement Agent, 3% of
the gross proceeds of the entire offering as a non-accountable expense allowance
and a 10% commission on the sales of the Second Private Placement Units.
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<PAGE> 52
LEGAL MATTERS
The validity of the issuance of the securities offered hereby will be
passed upon for the Company by the law firm of Blau, Kramer, Wactlar &
Lieberman, P.C., Jericho, New York. The law firm of Beckman & Millman, P.C., New
York, New York will pass on certain aspects of this offering on behalf of the
Representative. Employees of Blau, Kramer, Wactlar & Lieberman, P.C. own an
aggregate of 193,269 shares of Common Stock, 166,859 of which are registered for
resale hereunder, and options to purchase 73,334 shares of Common Stock issued
under the 1996 Non-Qualified Stock Option Plan.
EXPERTS
The audited financial statements of the Company for the fiscal year ended
December 31, 1996 and the nine month period ended December 31, 1995, are
included herein and in the registration statement in reliance upon the report,
which report includes an emphasis paragraph regarding the ability of the Company
to continue as a going concern, of Grant Thornton LLP, independent certified
public accountants, appearing elsewhere herein, and upon the authority of said
firm as experts in accounting and auditing.
CHANGE IN ACCOUNTANTS
Price Waterhouse LLP served as the Company's independent auditors for the
fiscal years ended March 31, 1994 and March 31, 1995 and the nine month period
ended December 31, 1995. On September 23, 1996, Price Waterhouse LLP advised the
Company that they had resigned as the Company's independent auditors.
Subsequently, the Company's Board of Directors replaced Price Waterhouse LLP in
favor of Grant Thornton LLP as its independent certified public accountants.
Price Waterhouse LLP's report on the Company's financial statements for the
fiscal years ended March 31, 1994 and March 31, 1995 and the nine-month period
ended December 31, 1995, did not contain an adverse opinion or a disclaimer of
opinion, nor was it qualified or modified as to uncertainty, audit scope, or
accounting principles, except that the opinion included an explanatory paragraph
that there were conditions that raise substantial doubt about the Company's
ability to continue as a going concern. During this period there was no
disagreement with Price Waterhouse LLP on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure, which
disagreement, if not resolved to Price Waterhouse's LLP's satisfaction, would
have caused Price Waterhouse LLP to make reference to the subject matter of the
disagreement in connection with its report.
AVAILABLE INFORMATION
The Company has filed with the Commission a registration statement on Form
SB-2, pursuant to the Securities Act, with respect to the securities offered by
this Prospectus. This Prospectus does not contain all of the information set
forth in said registration statement, and the exhibits thereto. For further
information with respect to the Company and the securities offered hereby,
reference is made to said registration statement and exhibits which may be
inspected without charge at the Commission's principal office at Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549.
As of the date of this Prospectus, the Company will be subject to the
informational requirements of the Securities Exchange Act of 1934, as amended,
and, in accordance therewith, shall file reports and other information with the
Commission. Such reports and other information can be inspected and copied at
the public reference facilities maintained by the Commission at Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549, and at its following regional
offices: Suite 788, 1375 Peachtree St. N.E., Atlanta, Georgia 30367,
Northwestern Atrium Center, 500 W. Madison Street, Suite 1400, Chicago, Illinois
60621-2511 and 7 World Trade Center, 13th Floor, New York, New York 10048. Also,
copies of such material can be obtained at prescribed rates from the Public
Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, or at the Commission's Web site located at
http://www.sec.gov.
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<PAGE> 53
CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Report of Independent Certified Public Accountants.............................. F-2
Financial Statements
Balance Sheets................................................................ F-3
Statements of Operations...................................................... F-4
Statement of Changes in Stockholders' Deficit................................. F-5
Statements of Cash Flows...................................................... F-6
Notes to Financial Statements................................................. F-7-F-19
</TABLE>
F-1
<PAGE> 54
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Mike's Original, Inc.
We have audited the accompanying balance sheets of Mike's Original, Inc. as
of December 31, 1996 and 1995 and the related statements of operations, changes
in stockholders' deficit and cash flows for the year ended December 31, 1996 and
for the nine-month period ended December 31, 1995. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Mike's Original, Inc. as of
December 31, 1996 and 1995 and the results of its operations and its cash flows
for the year ended December 31, 1996 and for the nine-month period ended
December 31, 1995 in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As shown in the financial statements,
the Company incurred a net loss of $4,050,547 during the year ended December 31,
1996, and, as of that date, the Company's current liabilities exceeded its
current assets by $2,539,788 and the Company's stockholders' deficit was
$2,996,411. These factors, among others, as discussed in Note B to the financial
statements, raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note B. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
GRANT THORNTON LLP
Melville, New York
April 17, 1997
(except for Notes B, C-10 and O, as to
which the date is May 9, 1997)
F-2
<PAGE> 55
MIKE'S ORIGINAL, INC.
BALANCE SHEETS
DECEMBER 31,
ASSETS
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
CURRENT ASSETS
Cash............................................................ $ 32,523 $ 15,716
Accounts receivable, less allowance for doubtful accounts of
$20,751 and $6,888, respectively............................. 61,219 153,402
Inventories..................................................... 247,608 176,885
Other receivables............................................... 16,589 --
----------- -----------
Total current assets.................................... 357,939 346,003
FIXED ASSETS, NET................................................. 14,478 25,494
OTHER ASSETS
Deferred offering costs......................................... 45,000 --
Trademarks and organizational costs, net of accumulated
amortization of $11,787 and $8,085, respectively............. 6,724 10,426
Security deposits............................................... 18,091 18,091
Other........................................................... 1,000
----------- -----------
$ 443,232 $ 400,014
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable................................................ $ 1,104,336 $ 1,468,610
Accrued expenses and other liabilities.......................... 140,629 249,772
Notes payable to related parties................................ 253,750 125,000
Subordinated notes payable -- stockholders...................... 153,750 --
Note payable -- convertible..................................... 225,000 --
Notes payable................................................... 980,821 49,114
Accrued interest payable to related parties..................... 5,978 --
Line of credit.................................................. 23,506 --
Obligations under capital lease................................. 9,957 9,148
----------- -----------
Total current liabilities............................... 2,897,727 1,901,644
ACCRUED COMPENSATION EXPENSE...................................... -- 158,333
OBLIGATIONS UNDER CAPITAL LEASE................................... 3,611 13,567
NOTES PAYABLE TO RELATED PARTIES.................................. 486,250 55,000
ACCRUED INTEREST PAYABLE TO RELATED PARTIES....................... 52,055 28,822
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT
Preferred stock, $.01 par value; 500,000 shares authorized; no
shares issued or outstanding................................. -- --
Common stock, $.001 par value; 20,000,000 shares authorized;
1,892,641 shares and 1,362,160 shares issued and outstanding
at December 31, 1996 and 1995, respectively.................. 1,892 1,362
Additional paid-in capital...................................... 4,000,700 829,742
Deferred financing costs........................................ (360,000) --
Accumulated deficit............................................. (6,639,003) (2,588,456)
----------- -----------
(2,996,411) (1,757,352)
----------- -----------
$ 443,232 $ 400,014
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE> 56
MIKE'S ORIGINAL, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
Sales, net........................................................ $ 2,392,258 $ 2,312,144
Cost of sales..................................................... 1,439,635 1,312,792
----------- -----------
Gross profit.................................................... 952,623 999,352
Operating expenses
Selling and shipping............................................ 2,596,500 1,864,890
General and administrative...................................... 2,193,602 717,315
Research and development........................................ 70,632 19,529
----------- -----------
4,860,734 2,601,734
----------- -----------
Loss from operations............................................ (3,908,111) (1,602,382)
Interest expense, net of interest income of $547 and $478, 142,436 12,476
respectively....................................................
----------- -----------
NET LOSS........................................................ $ (4,050,547) $ (1,614,858)
----------- -----------
Net loss per share................................................ $ (1.64) $ (.74)
----------- -----------
Weighted average common shares outstanding........................ 2,473,745 2,193,037
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 57
MIKE'S ORIGINAL, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
YEAR ENDED DECEMBER 31, 1996 AND NINE MONTHS ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
ADDITIONAL DEFERRED TOTAL
NUMBER PAID-IN FINANCING ACCUMULATED STOCKHOLDERS'
OF SHARES AMOUNT CAPITAL COSTS DEFICIT DEFICIT
--------- ------ ---------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at April 1, 1995............. 1,294,878 $1,295 $ 534,124 $ (973,598) $ (438,179)
Issuance of common stock for services
rendered........................... 12,307 12 47,488 47,500
Sale of common stock to investors,
net of issuance costs of $19,815... 54,975 55 248,130 248,185
Net loss............................. (1,614,858) (1,614,858)
--------- ------ ---------- ----------- ----------- -----------
Balance at December 31, 1995......... 1,362,160 1,362 829,742 (2,588,456) (1,757,352)
Issuance of common stock for services
rendered........................... 69,231 69 207,623 207,692
Sale of common stock to investors,
net of issuance costs of
$330,437........................... 461,250 461 1,052,853 1,053,314
Compensation attributable to the
issuance of stock options.......... 812,000 812,000
Compensation attributable to the
release of shares held in escrow... 265,000 265,000
Compensation attributable to the
transfer of common stock owned by
the founder for services
rendered........................... 100,000 100,000
Waiver of compensation payable to
stockholders and founders.......... 358,482 358,482
Imputed interest -- convertible
debt............................... 375,000 $ (375,000)
Amortization of imputed interest --
convertible debt................... 15,000 15,000
Net loss............................. (4,050,547) (4,050,547)
--------- ------ ---------- ----------- ----------- -----------
Balance at December 31, 1996......... 1,892,641 $1,892 $4,000,700 $ (360,000) $(6,639,003) $ (2,996,411)
========= ====== ========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-5
<PAGE> 58
MIKE'S ORIGINAL, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER DECEMBER
31, 31,
1996 1995
----------- -----------
<S> <C> <C>
Cash flows from operating activities
Net loss........................................................ $(4,050,547) $(1,614,858)
Adjustments to reconcile net loss to net cash used in operating
activities
Imputed interest............................................. 15,000
Depreciation and amortization................................... 14,718 10,114
Provision for doubtful accounts................................. 13,863 21,378
Compensation expense attributable to the issuance of common
stock for services rendered.................................. 207,692 47,500
Compensation expense attributable to the release of common stock
from escrow account.......................................... 265,000 --
Compensation expense attributable to the issuance of stock
options...................................................... 812,000 --
Compensation expense attributable to the transfer of common
stock
by the founder for services rendered......................... 100,000 --
Changes in operating assets and liabilities
Accounts receivable.......................................... 78,320 (33,513)
Inventories.................................................. (70,723) 10,043
Prepaid expenses............................................. (4,500) 22,941
Other current assets......................................... (16,589) --
Accounts payable............................................. 812,163 975,711
Accrued expenses and other liabilities....................... 79,717 240,629
----------- -----------
Net cash used in operating activities................... (1,743,886) (320,055)
----------- -----------
Cash flows from investing activities
Intangible assets............................................... -- (916)
Security deposit................................................ -- (14,023)
Other assets.................................................... (1,000) --
----------- -----------
Net cash used in investing activities................... (1,000) (14,939)
----------- -----------
Cash flows from financing activities
Proceeds from convertible note payable.......................... 225,000 --
Proceeds from 12% subordinated notes payable -- stockholders.... 153,750 --
Net proceeds from issuance of common stock...................... 1,053,314 248,185
Proceeds from notes payable to related parties.................. 560,000 --
Payment of notes payable to related parties..................... -- (75,000)
Payment of capital lease obligations............................ (9,147) (5,682)
Payment of notes payable........................................ (244,730) --
Proceeds from line of credit.................................... 24,134 --
Payment of line of credit....................................... (628) --
----------- -----------
Net cash provided by financing activities............... 1,761,693 167,503
----------- -----------
NET INCREASE (DECREASE) IN CASH......................... 16,807 (167,491)
Cash at beginning of period....................................... 15,716 183,207
----------- -----------
Cash at end of period............................................. $ 32,523 $ 15,716
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE> 59
MIKE'S ORIGINAL, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE A -- ORGANIZATION OF BUSINESS
Mike's Original, Inc. (the "Company") was incorporated in Delaware in May
1994 as successor to Melanie Lane Farms, Inc. ("Melanie Farms"), a New York
corporation formed in 1993. In June 1994, Melanie Farms was merged into the
Company. As both entities were under common control, the merger has been
accounted for in a manner similar to a pooling of interests.
Effective December 31, 1995, the Company changed its fiscal year-end from
March 31 to December 31.
Since April 1, 1993, the Company has been engaged in the marketing and
distribution of super-premium ice cream products. The Company markets, sells and
distributes Mike's Original(R) Cheesecake Ice Cream, a blend of ice cream and
cheesecake ingredients. This product line is offered in a variety of flavors
mainly to supermarkets and grocery stores and also, to a lesser extent, to
convenience stores, food service outlets and warehouse clubs. The Company's
products are sold in approximately fifteen states, including New York,
California, Pennsylvania and New Jersey with sales generally concentrated on the
East and West Coasts of the United States. (See Note M.)
NOTE B -- BASIS OF PRESENTATION
The Company has incurred losses from operations since its inception in 1993
and at December 31, 1996 has a stockholders' deficit and a working capital
deficit of $2,996,411 and $2,539,788, respectively. A significant portion of
these amounts was incurred during the year ended December 31, 1996 as a result
of intense marketing by the Company, including the payment for introductory
programs with supermarkets and other food chain retailers of approximately
$622,000 and product advertising, promotion and marketing of approximately
$1,526,000.
In addition, the Company has incurred both short- and long-term debt in
order to finance its continuing operations. A substantial portion of these
borrowings is currently due or is past due. The Company is currently negotiating
with its creditors in order to defer payment of these obligations to future
periods.
In the event these creditors do not continue to extend credit to the
Company, the Company's ability to operate would be further hampered.
As described further in Note H, a creditor of the Company amended the terms
of a loan agreement to permit the Company to be in compliance with the agreement
at December 31, 1996. At December 31, 1996, the balance of this obligation to
this creditor was $710,275.
As described in Note N, the Company maintains an unsecured line of credit
aggregating $25,000, of which $23,506 was outstanding at December 31, 1996. The
Company has no additional credit facility.
The Company has signed a letter of intent with an investment banker for a
proposed public offering (the "Offering") by the Company of $4,225,000. It is
the underwriters' intent, immediately prior to the effective date of the
Offering to enter into a "firm commitment" Underwriting Agreement with the
Company and, upon execution thereof, to immediately commence a bona fide public
offering of shares. It is anticipated that the net proceeds of this Offering of
$3,372,500 will be used for the repayment of certain debt and working capital
needs, including marketing and product line expansions. The net proceeds to the
Company from this Offering are expected to be adequate to fund the Company's
working capital needs for the twelve months following the Offering.
In the event that the Offering is delayed, management recognizes that the
Company must generate additional resources to enable it to continue operations.
Management's plans include consideration of the sale of additional equity
securities to private investors under appropriate market conditions or other
business transactions which would generate sufficient resources to assure
continuation of the Company's operations. On
F-7
<PAGE> 60
MIKE'S ORIGINAL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
January 25, 1997, the Company obtained additional debt financing in the amount
of $100,000. On March 13, 1997 the Company obtained additional debt financing in
the amount of $50,000 and in connection therewith issued 2,000 shares of the
Company's Common Stock. On April 3, 1997 the holder of such note converted
$25,000 of principal into 12,500 shares of the Company's common stock. (See Note
H.)
NOTE C -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. USE OF ESTIMATES IN FINANCIAL STATEMENT PREPARATION
The preparation of these financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in these financial statements and
related notes. Actual results could differ from these estimates.
2. REVENUE RECOGNITION
Revenue from the sale of ice cream products is recognized upon shipment.
Effective October 1, 1995, a significant portion of the Company's sales are made
to one distributor pursuant to a distribution agreement which provides for the
payment of distribution fees based upon a percent of sales, price protection and
certain rights of return on product unsold by third parties. Net sales are
presented net of distribution fees of $527,540 and $129,373 for the year ended
December 31, 1996 and the nine months ended December 31, 1995, respectively. A
provision for such costs is made as revenue is recognized; however, costs
relating to price protection and returned product have not been material to
date.
3. INVENTORIES
Inventories are stated at the lower of cost or market value, with cost
determined on a first-in, first-out basis.
4. FIXED ASSETS
Fixed assets are stated at cost less accumulated depreciation. Depreciation
of fixed assets is recorded on a straight-line basis over their estimated useful
lives ranging from three to five years. Certain leased computer equipment with
future rental payments for periods through 1998 has been capitalized. These
amounts are included in fixed assets within the accompanying balance sheets and
are being depreciated over the estimated useful life of the equipment or the
term of the lease, whichever is shorter.
5. TRADEMARKS AND ORGANIZATIONAL COSTS
Costs relating to trademark and organizational expenditures have been
deferred and are being amortized on a straight-line basis over five years.
6. RESEARCH AND DEVELOPMENT
Research and development expenditures primarily for product development are
expensed as incurred.
7. INTRODUCTORY PROGRAMS
Payments for introductory programs are made to certain customers
(supermarkets and other food chain retailers) in exchange for the Company
obtaining retail shelf space and are charged to operations when the Company
initially ships products to customers under such agreement. No costs of
introductory programs are deferred as of December 31, 1996 and 1995.
F-8
<PAGE> 61
MIKE'S ORIGINAL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
8. ADVERTISING
Advertising costs are charged to operations when incurred. Advertising
expense of $346,000 was recorded for the year ended December 31, 1996 and
$92,000 was recorded for the nine months ended December 31, 1995.
9. INCOME TAXES
Deferred income taxes are recognized for temporary differences between the
financial statement and income tax bases of assets and liabilities and loss
carryforwards for which income tax benefits are expected to be realized in
future years. A valuation allowance has been established to offset the deferred
tax assets as it is more likely than not that such deferred tax assets will not
be realized. The effect on deferred taxes of a change in tax rates is recognized
in income in the period that includes the enactment date.
10. PER SHARE INFORMATION
In May 1996, the Company approved a 1-for-6.5 reverse stock split and, in
February 1997, the Company approved a 2-for-3 reverse stock split. Accordingly,
all share and per share amounts have been retroactively restated for these
transactions.
Net loss per common share is based on the weighted average number of common
shares outstanding during the periods. Considered in the calculation of earnings
per share are options to purchase 785,000 shares of the Company's common stock
with an average exercise price of $1.56 issued within a one-year period
preceding the Company's planned initial public offering and 422,831 shares
issuable upon the conversion of notes payable (Notes H and O).
The incremental common equivalent shares of 881,639 considered
outstanding for all periods presented have been determined using the treasury
stock method and an estimated initial public offering price of $6.00. All other
options and warrants have been excluded as their inclusion would be
antidilutive. Further, certain shares previously held in escrow (Note K) have
been excluded from the calculation of earnings per share during such period.
As described more fully in Note B, the Company signed a letter of intent
with an investment banker for a proposed public offering by the Company of
675,000 shares of common stock, $.001 par value at a price of $6.00 per share,
and 875,000 redeemable common stock purchase warrants at a price of $.20 per
warrant. Had the proposed public offering occurred on January 1, 1996, the
reported net loss per common share for the year ended December 31, 1996, would
have decreased $.37 to $1.27, after giving effect to the issuance of additional
shares of common stock and the application of $964,466 of proceeds to reduce
outstanding indebtedness.
11. NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 128, Earnings Per Share, which is effective for
financial statements issued after December 15, 1997. Early adoption of the new
standard is not permitted. The new standard eliminates primary and fully diluted
earnings per share and requires presentation of basic and diluted earnings per
share together with disclosure of how the per share amounts were computed. The
effect of adopting this new standard has not been determined.
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 129 ("SFAS No. 129"), Disclosure of Information About
Capital Structure. The Company does not anticipate that SFAS No. 129 will have a
material impact on the financial statements.
F-9
<PAGE> 62
MIKE'S ORIGINAL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE D -- SUPPLEMENTAL CASH FLOW INFORMATION
During the period ended December 31, 1995, the Company purchased fixed
assets of $28,397 pursuant to a lease which has been accounted for as a capital
lease.
Cash paid for interest was $64,685 and $1,468 during the year ended
December 31, 1996 and the nine-month period ended December 31, 1995,
respectively. Noncash financing and investing activity included the conversion
of trade accounts payable to notes payable of $1,176,437 and $53,114 during the
year ended December 31, 1996 and the nine-month period ended December 31, 1995,
respectively. In addition, during the year ended December 31, 1996, $45,000 of
accrued costs associated with the initial public offering were capitalized and
will be deducted from the proceeds of the offering.
NOTE E -- INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
Finished goods............................................... $ 97,536 $176,885
Raw materials................................................ 150,072 --
-------- --------
$247,608 $176,885
======== ========
</TABLE>
NOTE F -- FIXED ASSETS
Fixed assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
Computer equipment........................................... $ 29,447 $ 29,447
Office equipment............................................. 6,000 6,000
------- -------
35,447 35,447
Less accumulated depreciation................................ 20,969 9,953
------- -------
$ 14,478 $ 25,494
======= =======
</TABLE>
NOTE G -- NOTES PAYABLE TO RELATED PARTIES
During the fiscal year ended March 31, 1994, the Company obtained loans
from the founder and issued promissory notes of $40,000 and $15,000 which are
payable in May and June 1998, respectively. Interest accrues at an annual rate
of 8% and is payable at the maturity date of the notes. Accrued interest payable
related to these notes amounts to $14,557 and $10,157 at December 31, 1996 and
1995, respectively.
During the fiscal year ended March 31, 1994, the Company borrowed $100,000
from a stockholder of the Company. The loan, which was originally due on demand,
was formalized in the form of a promissory note during September 1995. In April
1996, the maturity date of the $100,000 obligation was revised to occur
subsequent to the repayment of the promissory note issued in April 1996 as
further described in Note H. The loan was noninterest bearing through April
1994. From May 1994 through maturity, interest accrues at an annual rate of 6%
and is payable upon maturity. In September 1996, the maturity date of this
promissory note was revised to occur the earlier of: (i) February 1, 1998 or
(ii) upon the occurrence of events defined by the note as a "Change in Control."
Accrued interest payable related to this note amounts to $21,491 and $15,491 at
December 31, 1996 and 1995, respectively. During the fiscal year ended March 31,
1995, the Company borrowed an additional $100,000 from the same stockholder. The
loan was due on demand with interest at an
F-10
<PAGE> 63
MIKE'S ORIGINAL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
annual rate of 6%. The Company repaid $50,000 of this loan in March 1995, and
repaid the remaining $50,000 during April 1995.
During the fiscal year ended March 31, 1995, the Company issued two
promissory notes of $25,000 each to an investor, who is related to the founder
of the Company, which were originally due in November and December 1998,
respectively. The Company repaid $25,000 of these notes in April 1995. In
September 1995, the maturity date of the outstanding promissory note was revised
to occur the earlier of the Company receiving proceeds from a securities
offering or June 1, 1996. In April 1996, the maturity date of the outstanding
promissory note was revised to occur subsequent to the repayment of the
promissory note issued in April 1996 as further described in Note H. In
September 1996, the maturity date of this promissory note was revised to occur
the earlier of: (i) February 1, 1998 or (ii) upon the occurrence of events
defined by the note as a "Change in Control." Interest accrues at an annual rate
of 6% and is payable at the maturity date of the note. Accrued interest payable
related to this note amounts to $4,674 and $3,174 at December 31, 1996 and 1995,
respectively.
In February 1996, the Company issued $325,000 of 12% promissory notes which
were payable on August 31, 1996 or convertible into units upon the consummation
of the Company's Second Private Placement. Such notes were converted into
thirteen units pursuant to the terms of the Company's Second Private Placement.
(See Note K.)
On May 30, 1996, the Company received loans aggregating $100,000 from two
stockholders. The loans were originally due on demand and bear interest at a
rate of 10%. In September 1996, the maturity date of these promissory notes was
revised to occur the earlier of: (i) twenty-four months from the date of the
loans, or (ii) the date the Company successfully consummates an initial public
offering of securities of the Company, but only to the extent that the
overallotment option is exercised in such offering and only from the proceeds
received by the Company from the exercise of the overallotment option. Accrued
interest payable related to these notes amounts to $5,833 at December 31, 1996.
In August and September 1996, the Company received three loans from a
stockholder aggregating $253,750. A portion of the funds that this shareholder
loaned the Company was a result of the shareholder selling shares of his stock
to investors. In August 1996, this shareholder sold 38,889 shares of his stock
at a price of $1.12 per share. In September 1996, this shareholder sold 23,333
shares of his stock at a price of $1.50 per share. These loans each bear
interest at a rate of 8% per annum and were originally payable the earlier of:
(i) thirteen months from the date of the loans, or (ii) the date the Company
successfully consummates an initial public offering, but only to the extent that
the overallotment option is exercised in such offering and only from the
proceeds received by the Company from the exercise of the overallotment option.
In September 1996, the maturity date of these promissory notes was revised to
June 1, 1997. In the event that the Company successfully consummates an initial
public offering prior to June 1, 1997, $123,750 will be payable from such
proceeds and $130,000 will be payable 90 days therefrom. In the event the
underwriter exercises its over-allotment option, the balance otherwise payable
in 90 days will be payable from such proceeds. Accrued interest payable related
to these borrowings amounts to $5,978 at December 31, 1996.
On August 28, 1996, the founder of the Company issued an additional
promissory note of $206,250. The funds that the founder loaned the Company were
a result of the founder selling 183,333 shares of his stock to an investor at a
price of $1.12 per share. This loan bears interest at a rate of 8% and was
originally payable the earlier of: (i) thirteen months from the date of the
loan, or (ii) the date the Company successfully consummates an initial public
offering of securities of the Company, but only to the extent that the
overallotment option is exercised in such offering and only from the proceeds
received by the Company from the exercise of the overallotment option. In
September 1996, the maturity date of this promissory note was revised to occur
twenty-four months from September 30, 1996. In addition, the revised promissory
note provides that one-half of the note will be paid with accrued interest in
the event the Company successfully consummates an initial public offering of
securities of the Company, but only to the extent that the
F-11
<PAGE> 64
MIKE'S ORIGINAL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
overallotment option is exercised in such offering and only from the proceeds
received by the Company from the exercise of the overallotment option. Accrued
interest related to this borrowing amounts to $5,500 at December 31, 1996.
Required principal payments on notes payable to related parties are
$253,750 in 1997 and $486,250 in 1998.
NOTE H -- NOTES PAYABLE
In 1995, the Company issued several promissory notes due in monthly
installments through October 1996 in exchange for certain trade accounts payable
aggregating $53,114. Interest on these notes accrues at annual rates ranging
from prime to 10% and is payable monthly. The balance of these notes was $4,583
and $49,114 at December 31, 1996 and 1995, respectively. Accrued interest
payable related to these borrowings amounts to $445 at December 31, 1996, and is
included in accrued expenses. These notes were due to be paid in full by
November 1, 1996. The Company has not, to date, renegotiated the terms of these
loans with the lenders.
In April 1996, the Company issued a promissory note in the amount of
$830,275 in exchange for certain trade accounts payable. The Company was
required to make payments in monthly installments beginning May 1996 consisting
of: (i) accrued interest, and (ii) principal in the amount of $12,000. In
addition to these monthly installments, the Company was required to pay
additional amounts upon the occurrence of certain events.
In the event the Company did not complete an initial public offering, the
note was due in full on December 31, 1996. Interest on the promissory note
accrues at the prime rate plus 1% per annum. This note is collateralized by
substantially all of the assets of the Company. The balance of this note was
$710,275 at December 31, 1996. Accrued interest payable related to this note
amounts to $2,738 at December 31, 1996, and is included in accrued expenses. As
the Company has not completed an initial public offering, the note was payable
on December 31, 1996. However, the lenders involved have amended the terms of
the original loan agreement to permit the Company to be in compliance with the
agreement at December 31, 1996. The amended terms, as of April 1997, provide for
payments to the lender from the proceeds of the Company's initial public
offering in the amount of $575,000 and $135,575 payable December 31, 1997. In
the event that the initial public offering is not completed by June 1, 1997, all
amounts outstanding will then become immediately due and payable in full.
Further, the Company issued a $221,550 convertible note due December 31, 1998 in
exchange for a like amount of trade payables. The convertible note bears
interest at 10% per annum, payable at maturity, and is convertible by the holder
into 73,850 shares of the Company's common stock at the option of the holder at
any time prior to maturity.
On August 20, 1996, the Company issued a promissory note in the amount of
$289,482 in exchange for certain trade accounts payable and inventories. The
note bears interest at a rate of 10% per annum and was payable on or before
November 15, 1996. The balance of this note was $210,283 at December 31, 1996.
Accrued interest payable related to this note amounts to $876 at December 31,
1996, and is included in accrued expenses. On December 31, 1996, the Company was
not in compliance with the terms of the subject loan agreement. However, the
lender involved has amended the agreement to permit the Company to be in
compliance with such terms at December 31, 1996. In February 1997, the Company
issued a promissory note in the amount of $20,000 in exchange for a like amount
of trade payables. In April 1997, the lender has agreed to extend the due date
of such notes to the earlier of June 1, 1997 or the closing of the Company's
initial public offering. In the event the Company completes its initial public
offering by June 1, 1997, the lender has agreed to extend the due date of
$96,000 of principal to December 31, 1998. If such amount is extended, the
lender has the right to convert such amount into 32,000 shares of the Company's
common stock at any time prior to maturity.
F-12
<PAGE> 65
MIKE'S ORIGINAL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
In December 1996, the Company issued a $225,000 promissory note to an
investor bearing interest at the rate of 8% per annum. This note is payable in
full the earlier of (i) December 31, 1997 or (ii) five days after the closing
date of an initial public offering. In lieu of receiving payment, the investor
has the right to convert this promissory note within five days of the closing of
such initial public offering into 200,000 shares of common stock of the Company,
par value $.001 per share. Accrued interest payable related to this note amounts
to $938 at December 31, 1996. These costs are being amortized over the life of
the note. Imputed interest resulting from the difference between the estimated
fair value of the Company's common stock and the conversion price has been
provided for and will be charged to operations over the life of the note. In
April 1997, the investor elected to convert such note.
In January 1997, the Company issued a convertible promissory note to an
investor bearing interest at the rate of 8% per annum in the principal amount of
$100,000. This convertible note will be paid in full the earlier of five days
after the closing of an initial public offering or January 31, 1998. In April
1997, the investor converted the note into 78,431 shares of the Company's common
stock.
In December 1996, the Company issued two additional short-term promissory
notes in exchange for certain trade accounts payable aggregating $56,680. One
promissory note bears interest at the rate of 10% per annum. Principal and
interest are payable in installments as follows: the sum of $500, or more,
semimonthly beginning on December 5, 1996, and payable thereafter on the 20th
and 5th day of each month, until principal and interest have been paid in full.
The second promissory note bears interest at the rate of 8% per annum. Payment
of principal will be made at the rate of $5,000 per month commencing on January
1, 1997 and monthly thereafter until the earlier of: (i) May 1, 1997 or (ii) the
date the Company successfully consummates an initial public offering of
securities of the Company, at which time this note will be paid in full with
interest. The balance of these notes was $55,680 at December 31, 1996. Accrued
interest payable related to these borrowings amounts to $285 at December 31,
1996, and is included in accrued expenses.
NOTE I -- ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities include the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
Accrued payroll............................................ $ 28,000 $ 95,399
Accrued distribution fee................................... 7,921 129,373
Distributors' deposits..................................... 46,739 --
Accrued interest payable -- other.......................... 12,969 --
Professional fees payable.................................. 45,000 25,000
-------- --------
$140,629 $249,772
======== ========
</TABLE>
NOTE J -- INCOME TAXES
A reconciliation between actual income tax (benefit) and the amount
computed by applying the statutory Federal income tax rate to the loss before
taxes is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
Tax expense (benefit) at statutory Federal income tax
rates................................................... $ (1,377,000) $ (669,000)
Nondeductible compensation................................ 128,000 --
Net operating loss not currently utilizable............... 1,249,000 669,000
----------- ----------
$ -- $ --
=========== ==========
</TABLE>
F-13
<PAGE> 66
MIKE'S ORIGINAL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The tax effects of temporary differences and loss carryforwards giving rise
to deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
Net operating loss and other carryforwards................ $ 1,814,000 $ 835,000
Bad debts................................................. 7,000 2,000
Depreciation/amortization................................. 2,000 1,000
Deferred compensation..................................... 276,000 32,000
Other deferred assets..................................... 20,000 --
----------- ---------
Gross deferred tax asset.................................. 2,119,000 870,000
Deferred tax asset valuation allowance.................... (2,119,000) (870,000)
----------- ---------
Net deferred tax asset.................................... $ -- $ --
=========== =========
</TABLE>
The Company anticipates that for the foreseeable future it will continue to
be required to provide a 100% valuation allowance for the tax benefit of its net
operating loss carryforward and temporary differences as the Company cannot
presently predict when it will generate sufficient taxable income to utilize
such deferred tax assets.
At December 31, 1996, the Company had net operating losses available to
carry forward of approximately $5,320,000 for tax purposes. Such net operating
loss carryforwards expire through the year ending 2011. No benefit has been
recorded for such loss carryforwards since realization cannot be assured. The
Company's use of its net operating loss carryforwards is limited as the Company
is deemed to have undergone an ownership change as defined in Internal Revenue
Code Section 382.
NOTE K -- STOCKHOLDERS' EQUITY
In May 1994, the Company issued 30,769 and 5,128 shares of its common stock
to its legal counsel and an independent consultant, respectively, for services
rendered. These shares are valued at $.0015 per share, the fair market value as
determined by the Company's Board of Directors at the date of issuance.
During November 1994 through May 1995, the Company completed the First
Private Placement. During the nine-month period ended December 31, 1995 and the
year ended March 31, 1995, the Company issued a total of 27,487 and 62,824
units, respectively, at $9.75 per unit, each unit consisting of two shares of
common stock and one warrant. Each warrant, which is antidilutive, entitled the
holder to purchase one share of the Company's common stock on or after August 1,
1995 through January 1997. At December 31, 1996, 151,159 of these warrants are
outstanding and are exercisable at $29.13 per share and none have been
exercised. These warrants expired on January 10, 1997.
In April 1995, the Company issued 5,128 shares of its common stock to a
consultant in consideration of his efforts in assisting in various matters for
the Company during the fiscal years ended March 31, 1994 and 1995. These shares
were valued at $2.45 per share, the estimated fair market value of the stock at
the date the commitment to issue the shares was made and, accordingly, $12,500
was charged to operations.
In September 1995, the Company issued 7,179 shares of its common stock to
certain individuals for services rendered on behalf of the Company during the
nine-month period ended December 31, 1995. These shares were valued at $4.88 per
share, the estimated fair market value of the stock at the date of issuance and,
accordingly, $35,000 was charged to operations.
In September 1995, pursuant to a Shareholders' Agreement and associated
Escrow Agreement, a shareholder of the Company placed 88,513 shares of his
common stock in an escrow account. The Escrow Agreement was terminated in
February 1996 and the subject shares were returned to the shareholder.
F-14
<PAGE> 67
MIKE'S ORIGINAL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Compensation expense of $265,000 was recognized based upon the estimated fair
value of the shares by the Company upon the release of the shares from escrow.
On May 30, 1996, the Board of Directors authorized a reverse stock split in
the ratio of one common share for every six and one-half common shares
outstanding as of that date. In addition, on such date, the Board of Directors
approved an amendment to the Company's Certificate of Incorporation increasing
the number of authorized shares of the Company's common stock from 3,076,923 to
20,000,000 shares. The reverse stock split and changes in authorized capital
have been retroactively reflected for all periods presented.
In May 1996, the Company issued 50,000 shares of its common stock to
certain individuals for services rendered on behalf of the Company. These shares
were valued at $3.00 per share, the estimated fair value of the stock at the
date of issuance and, accordingly, $150,000 was charged to operations.
During June 1996 through September 1996, the Company completed a Private
Placement Offering pursuant to Rule 506 of the Securities Act of 1933 consisting
of the sale of 61.5 units (the "Second Private Placement"). Each unit consisted
of a $2,500, 12% subordinated promissory note and 7,500 shares of common stock
at an offering price of $25,000 per unit. The note balance at December 31, 1996
which resulted from this Second Private Placement was $153,750. These notes
mature on the earlier of (i) July 31, 1997, or (ii) the closing date of the
initial public offering, provided that the maturity of the notes will be
accelerated upon an Event of Default. Accrued interest payable related to these
notes amounts to $7,688 at December 31, 1996. Subsequent to December 31, 1996,
$30,000 of such notes, as well as $2,100 of accrued interest, were converted to
16,050 shares of the Company's common stock.
In September 1996, the founder of the Company transferred 33,333 shares of
his common stock to certain individuals for services rendered on behalf of the
Company. These shares were valued at $3.00 per share, the estimated fair value
of the stock at the date of the transfer. As the Company implicitly benefited
from this transaction, the value of the shares transferred was reflected as an
expense in the accompanying financial statements with a corresponding credit to
additional paid-in capital.
In October 1996, the Company issued 19,231 shares of its common stock to
certain individuals for services rendered during the year ended December 31,
1996. These shares were valued at $3.00 per share, the estimated fair market
value of the stock at the date of issuance.
On February 6, 1997, the Board of Directors authorized a reverse stock
split in the ratio of two common shares for every three common shares
outstanding as of February 7, 1997. The reverse stock split has been
retroactively reflected for all periods presented.
In March 1997, the Company, in connection with entering into a two year
exclusive East coast manufacturing agreement, issued 35,000 shares of its common
stock. Pursuant to the agreement, the manufacturer has agreed to provide
$250,000 of twenty-one (21) day trade credit terms. Further, the Company is
obligated to pay the manufacturer $150,000 against existing amounts owed by
April 30, 1997. In the event such amount is not paid, the Company will be
obligated to issue an additional 30,000 shares of its common stock to the
manufacturer.
NOTE L -- STOCK OPTION PLANS
At December 31, 1996, the Company has two stock-based compensation plans,
which are described below. The Company applies APB Opinion 25, Accounting for
Stock Issued to Employees, and related interpretations in accounting for stock
options issued to employees. The Company applies SFAS No. 123, Accounting for
Stock-Based Compensation, in accounting for stock options issued to
nonemployees. The compensation cost that has been charged against income for
stock options issued to nonemployees was $812,000 for the year ended December
31, 1996.
F-15
<PAGE> 68
MIKE'S ORIGINAL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Had compensation cost for employees been determined based on the fair value
at the grant dates consistent with the method of SFAS No. 123, the Company's net
loss and net loss per share would have been increased to the pro forma amounts
indicated below for 1996:
<TABLE>
<S> <C>
Net loss
As reported......................................................... $(4,050,547)
Pro forma........................................................... (4,581,047)
Net loss per share
As reported......................................................... $ (1.64)
Pro forma........................................................... (1.85)
</TABLE>
The Company's net loss and net loss per share for the nine-month period
ended December 31, 1995 would not have been impacted as no stock options were
issued by the Company during the period.
In August 1995, the Company formally adopted a Long-term Incentive Plan
(the "1995 Plan"), which provides that the Company may grant certain key
employees or consultants either stock options, stock appreciation rights,
restricted stock, performance grants or other types of awards to acquire shares
of the Company's common stock or other company securities (the "Awards"). The
1995 Plan, as amended, authorizes the issuance of a maximum of 433,333 shares of
common stock. As of December 31, 1996, the Company has granted an aggregate of
256,667 options to purchase common stock with exercise prices ranging from $1.50
to $3.00 under the 1995 Plan. At December 31, 1996, 33,333 options to purchase
common stock at an exercise price of $3.00 were exercisable. None of these
options have been exercised to date. During the year ended December 31, 1996,
compensation cost recognized in income for the issuance of options under the
1995 Plan to nonemployees totaled $119,000.
On October 15, 1996, the Company's Board of Directors approved a 1996
Nonqualified Stock Option Plan ("Nonqualified Plan") for officers, directors,
employees and consultants of the Company. The Plan, as amended, authorizes the
issuance of up to 500,000 shares of common stock. To date, the Company has
granted 396,667 options to purchase shares of common stock under the
Nonqualified Plan at an exercise price of $1.50 per share. None of the stock
options granted in 1996 were exercisable at December 31, 1996. During the year
ended December 31, 1996, compensation cost recognized in income for the issuance
of options under the Nonqualified Plan to nonemployees totaled $693,000.
On January 24, 1997, the Company granted an outside director nominee and
its Vice President -- Finance stock options of 23,333 and 33,333, respectively,
under the 1996 Nonqualified Stock Option Plan. These options have an exercise
price of $1.50 per share, the estimated fair market value at the date of the
grant. These options are exercisable six months from the date of grant and
expire ten years from the date of grant.
In March 1997, the Company granted options to purchase 25,000 shares of its
common stock at an exercise price of $1.50 to its Vice President -- Finance.
NOTE M -- FAIR VALUE OF FINANCIAL INSTRUMENTS AND CONCENTRATION OF
CREDIT RISK
The carrying amounts of cash, accounts receivable, accounts payable and
other accrued liabilities are estimated to approximate their fair value. The
Company believes that it is not practicable to estimate the fair value of its
debt obligations due to its current financial condition.
Concentrations of credit risk with respect to trade accounts receivable
exist as the Company sells products primarily to one distributor. The Company
performs periodic credit evaluations of its customers' financial condition and
does not require collateral or other security. The distributor referred to in
Note C accounted for approximately 79% of the Company's sales for the year ended
December 31, 1996 and 57% of the Company's net accounts receivable at December
31, 1996. This distributor accounted for approximately
F-16
<PAGE> 69
MIKE'S ORIGINAL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
22% of the Company's sales for the nine months ended December 31, 1995 and 94%
of the Company's net accounts receivable at December 31, 1995. A second customer
accounted for approximately 10% of the Company's sales for the nine months ended
December 31, 1995.
The Company's products have historically been manufactured by independent
facilities. Certain of these facilities have ceased manufacturing on behalf of
the Company due to the fact that these facilities are owed substantial sums of
money by the Company and the Company's products are currently manufactured at
only one facility. If this manufacturer elects to suspend the manufacturing of
the Company's products, the Company's operating results may be adversely
affected.
NOTE N -- COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
Future minimum payments under a capital lease and noncancellable operating
leases for office space, equipment and vehicles, with initial terms of one or
more years, consist of the following at December 31, 1996:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASE LEASES
-------- --------
<S> <C> <C>
Twelve months ending December 31,
1997........................................................... $10,728 $29,912
1998........................................................... 3,676 15,836
1999........................................................... 11,025
2000........................................................... 2,023
2001...........................................................
------- -------
Total minimum lease payments..................................... $14,404 $58,796
=======
Less amounts representing interest............................... 836
-------
Present value of net minimum lease payments...................... $13,568
=======
</TABLE>
EMPLOYMENT CONTRACTS
During the year ended December 31, 1996, the Company hired a Vice President
of Sales and Marketing. The Company has entered into an employment agreement
with this individual. The agreement provides for an annual base salary of
$100,000, plus an incentive bonus. This agreement is for an initial term of one
year from the earlier of the effective date of an initial public offering of the
Company's securities or March 1, 1997.
In addition, the Company has employment agreements with the founder and
another employee which provide for annual base salaries of $125,000 and $40,000,
respectively, and expire, as amended, in June 2001 and June 1998, respectively.
During the year ended December 31, 1996, these individuals voluntarily waived
all rights to receive the accrued salaries payable to them aggregating $110,565
and, accordingly, such amount has been presented as a contribution to the
Company's additional paid-in capital. Further, in April 1997, the founder agreed
to waive an additional $27,333 of accrued salary through February 28, 1997.
In March 1997, the Company entered into a two-year employment agreement
with its Vice President -- Finance which provides for an annual base salary of
$95,000 for the first year and $105,000 for the second year.
CONSULTING AGREEMENTS
On March 1, 1994, the Company entered into a consulting agreement with an
investor (the "Investor"), whereby the Company shall pay the Investor $75,000
for the first year ended on March 31, 1995, $100,000 for the second year and
$125,000 for the third year. The Company recorded accrued consulting expense of
F-17
<PAGE> 70
MIKE'S ORIGINAL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
$89,585 during the year ended December 31, 1996 and $75,000 for the nine months
ended December 31, 1995. In September 1996, this investor voluntarily waived all
rights to receive the consulting fee payable to him and, accordingly, the
aggregate amount waived, $247,917, has been reflected as a contribution to
additional paid-in capital.
In November 1996, this consulting agreement was superceded by a new
agreement. The new agreement provides that beginning January 1, 1997, the
Company will pay the Investor an annual salary at the rate of $125,000 per annum
for a three-year period. However, no monies will be paid to this Investor until
such time as the Company shall consummate a private or public offering of its
securities for not less than $2,000,000 in gross proceeds. In April 1997, the
November 1996 Consulting Agreement was terminated and in consideration for such
termination, the Company issued 150,000 shares of its common stock to the
consultant.
During the year ended December 31, 1996, the Company entered into a
consulting agreement with an entity that will provide sales and marketing
advisory and consulting services to the Company. This entity will receive an
annual consulting fee of $50,000 and has received options to purchase 133,333
shares of the Company's common stock at $1.50 per share expiring October 15,
2006. One third of such options become exercisable at the end of each successive
six month period.
LINE OF CREDIT
In December 1995, the Company obtained an unsecured line of credit for
$25,000. Borrowings under this line bear interest at 15% per annum. Borrowings
made under this line during the year ended December 31, 1996 totaled $23,506.
LEGAL PROCEEDINGS
The Company is subject to various legal proceedings, claims and liabilities
which arise in the ordinary course of its business. In the opinion of
management, the amount of ultimate liability with respect to these actions will
not have a material adverse effect on the Company's results of operations, cash
flow or financial position.
In addition, the Company is subject to two proceedings that arose due to
the Company's present financial condition and its delinquent payments to certain
creditors. Specifically, in December 1996, the Company entered a Stipulation of
Entry of Judgment with a former manufacturer, whereby the Company acknowledged
an obligation in the amount of $539,482 to this manufacturer. Entry of the
judgment, however, has been stayed as long as the Company continues to make
payments with respect to this obligation. Pursuant to this judgment with this
manufacturer, the Company is continuing to make payments to reduce this
obligation, the balance of which was $276,283 at December 31, 1996.
Furthermore, in September 1996, an action was commenced against the Company
in the United States District Court for the Eastern District of New York. This
plaintiff in this case seeks damages of $125,936, plus interest, arising from
advertising and marketing services that it claims to have performed for the
Company for which the Company has allegedly failed to pay. The Company has filed
an answer asserting a number of affirmative defenses to the claims asserted by
the plaintiff.
In the opinion of management, the amount of any additional liability in
connection with the aforementioned matters, in excess of amounts provided for in
the normal course of business, will not materially affect the Company.
TERMINATION OF EMPLOYMENT CONTRACT AND ASSOCIATED STOCK OPTIONS
The Company had an employment agreement with its President which provided
for an annual base salary and bonuses. The agreement also provided for the
granting of 5,101 of immediately exercisable and fully
F-18
<PAGE> 71
MIKE'S ORIGINAL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
vested options to purchase shares of the Company's common stock at an exercise
price of $3.00. This agreement expires in February 1999. In addition, the
President was granted an incentive stock option to purchase 73,205 shares of the
Company's common stock at an exercise price of $3.00, which vested ratably over
three years beginning February 1995.
On September 15, 1996, the President resigned his employment with the
Company. At the time of the resignation, 29,530 options to purchase shares of
the Company's common stock at an option price of $3.00 per share were
exercisable and the balance was cancelled. The exercisable options expired on
December 15, 1996, three months from the date of the President's resignation.
NOTE O -- SUBSEQUENT EVENTS
On May 2, 1997, the Company granted its President 50,000 stock options
under the Long-term Incentive Plan. These options have an exercise price of
$1.50. The options are exercisable on November 1, 1997 and expire ten years from
the date of the grant.
In May 1997, the Company issued 100,000 shares of its common stock to its
legal counsel for services rendered during 1997. The estimated fair market value
of the stock at the date of issuance will be charged to operations during 1997.
In May 1997, the Company negotiated with a creditor in connection with
trade accounts payable balances owed to this creditor aggregating $60,000. This
creditor agreed that the Company would repay $30,000 of this balance upon the
completion of an initial public offering. The Company issued a convertible
promissory note for the remaining outstanding balance of $30,000 bearing
interest at the rate of 10% per annum. The note is payable in full on December
31, 1998. In lieu of receiving payment, the creditor has the right to convert
this promissory note at any time prior to the maturity date into 10,000 shares
of common stock of the Company, par value $.001 per share.
F-19
<PAGE> 72
======================================================
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS. ANY INFORMATION OR PRESENTATIONS
NOT HEREIN CONTAINED, IF GIVEN OR MADE, MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL
OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE SECURITIES
OFFERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY THE SECURITIES BY ANY PERSON IN ANY JURISDICTION
WHERE SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON
MAKING SUCH OFFER IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. THE DELIVERY OF THIS PROSPECTUS
SHALL NOT, UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 4
Risk Factors.......................... 8
Use of Proceeds....................... 14
Dilution.............................. 15
Capitalization........................ 16
Dividend Policy....................... 17
Selected Financial Data............... 18
Management's Discussion and Analysis
and of Financial Condition and
Results of Operations............... 19
Business.............................. 27
Management............................ 32
Principal Stockholders................ 38
Certain Transactions.................. 39
Selling Securityholders............... 41
Description of Securities............. 44
Underwriting.......................... 48
Legal Matters......................... 50
Experts............................... 50
Change in Accountants................. 50
Available Information................. 50
Index to Financial Statements......... F-1
Independent Auditor's Report.......... F-2
</TABLE>
Until , 1997 (25 days after the commencement of the
offering), all dealers effecting transactions in the Common Stock or Warrants,
whether or not participating in this distribution, may be required to deliver a
Prospectus. This delivery requirement is in addition to the obligation of
dealers to deliver a Prospectus when acting as Underwriters and with respect to
their unsold allotments or subscriptions.
======================================================
======================================================
675,000 SHARES
OF COMMON STOCK AND
875,000 REDEEMABLE COMMON
STOCK PURCHASE WARRANTS
MIKE'S ORIGINAL, INC.
--------------------
PROSPECTUS
--------------------
IAR SECURITIES CORP.
MILLENNIUM
SECURITIES CORP.
, 1997
======================================================
<PAGE> 73
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICES
See "Management -- Personal Liability and Indemnification of Directors".
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated expenses of the distribution, all of which are to be borne by
the Company, are as follows:
<TABLE>
<S> <C>
SEC Registration Fee...................................................... $ 6,836
NASD Filing Fee........................................................... 2,756
Blue Sky Fees and Expenses................................................ 35,000
Transfer Agent Fees....................................................... 5,000
Accounting Fees and Expenses.............................................. 70,000
Legal Fees and Expenses................................................... 165,000
Printing and Engraving.................................................... 50,000
Representative's Non-Accountable Expense Allowance........................ 76,750
Miscellaneous............................................................. 18,658
--------
Total........................................................... $430,000
========
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
1. In May 1994, the Company issued an aggregate of 1,133,333 shares of
Common Stock to its two founding stockholders and two consultants for services
rendered. These transactions by the issuer did not involve any public offering
and were exempt from the registration requirements under the Securities Act
pursuant to Section 4(2) thereof.
2. From November 1994 to May 1995, the Company issued an aggregate of
approximately 180,667 shares of Common Stock to 206 purchasers. These
transactions by the Company did not involve any public offering and were exempt
from the registration requirements under the Securities Act pursuant to Section
3(b) thereof and Rule 504 of Regulation D promulgated pursuant thereto.
3. In April 1995, the Company issued 5,128 shares of its Common Stock to a
consultant in consideration of his efforts in assisting in various matters for
the Company during the fiscal year ended March 31, 1994 and 1995. This
transaction by the Company did not involve any public offering and was exempt
from the registration requirements under the Securities Act pursuant to Section
4(2) thereof.
4. In September 1995, the Company issued 7,179 shares of its common stock
to two individuals for services rendered on behalf of the Company during the
nine month period ending December 31, 1995. These transactions by the Company
did not involve any public offering and were exempt from the registration
requirements under the Securities Act pursuant to Section 4(2) thereof.
5. In February 1996, the Company issued $325,000 principal amount of 12%
convertible notes payable in August 1996 to four purchasers thereof. These
transactions by the Company did not involve any public offering and were exempt
from the registration requirements under the Securities Act pursuant to Section
4(2) thereof.
6. In October 1996, the Company issued 19,231 shares of Common Stock to two
consultants as payment for services rendered during the year ended December 31,
1996. These transactions by the Company did not involve any public offering and
were exempt from the registration requirements under the Securities Act pursuant
to Section 4(2) thereof.
II-1
<PAGE> 74
7. In May 1996, the Company issued two 10% notes each in the amount of
$50,000 to two purchasers. These transactions by the Company did not involve any
public offering and were exempt from the registration requirements under the
Securities Act pursuant to Section 4(2) thereof.
8. In May 1996, the Company issued 50,000 shares of Common Stock to four
persons for services rendered. These transactions by the Company did not involve
any public offering and were exempt from the registration requirements under the
Securities Act pursuant to Section 4(2) thereof.
9. In June through September 1996, the Company sold $1,537,500 principal
amount of Second Private Placement Units, each Second Private Placement Unit
consisted of one $2,500 principal amount of 12% promissory notes and 7,500
shares of Common Stock, to 36 persons, all of whom are deemed accredited
pursuant to Rule 501 of Regulation D, including the exchange of the notes
referred to in paragraph 3, in private transactions by the issuer not involving
any public offering which were exempt from registration requirements under the
Securities Act pursuant to Section 4(2) thereof and Rule 506 of Regulation D
promulgated pursuant thereto.
10. In December 1996, the Company issued an 8% convertible promissory note
in the amount of $225,000 to one purchaser, which was convertible into 200,000
shares of Common Stock in April 1997. This transaction by the Company did not
involve any public offering and was exempt from the registration requirements
under the Securities Act pursuant to Section 4(2) thereof.
11. In January 1997, the Company issued an 8% convertible promissory note
in the amount of $100,000 to one purchaser, which was convertible into 78,431
shares of Common Stock in April 1997. This transaction by the Company did not
involve any public offering and was exempt from the registration requirements
under the Securities Act pursuant to Section 4(2) thereof.
12. In March 1997, the Company issued 65,000 shares of Common Stock to its
East coast product manufacturer pursuant to the terms of a credit agreement by
and among the Company, the product manufacturer and Michael Rosen. This
transaction by the Company did not involve any public offering and was exempt
from the registration requirements under the Securities Act pursuant to Section
4(2) thereof.
13. In March 1997, the Company issued a 10% promissory note in the amount
of $50,000 together with 2,000 shares of Common Stock, to one purchaser. In
April 1997, this person exchanged $25,000 of such note into 12,500 shares of
Common Stock. This transaction by the Company did not involve any public
offering and was exempt from the registration requirements under the Securities
Act pursuant to Section 4(2) thereof.
14. In April 1997, the Company issued 150,000 shares of Common Stock in
payment of obligations under a consulting agreement. This transaction by the
Company did not involve any public offering and was exempt from the registration
requirements under the Securities Act pursuant to Section 4(2) thereof.
15. In May 1997, the Company issued 100,000 shares of Common Stock to its
legal counsel in exchange for services rendered. This transaction by the Company
did not involve any public offering and was exempt from the registration
requirement under the Securities Act pursuant to Section 4(2) thereof.
ITEM 27. EXHIBITS.
<TABLE>
<S> <C>
1.1 Form of Underwriting Agreement.(**)
1.2 Form of Agreement Among Underwriters.(**)
1.3 Form of Selling Agreement.
3.1 Restated Certificate of Incorporation of the Registrant.(**)
3.2 By-laws of the Registrant.(**)
4.1 Specimen Common Stock Certificate.(**)
4.2 Form of Warrant Agreement (including Warrant Certificate).
4.3 Form of Representative's Purchase Option.
</TABLE>
II-2
<PAGE> 75
<TABLE>
<S> <C>
5.1 Form of Opinion and Consent of Blau, Kramer, Wactlar & Lieberman, P.C. regarding the
legality of the securities being registered.(**)
10.1 Lease Agreement dated March 24, 1994 between the Registrant and Donald E. Axinn, as
amended.(**)
10.2 1995 Long Term Incentive Plan.(**)
10.3 1996 Non-Qualified Stock Option Plan.(**)
10.4 Employment Agreement dated June 1, 1995 between the Registrant and Michael Rosen, as
amended.(**)
10.5 Employment Agreement dated November 1, 1996 between the Registrant and Martin
Weiss.(**)
10.6 Employment Agreement dated March 1, 1997 between the Registrant and Frederic D.
Heller.(**)
10.7 Consulting Agreement dated November 4, 1996 the Registrant and Steven A. Cantor.(**)
10.8 Consulting Agreement dated November 1, 1996 between the Registrant and Alma
Management Corp.(**)
10.9 Form of Second Private Placement Note.(**)
10.10 Form of Second Private Placement Unit Subscription Agreement.(**)
10.11 Form of Indemnification Agreement between the Company and its officers and
directors.(**)
10.12 Credit Agreement dated April 10, 1996, as amended, between the Registrant and The
Penn Traffic Company.(**)
10.13 Manufacturing, Delivery & Pricing Agreement dated as of September 11, 1996 between
the Registrant and Fieldbrook Farms.(**)
10.14 Distribution Agreement between the Registrant and Kraft Pizza Company.(**)
10.15 Distribution Agreement between the Registrant and Kraft Foods, Inc.(**)
10.16 Credit Agreement with Fieldbrook Farms dated March 20, 1997.(**)
10.17 Modification Agreement with The Penn Traffic Company dated April 15, 1997.(**)
10.18 Form of Financial Consulting Agreement between the Representative and the Company.
11 Earnings Per Share.(**)
16 Letter re: Change of Accountant.(**)
23.1 Consent of Blau, Kramer, Wactlar & Lieberman, P.C. (included in Exhibit 5.1).(**)
23.2 Consent of Grant Thornton LLP.
25.1 Powers of Attorney.
</TABLE>
- ---------------
(**) Previously filed.
ITEM 28. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers, and controlling persons of the small
business issuer pursuant to the foregoing provisions, or otherwise, the small
business issuer has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the small business issuer of expenses incurred or paid by a director, officer or
controlling person of the small business issuer in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the small business
issuer will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
II-3
<PAGE> 76
Registrant hereby undertakes that it will:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information in the registration statement; and
(iii) Include any additional or changed material information on the
plan of distribution.
(2) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration
statement, and that offering of the securities at that time as the initial
bona fide offering of those securities.
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
(4) For determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the small business issuer under Rule 424(b)(1), or
(4) or 497(h) under the Securities Act as part of this registration
statement as of the time the Commission declared it effective.
(5) Provide to the underwriter at the closing specified in the
underwriting agreement certificates in such denominations and registered in
such names as required by the underwriter to permit prompt delivery to each
purchaser.
Certain Selling Securityholders have agreed not to sell or transfer the
shares of Common Stock owned by them and registered hereunder for twenty-four
(24) months from the date of this Prospectus. The Representative and the
Underwriters have indicated that in the event they enter into transactions with
any of
the Selling Securityholders, or waive the lock-ups applicable to such Selling
Securityholders securities under the following circumstances, disclosure will be
provided in the following manners: (i) if such transactions involve from five
(5) percent up to ten (10) percent of the registered Selling Securityholders'
securities, to file "Sticker" supplements pursuant to Rule 424(c) of the
Securities Act and (ii) if such transactions involve over ten (10) percent of
the registered Selling Securityholders securities, to file a post-effective
amendment to the registration statement of which this Prospectus forms a part.
II-4
<PAGE> 77
SIGNATURES
In accordance with the requirements of the Securities Act, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements of filing on Form SB-2 and authorized Amendment No. 3 to this
registration statement to be signed on its behalf by the undersigned, in
Jericho, New York on the 12th day of May, 1997.
MIKE'S ORIGINAL, INC.
By: /s/ MICHAEL ROSEN
------------------------------------
Michael Rosen, Chairman of the
Board,
Chief Executive Officer
In accordance with the requirements of the Securities Act, this
registration statement was signed by the following persons in the capacities
indicated on May 12, 1997.
<TABLE>
<CAPTION>
SIGNATURES TITLE
- --------------------------------------------- --------------------------------------------
<C> <S>
/s/ MICHAEL ROSEN Chairman of the Board, Chief Executive
- --------------------------------------------- Officer, President
Michael Rosen
* Vice President -- Finance, Chief Financial
- --------------------------------------------- Officer and Director
Frederic D. Heller
* Director
- ---------------------------------------------
Martin Pilossoph
* Director
- ---------------------------------------------
Arthur G. Rosenberg
</TABLE>
- ---------------
* By Michael Rosen, Attorney-in-fact
II-5
<PAGE> 78
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGE
- ------- -------------------------------------------------------------------------- ------------
<C> <S> <C>
1.1 Form of Underwriting Agreement.(**)
1.2 Form of Agreement Among Underwriters.(**)
1.3 Form of Selling Agreement.
3.1 Restated Certificate of Incorporation of the Registrant.(**)
3.2 By-laws of the Registrant.(**)
4.1 Specimen Common Stock Certificate.(**)
4.2 Form of Warrant Agreement (including Warrant Certificate).
4.3 Form of Representative's Purchase Option.
5.1 Form of Opinion and Consent of Blau, Kramer, Wactlar & Lieberman, P.C.
regarding the legality of the securities being registered.(**)
10.1 Lease Agreement dated March 24, 1994 between the Registrant and Donald E.
Axinn, as amended.(**)
10.2 1995 Long Term Incentive Plan.(**)
10.3 1996 Non-Qualified Stock Option Plan.(**)
10.4 Employment Agreement dated June 1, 1995 between the Registrant and Michael
Rosen, as amended.(**)
10.5 Employment Agreement dated November 1, 1996 between the Registrant and
Martin Weiss.(**)
10.6 Employment Agreement dated March 1, 1997 between the Registrant and
Frederic D. Heller.(**)
10.7 Consulting Agreement dated November 4, 1996 the Registrant and Steven A.
Cantor.(**)
10.8 Consulting Agreement dated November 1, 1996 between the Registrant and
Alma Management Corp.(**)
10.9 Form of Second Private Placement Note.(**)
10.10 Form of Second Private Placement Unit Subscription Agreement.(**)
10.11 Form of Indemnification Agreement between the Company and its officers and
directors.(**)
10.12 Credit Agreement dated April 10, 1996, as amended, between the Registrant
and The Penn Traffic Company.(**)
10.13 Manufacturing, Delivery & Pricing Agreement dated as of September 11, 1996
between the Registrant and Fieldbrook Farms.(**)
10.14 Distribution Agreement between the Registrant and Kraft Pizza Company.(**)
10.15 Distribution Agreement between the Registrant and Kraft Foods, Inc.(**)
10.16 Credit Agreement with Fieldbrook Farms dated March 20, 1997.(**)
10.17 Modification Agreement with The Penn Traffic Company dated April 15,
1997.(**)
10.18 Form of Financial Consulting Agreement between the Representative and the
Company.
11 Earnings Per Share.(**)
16 Letter re: Change of Accountant.(**)
23.1 Consent of Blau, Kramer, Wactlar & Lieberman, P.C. (included in Exhibit
5.1).(**)
23.2 Consent of Grant Thornton LLP.
25.1 Powers of Attorney.
</TABLE>
- ---------------
(**) Previously filed.
<PAGE> 1
Exhibit 1.3
MIKE'S ORIGINAL, INC.
675,000 Shares of Common Stock and
875,000 Redeemable Common Stock Purchase Warrants
SELLING AGREEMENT
__________________, 1997
Dear Sirs:
The undersigned, IAR Securities Corp., as representative of the
underwriters (the "Representative"), has agreed, subject to the terms and
conditions of the Underwriting Agreement dated __________, 1997 (the
"Underwriting Agreement"), to purchase from Mike's Original, Inc., a Delaware
corporation (the "Company"), an aggregate of 675,000 shares of Common Stock, par
value $.001 per share, of the Company (the "Common Stock") and 875,000
Redeemable Common Stock Purchase Warrants (the "Warrants") to purchase one share
of Common Stock, at the purchase price set forth on the cover of the Prospectus
(as hereinafter defined), and has obtained from the Company an option to
purchase at such price an additional 101,250 shares of Common Stock and an
additional 131,250 Redeemable Common Stock Class A Purchase Warrants (the
"Additional Securities"), identical to the Common Stock and Warrants, to cover
over-allotments. The 675,000 Shares of Common Stock and 875,000 Warrants are
hereinafter referred to as the "Firm Securities." The Firm Securities and
Additional Securities are hereinafter collectively called the "Securities". The
Firm Securities, Additional Securities, Common Stock and Warrants are more
particularly described in the enclosed prospectus (the "Prospectus"), additional
copies of which will be supplied in reasonable quantities upon request.
<PAGE> 2
We are offering a part of the Securities for sale to selected dealers
(the "Selected Dealers"), among which we are pleased to include you, at the
public offering price or at such price less a concession in the amount set forth
in the Prospectus under "Underwriting", as provided herein. This offering is
made subject to delivery of the Securities and its acceptance by us, to the
approval of all legal matters by counsel, and to the terms and conditions herein
set forth and may be made on the basis of the reservation of Securities or an
allotment against subscription.
We have advised you by telegram or telex of the method and terms of the
offering. Acceptances should be sent to IAR Securities Corp., 99 Wall Street,
New York, New York 10005, Attn: Isaac Rabinowitz, President. We reserve the
right to reject any acceptance in whole or in part.
The Securities purchased by you hereunder are to be offered by you to
the public at the public offering price, except as herein otherwise provided.
We, as Representative, may buy Securities from, or sell Securities to,
any Selected Dealer, and any Selected Dealer may buy Securities from, or sell
Securities to, any other Selected Dealer at the public offering price or at such
price less all or any part of the concession, as provided herein. We, as
Representative, after the initial public offering may change the public offering
price, the concession, and the reallowance.
Securities purchased by you hereunder shall be paid for in full at the
public offering price or such price less the applicable concession, as we shall
advise, on such date as we shall determine, on one day's notice to you, by
certified or official bank check payable in New York Clearing House funds to the
order of IAR Securities Corp., 99 Wall Street, New York, New York 10005 against
delivery of the Securities. If you are called upon to pay the public offering
price for the Securities purchased by you, the applicable concession will be
paid to you, less any amounts
2
<PAGE> 3
charged to your account as provided herein, after termination of this Agreement
as it applies to the offering of the Securities. Notwithstanding the preceding
two sentences, payment for and delivery of Securities purchased by you hereunder
will be made at our option either by physical delivery of certificates
representing the shares so purchased or through the facilities of The Depository
Trust Company if you are a member or, if you are not a member, settlement may be
made through a correspondent which is a member pursuant to instructions you may
send to us prior to such specified date.
We have been advised by the Company that a registration statement for
the Securities, filed under the Securities Act of 1933, as amended (the
"Securities Act"), has become effective. You agree (which agreement shall also
be for the benefit of the Company) that in selling Securities purchased pursuant
hereto you will comply with the applicable requirements of the Securities Act
and of the Securities Exchange Act of 1934, as amended, (the "Exchange Act"). No
person is authorized by the Company or the Representative to give any
information or to make any representations not contained in the Prospectus, in
connection with the sale of Securities. You are not authorized to act as agent
for the Company or the Representative in offering Securities to the public or
otherwise. Nothing contained herein shall constitute the Selected Dealers
partners with the Representative or with one another.
Upon your application to us, we will inform you as to the advice we
have received from counsel concerning the jurisdictions under the respective
"blue sky" or securities laws of which it is believed that the Securities have
been qualified or registered or is exempt for offer and sale, but we have not
assumed and will not assume any responsibility or obligation as to the accuracy
of such information or as to the right of any Selected Dealers to offer or sell
Securities in any jurisdiction.
3
<PAGE> 4
As Representative, we shall have full authority to take such action as
we may deem advisable in respect of all matters pertaining to the offering or
arising thereunder. We, acting as the Representative shall not be under any
obligation to you except for obligations expressly assumed by us in this
Agreement.
We are authorized to over-allot in arranging for sale of the Securities
to the Selected Dealers and to purchase and sell the Securities and shares of
Common Stock or Warrants for long or short account and we are also authorized to
stabilize or maintain the market prices of the Common Stock and the Warrants.
You agree, from time to time until the termination of this Agreement,
to report to us the number of Securities purchased by you pursuant to the
provisions hereof which then remain unsold and, on our request, you will resell
to us any such Securities remaining unsold at the purchase price thereof if, in
our opinion, such Securities are needed to make delivery against sales made to
others.
If prior to the termination of this Agreement as it applies to the
offering of the Securities (or prior to such earlier date as we have determined)
we purchase or contract to purchase in the open market or otherwise any
Securities or shares of Common Stock or Warrants underlying the Securities which
were purchased by you from us or from any other underwriter or dealer for
reoffering (including any Securities or shares of Common Stock or Warrants which
may have been issued on transfer or in exchange for such Securities or shares of
Common Stock or Warrants), and which Securities or shares of Common Stock or
Warrants were therefore not effectively placed for investment by you, you
authorize us either to charge your account with an amount equal to the
concession from the public offering price for which you purchased such
Securities, which shall be credited against the cost of such Securities, or to
require you to
4
<PAGE> 5
repurchase such Securities at a price equal to the total cost of such purchase,
including any commissions and transfer taxes on redelivery.
You agree that except with our consent and except as otherwise provided
herein, you will not, prior to termination of this Agreement or until we notify
you that you are released from this restriction, bid for, purchase, or sell,
directly or indirectly, any Securities or any shares of Common Stock or Warrants
(or, if requested by us by telex or otherwise, any other securities of the
Company) for your account or for the accounts of customers except as broker or
agent in the execution of unsolicited brokerage orders therefor.
As contemplated by Rule 15c2-8 under the Exchange Act, we agree to mail
a copy of the Prospectus to any person making a written request therefor during
the period referred to in Rule 15c2-8, such mailing to be made to the address
given in the request. You confirm that you have delivered all preliminary
prospectuses and revised preliminary prospectuses, if any, required to be
delivered under the provisions of Rule 15c2-8 and agree to deliver all final
prospectuses and amendments or supplements thereto required to be delivered
under Rule 15c2-8. We have heretofore delivered to you such preliminary
prospectuses as have been requested by you, receipt of which is hereby
acknowledged, and will deliver such copies of the Prospectus as will be
requested by you.
Selected Dealers will be governed by the conditions herein set forth
until this Agreement is terminated. This Agreement will terminate at the close
of business on the 45th full day after the date hereof, but may be extended by
us for an additional period or periods not exceeding 45 full days in the
aggregate. Whether or not extended, we may, however, terminate this agreement or
any provision hereof at any time. Notwithstanding the termination of this
Agreement, you shall be and shall remain liable for, and will pay on demand,
your proportionate amount of any loss,
5
<PAGE> 6
liability, claim, or damage or related expense which may be asserted against you
alone, or against you together with other dealers purchasing Securities upon the
terms hereof, or against us, based upon the claim that the Selected Dealers, or
any of them, constitute an association, unincorporated business, partnership, or
separate entity.
All communications from you shall be address to IAR Securities Corp.,
99 Wall Street, New York, New York 10005, Attn: Isaac Rabinowitz, President. Any
notice from us to you shall be deemed to have been fully authorized by us and to
have been duly given if mailed, telegraphed, or telexed to you at the address to
which this letter is mailed. This Agreement shall be construed in accordance
with the laws of the State of New York, without giving effect to conflict of
laws. Time is of the essence in this Agreement.
If you agree to purchase Securities in accordance with the terms
hereof, kindly confirm such agreement by completing and signing the form
provided for that purpose on the enclosed duplicate hereof and returning it to
us promptly.
Very truly yours,
IAR SECURITIES CORP.
By:
-----------------------------
Isaac Rabinowitz
President
6
<PAGE> 7
IAR Securities Corp.,
99 Wall Street
New York, New York 10005
Dear Sirs:
We hereby confirm our agreement to purchase shares of Common Stock, par
value $.001 per share, of Mike's Original, Inc. (the "Company") (the "Common
Stock") and warrants (the "Warrants") to purchase one share of Common Stock,
allotted to us subject to the terms and conditions of the foregoing Selling
Agreement and your telegram or telex to us referred to therein. We hereby
acknowledge receipt of the definitive Prospectus relating to the Common Stock
and Warrants, and we confirm that in purchasing Common Stock and Warrants we
have relied upon no statements whatsoever, written or oral, other than the
statements in the Prospectus. We represent that we are actually engaged in the
investment banking or securities business and that we are a member in good
standing of the NASD which agrees to comply with all applicable rules of the
NASD or, if we are not such a member, we are a foreign dealer or institution not
eligible for membership in the NASD (a) which agrees to make no offers or sales
within the United States, it territories, or its possessions or to persons who
are citizens thereof or residents therein, and, in making sales, to comply with
the NASD's interpretation with respect to free-Riding and Withholding and Rules
2730, 2740 and 2750 of the NASD Conduct Rules as if we were an NASD member and
Rule 2420 as it applies to a nonmember broker or dealer in a foreign country and
(b) which in connection with offers and sales of Common Stock and Warrants made
by us outside the United States (i) will either furnish to each person to whom
any such offer or sale is made a copy of the then current preliminary prospectus
or the Prospectus (as then amended or supplemented if the Company shall have
furnished amendments or supplements thereto), as the case may be, or inform such
person that such preliminary prospectus or the
7
<PAGE> 8
Prospectus will be available upon request and (ii) will furnish to each person
to whom any such offer or sale is made such prospectus, advertisement, or other
offering document containing information relating to the the Common Stock, the
Warrants or the Company as may be required under the law of the jurisdiction in
which such offer or sale is made. Any prospectus, advertisement, or other
offering document furnished by us to any person in accordance with clause
(b)(ii) of the preceding sentence and any such additional offering material as
we may furnish to any person (c) shall comply in all respects with the laws of
the jurisdiction in which it is so furnished, (d) shall be prepared and so
furnished at our sole risk and expense, and (e) shall not contain information
relating to the the Common Stock, the Warrants or the Company which is
inconsistent in any respect with the information contained in the then current
preliminary prospectus or in the Prospectus (as then amended or supplemented if
the Company shall have furnished any amendments or supplements thereto), as the
case may be. It is understood that no action has been taken to permit a public
offering in any jurisdiction other than the United States where action would be
required for such purpose.
If for federal income tax purposes the Selected Dealers, among
themselves or with the Representative, should be deemed to constitute a
partnership, then we elect to be excluded from the application of Subchapter K,
Chapter 1, Subtitle A of the Internal Revenue Code of 1986, as amended, and we
agree not to take any position inconsistent with such election. We authorize
8
<PAGE> 9
you, in your discretion, to execute and file on our behalf such evidence of such
election as may be required by the Internal Revenue Service.
-------------------------------
(Name of Selected Dealer)
--------------------------------
(Authorized Signature)
Dated: , 1997
9
<PAGE> 1
Exhibit 4.2
AGREEMENT
THIS AGREEMENT made as of this _______ day of _______ 1997, between
MIKE'S ORIGINAL, INC., a Delaware corporation with offices at 131 Jericho
Turnpike, Jericho, New York 11753 (the "Company") and AMERICAN STOCK TRANSFER &
TRUST COMPANY, with offices at 6201 15th Avenue, Brooklyn, New York 11219 (the
"Warrant Agent").
Introduction
The Company (i) has determined to issue and deliver up to 1,006,250
common stock purchase warrants (the "IPO Warrants") evidencing the right of the
holders thereof to purchase an aggregate of 1,006,250 shares of common stock,
$0.001 par value of the Company (the "Common Stock"), which IPO Warrants are to
be offered for sale to the public pursuant to a registration statement No.
333-21575 (the "Registration Statement") filed with the Securities and Exchange
Commission; and (ii) has determined to issue and deliver to IAR Securities Corp.
("IAR") an option (the "Representative's Purchase Option") evidencing, inter
alia, the right of IAR and its permitted transferees as holders thereof to
purchase up to 67,500 shares of common stock and 87,500 nonredeemable common
stock purchase warrants (the "IAR Warrants") evidencing the right of the holder
thereof to purchase an aggregate of 87,500 shares of Common Stock. The IPO
Warrants and the IAR Warrants are hereinafter referred to as the "Warrants". The
Company desires the Warrant Agent to act on behalf of the Company, and the
Warrant Agent is willing to so act, in connection with the issuance,
registration, transfer, exchange, redemption and exercise of the Warrants. The
Company desires to provide for the form and provisions of the Warrants, the
terms upon which they shall be issued and exercised, and the respective rights,
limitation of rights, and immunities of the Company, the Warrant Agent, and the
holders of the Warrants.
All acts and things have been done and performed which are necessary to
make the Warrants, when executed on behalf of the Company and countersigned by
or on behalf of the Warrant Agent, as provided herein, the valid, binding and
legal obligation of the Company, and to authorize the execution and delivery of
this Agreement.
NOW, THEREFORE, in consideration of the mutual agreements herein
contained, the parties hereto agree as follows:
ARTICLE I
Appointment of Warrant Agent
The Company hereby appoints the Warrant Agent to act as agent for the
Company for the Warrants, and the Warrant Agent hereby accepts such appointment
and agrees to perform the same in accordance with the terms and conditions set
forth in this Agreement.
-1-
<PAGE> 2
ARTICLE II
Warrants, Form of Warrants, Execution,
Countersignature and Registration of Warrants
2.01. Form of Warrant. Each Warrant shall be issued in registered form
only, shall be in substantially the form of Exhibit A hereto (the "Warrant
Certificate"), shall be signed by, or bear the facsimile signature of, the
President or any Vice President and by the Secretary of the Company and shall
bear a facsimile of the Company's seal. The Warrant Certificate may also bear
such letters, marks of identification, legends, designations, summaries and
endorsements as the Company may deem appropriate and as are not inconsistent
with this Agreement, or in any particular case as may be required in the opinion
of counsel to the Company. In the event the person whose facsimile signature has
been placed upon any Warrant Certificate shall have ceased to be President or
Secretary of the Company before such Warrant Certificate is issued, it may be
issued with the same effect as if she had not ceased to be such at the date of
issuance. No Warrant Certificate may be exercised until it has been
countersigned by the Warrant Agent as provided in Section 2.03 hereof.
2.02. Warrant Valid Only If Countersigned. Unless and until manually
countersigned by the Warrant Agent and dated the date of countersignature
pursuant to this Agreement, a Warrant Certificate shall be invalid and of no
effect.
2.03. Countersignature. The Warrant Agent shall countersign a Warrant
Certificate only (i) if the Warrant Certificate is to be issued in exchange or
substitution for one or more previously countersigned Warrant Certificates, as
hereinafter provided, or (ii) if the Company instructs the Warrant Agent to do
so.
2.04. Registration.
2.04.1 The Warrant Agent shall maintain books (the "Warrant Register")
for the registration of original issuance and the registration of transfer of
the Warrant Certificates. Upon the initial issuance of the Warrant Certificates,
the Warrant Agent shall issue and register the Warrant Certificates in the names
of the respective holders thereof in such denominations and otherwise in
accordance with instructions delivered to the Warrant Agent by the Company.
2.04.2 Prior to due presentment for registration of transfer of any
Warrant Certificate, the Company and the Warrant Agent may deem and treat the
person in whose name such Warrant Certificate shall be registered upon the
Warrant Register (the "Holder" or the "registered holder") as the absolute owner
of such Warrant Certificate and of each Warrant represented thereby
(notwithstanding any notation of ownership or other writing on the Warrant
Certificate made by anyone other than the Company or the Warrant Agent) for the
purpose of any exercise thereof, and for all other purposes, and neither the
Company nor the Warrant Agent shall be affected by any notice to the contrary
and shall not be required to recognize any equitable or other claim to or
interest in such Warrant Certificate on the part of any other person, and shall
not be liable for any registration or transfer of Warrant Certificates which are
registered or to be registered in the name of a fiduciary or the nominee of a
fiduciary unless made with the actual
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knowledge that a fiduciary or nominee is committing a breach of trust in
requesting such registration or transfer, or with such knowledge of such facts
that its participation therein amounts to bad faith.
ARTICLE III
Term and Exercise of Warrants
3.01. Warrant Price. Each Warrant Certificate shall, when signed by the
proper officers of the Company and countersigned and dated by the Warrant Agent,
entitle the registered holder thereof, subject to the provisions of such Warrant
Certificate and of this Warrant Agreement, to purchase from the Company up to
the number of shares (the "Warrant Shares") of Common Stock stated therein, at
the price of $6.00 per share in the case of the IPO Warrants and at the price of
$7.30 per share in the case of the IAR Warrants, subject to the adjustments
provided in Article IV hereof. The term "Warrant Price" as used in this
Agreement refers to the price per share at which Common Stock may be purchased
at the time a Warrant is exercised, reflecting all appropriate adjustments made
in accordance with Article IV hereof.
3.02. Duration of Warrants. An IPO Warrant may be exercised only during
the period (the "IPO Exercise Period") commencing on the effective date (the
"Effective Date") of the Registration Statement, and ending at 5:00 p.m. New
York City time on the date which is the earlier of (i) the third anniversary of
the Effective Date, or (ii) the date fixed for redemption of such Warrant as
provided in Article VI of this Agreement (in each such case, the "IPO Expiration
Date"). The IAR Warrants may be exercised only during the period (the "IAR
Exercise Period") commencing on the first anniversary of the Effective Date and
ending on the fifth anniversary of the Effective Date (the "IAR Warrant
Expiration Date"). Each Warrant not exercised on or before the applicable
Expiration Date shall become void, and all rights thereunder and all rights in
respect thereof under this Agreement shall cease at the close of business on the
Expiration Date. The Company in its sole discretion may extend the duration of
the Warrants by extending the applicable Expiration Date upon written notice to
holders of the Warrants.
3.03. Exercise of Warrants.
3.03.1 A Warrant Certificate, when countersigned by the Warrant Agent,
may be exercised by the registered holder thereof by surrendering it, at the
office of the Warrant Agent, or at the office of its successor as Warrant Agent,
in the Borough of Manhattan, City and State of New York, with the subscription
form, as set forth in the Warrant Certificate and in substantially the form of
Exhibit A hereto, duly executed with signature guaranteed by an eligible
guarantor institution. These institutions (commercial banks, member firms of a
national securities exchange, savings and loans and thrifts) qualify as long as
the guarantor is a member of The Securities Transfer Agent Medallion Program or
any other industry recognized program and by paying in full, in lawful money of
the United States, in cash, certified check or bank draft payable to the
Company, the Warrant Price for each full share of Common Stock as to which the
Warrant is exercised and any and all applicable taxes due in connection with the
exercise of the Warrant, the exchange of the Warrant for the Common Stock, and
the issuance of the Common Stock.
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3.03.2 As soon as practicable after the exercise of any Warrant, the
Company shall issue to the registered holder of such Warrant a certificate or
certificates for the number of full shares of Common Stock to which he is
entitled, registered in such name or names as may be directed by him, and if
such Warrant shall not have been exercised in full, a new countersigned Warrant
for the number of shares as to which such Warrant shall not have been exercised.
3.03.3 All shares of Common Stock issued upon the proper exercise of a
Warrant in conformity with this Warrant Agreement shall be validly issued.
3.03.4 Each person in whose name any such certificate for shares of
Common Stock is issued shall for all purposes be deemed to have become the
holder of record of such shares on the date on which the Warrant was surrendered
and payment of the Warrant Price was made, irrespective of the date of delivery
of such certificate, except that, if the date of such surrender and payment is a
date when the stock transfer books of the Company are closed, such person shall
be deemed to have become the holder of such shares at the close of business on
the next succeeding date on which the stock transfer books are open.
3.03.5 If, upon the exercise of any Warrant (other than an IAR Warrant,
as to which this subsection shall not apply), after the first anniversary of the
Effective Date, (i) disclosure of compensation arrangements was made both at the
time of the original offering and at the time of exercise (by delivery of the
Prospectus or as otherwise required by applicable law, rule or regulation), and
(ii) the solicitation of the exercise of the Warrant was not in violation of
rules 100-105 of Regulation M (as such rules, or any successor rule as may be in
effect as of such time of exercise) promulgated under the Securities Exchange
Act of 1934 and is otherwise in compliance with any applicable rules and
regulations of NASD, then the Company shall forthwith pay from the proceeds
received upon exercise of the Warrant(s), a fee of % of the Warrant Price to
IAR. Within five days after exercise, the Warrant Agent shall send IAR a copy of
the reverse side of each Warrant exercised. IAR and the Company may at any
time during business hours, examine the records of the Warrant Agent, including
its ledger of original Warrant Certificates returned to the Warrant Agent upon
exercise of Warrants. The provisions of this Section may not be modified,
amended or deleted without the prior written consent of IAR.
3.04. Disposition of Proceeds. Upon the exercise of any Warrant, the
Warrant Agent shall promptly forward all funds received by it for the purchase
of Warrant Shares to the Company.
ARTICLE IV
Adjustments
4.01. Stock Dividends--Split-Ups. If after the date hereof the number
of outstanding shares of Common Stock is increased by a stock dividend payable
in shares of Common Stock or by a split-up of shares of Common Stock or other
similar event, or the number of outstanding shares of Common Stock is decreased
by a consolidation, combination or reclassification of shares of Common Stock,
reverse stock split or other similar event, then, on the date following the date
fixed for the determination of holders of Common Stock entitled to receive such
stock dividend, or whom are affected by such split-up,
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consolidation, combination, reclassification or other similar event, the Warrant
Price in effect immediately after the record date of such dividend or
distribution or the effective date of any such subdivision, combination or
reclassification shall be proportionately adjusted so that the Holder of any
Warrant exercised after such time shall be entitled to receive the aggregate
number of shares which, if such Warrant had been exercised prior to any such
event, the registered holder would have owned upon such exercise and would have
been entitled to receive by virtue of such event. Such adjustment shall be made
successively whenever any such event specified above shall occur.
4.02. Adjustment to Number of Shares. Upon each adjustment of the
Warrant Price pursuant to Section 4.01, each Warrant shall thereupon evidence
the right to purchase that number of shares of Common Stock (calculated to the
nearest hundredth of a share) obtained by multiplying the number of shares of
Common Stock purchasable immediately prior to such adjustment upon exercise of
the Warrant by the Warrant Price in effect immediately prior to such adjustment
and dividing the product so obtained by the Warrant Price in effect immediately
after such adjustment.
4.03. Reorganization, etc. If after the date hereof any capital
reorganization or reclassification (other than pursuant to Section 4.01 hereof)
of the Common Stock of the Company, or consolidation or merger of the Company
with another corporation (other than a consolidation or merger in which the
Company is the continuing corporation and which does not result in any
reclassification of the outstanding shares of Common Stock or the conversion or
exchange of such outstanding shares into shares of other stock or other
securities or property), or the sale of all or substantially all of its assets
to another corporation or other similar event shall be effected, then, as a
condition of such reorganization, reclassification, consolidation, merger, or
sale, lawful and fair provision shall be made whereby the Warrant holders shall
thereafter have the right to purchase and receive upon the basis and upon the
terms and conditions specified in the Warrants and in lieu of the shares of
Common Stock of the Company immediately theretofore purchasable and receivable
upon the exercise of the rights represented thereby, such shares of stock,
securities, or assets as may be issuable or payable with respect to or in
exchange for the number of shares of Common Stock purchasable and receivable
upon the exercise of the Warrants had such exercise occurred in full prior to
such reorganization, reclassification, consolidation, merger, or sale. In such
event appropriate provision shall be made with respect to the rights and
interests of the Warrant Holders to the end that the provisions hereof
(including, without limitation, provisions for adjustments of the Warrant Price
and of the number of shares purchasable upon the exercise of the Warrants) shall
thereafter be applicable, as nearly as may be in relation to any share of stock,
securities, or assets thereafter deliverable upon the exercise hereof. The
Company shall not effect any such consolidation, merger, or sale unless prior to
the consummation thereof the successor corporation (if other than the Company)
resulting from such consolidation or merger, or the corporation purchasing such
assets, shall assume by written instrument executed and delivered to the Warrant
Agent the obligation to deliver to the Warrant Holders such shares of stock,
securities, or assets as, in accordance with the foregoing provision, such
Holders may be entitled to purchase. In the event of sale or conveyance or other
transfer of all or substantially all of the assets of the Company as a part of a
plan for total liquidation of the Company, all rights to exercise any Warrant
shall terminate 30 days after the Company gives notice to each Holder that such
sale or conveyance or other transfer has been consummated.
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4.04. Notices of Changes in Warrant. Upon every adjustment of the
Warrant Price or the number of shares issuable on exercise of a Warrant, the
Company shall give notice thereof to the Warrant Agent, which notice shall state
the Warrant Price resulting from such adjustment and the increase or decrease,
if any, in the number of shares purchasable at such price upon the exercise of a
Warrant, setting forth in reasonable detail the method of calculation and the
facts upon which such calculation is based. The Warrant Agent shall promptly
cause a similar notice to be mailed to each Holder of Warrants. Upon the
occurrence of any event above specified in this Article IV, the Company shall
give notice to the Warrant Agent and each Holder of the record date for such
dividend, distribution, or subscription rights, or the effective date of such
reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation, winding up or issuance. Such notice shall also specify the date as
of which the holders of Common Stock of record shall participate in such
dividend, distribution, or subscription rights, or shall be entitled to exchange
their Common Stock for stock, securities, or other assets deliverable upon such
reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation, winding up or issuance. Failure to give such notice, or any defect
therein shall not affect the legality or validity of such event.
4.05. No Fractional Shares. Notwithstanding any provision contained in
this Agreement to the contrary, the Company shall not issue fractional shares
upon exercise of Warrants. If, by reason of any adjustment made pursuant to this
Article IV, the holder of any Warrant would be entitled, upon the exercise of
such Warrant, to receive a fractional interest in a share, the Company shall,
upon such exercise, purchase such fractional interest for an amount in cash
equal to the current market value of such fractional interest, determined as
follows:
4.05.1. If the Common Stock is listed on a national securities exchange
or admitted to unlisted trading privileges on such exchange, the current value
shall be the last reported sale price regular way of the Common Stock on such
exchange. If the Common Stock is not listed on a national securities exchange or
admitted to unlisted trading privileges on such exchange but is listed for
trading on the NASDAQ Automated Quotation System, the current value shall be the
closing bid quotation on NASDAQ on the last business day prior to the date of
exercise of the Warrant.
4.05.2. If the Common Stock is not listed or admitted as above
described, the current value shall be the mean of the last reported bid and
asked prices reported by first, the OTC Bulletin Board, or if the Common Stock
is not listed or admitted for trading on the OTC Bulletin Board, second, the
National Quotation Bureau, Inc. on the last business day prior to the date of
the exercise of the Warrant.
4.05.3. If the Common Stock is not so listed or admitted as above
described and bid and asked prices are not so last reported, the current value
shall be an amount determined in such reasonable manner as may be prescribed by
the Board of Directors of the Company.
4.06. Form of Warrant. The form of Warrant need not be changed because
of any adjustment pursuant to this Article IV or Article IX hereof, and Warrants
issued after such adjustment may state the same Warrant Price and the same
number of shares as is stated in the Warrants initially issued pursuant to this
Agreement. However, the Company may at any time in its sole discretion make any
change in the form of Warrant that the Company may deem appropriate and that
does not affect the substance thereof,
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and any Warrant thereafter issued or countersigned, whether in exchange or
substitution for an outstanding Warrant or otherwise, may be in the form as so
changed.
4.07. Limitations. No adjustment of the Warrant Price shall be made as
a result of or in connection with (i) the issuance of Common Stock pursuant to
options, warrants, and stock purchase agreements outstanding or in effect on the
date hereof and as set forth on Schedule 1 hereto, or issuable pursuant to
agreements for the issuance thereof described in the Registration Statement;
(ii) the granting of additional options or warrants by separate agreements or
pursuant to the 1995 Long-Term Incentive Plan and/or the 1996 Non-Qualified
Stock Option Plan of the Company as currently in effect or as hereafter
modified, renewed, or extended, or the issuance of Common Stock of the Company
upon exercise of any such options or warrants described in the Registration
Statement; (iii) the issuance of Common Stock of the Company in connection with
(a) the IPO Warrants, the Representative's Purchase Option and/or the IAR
Warrants or (b) compensation arrangements with officers, employees, or agents of
the Company or any subsidiary described in the Registration Statement, (iv) the
issuance of Common Stock in connection with the conversion of any other
securities of the Company currently issued and outstanding or hereafter issued
or issuable pursuant to agreements for the issuance thereof described in the
Registration Statement into shares of Common Stock or other securities of the
Company pursuant to any conversion or exercise privileges attached thereto or
contained therein, or (v) any other circumstances other than those set forth in
Section 4.01 hereof.
ARTICLE V
Transfer and Exchange of Warrants
5.01. Registration Procedure. The Warrant Certificates shall be
transferable only on the books of the Company maintained at the principal office
of the Warrant Agent in New York, New York upon delivery thereof duly endorsed
by the registered holder or to his order, or duly authorized attorney or
representative, accompanied by proper evidence of succession, assignment or
authority to transfer, which endorsement shall be guaranteed by a member firm of
a national securities exchange, a commercial bank (not a savings bank or a
savings and loan association) or trust company located in the United States or a
member of the NASD. In all cases of transfer by an attorney-in-fact, the
original power of attorney, duly approved, or a copy thereof, duly certified, by
such attorney-in-fact, shall be deposited and remain with the Warrant Agent. In
case of transfer of executors, administrators, guardians or other legal
representatives, duly authenticated evidence of their authority shall be
produced, and may be required to be deposited and remain with the Warrant Agent
in its discretion. Upon any such transfer, a new Warrant Certificate
representing an equal aggregate number of Warrants so transferred shall be
issued, a new Warrant Certificate representing the balance of the Warrants not
so transferred shall be issued, and the original Warrant Certificate which is
the subject of such transfers shall be canceled by the Warrant Agent. The
Warrant Certificate so canceled shall be delivered by the Warrant Agent to the
Company upon request.
5.02. Cancellation and Surrender. Warrant Certificates may be
surrendered to the Warrant Agent together with a request for exchange, and
thereupon the Warrant Agent shall issue in exchange therefor one or more new
Warrant Certificates as requested by the registered holder of the Warrants so
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surrendered, representing an equal aggregate number of Warrants. In the event
that a Warrant Certificate surrendered for transfer bears a restrictive legend,
the Warrant Agent shall not cancel such Warrant Certificate and issue a new
Warrant Certificate in exchange therefor until the Warrant Agent has received an
opinion of counsel for the Company stating that such transfer may be made and
indicating whether the new Warrants must also bear a restrictive legend. The
Warrant Agent shall not be required to effect any registration of transfer or
exchange which will result in the issuance of a Warrant Certificate for a
fraction of a Warrant.
5.02.1. No service charge shall be made for any exchange or
registration of transfer of Warrants.
5.02.2. The Warrant Agent is hereby authorized to countersign and to
deliver, in accordance with the terms of this Agreement, the Warrant Certificate
required to be issued pursuant to the provisions hereof, and the Company,
whenever required by the Warrant Agent, will supply the Warrant Agent with
Warrants duly executed on behalf of the Company for such purpose.
ARTICLE VI
Redemption
6.01. Redemption. The IPO Warrants, but not the IAR Warrants, may be
redeemed prior to the Expiration Date, at the option of the Company, with the
consent of IAR with respect to any notice of redemption given during the twelve
(12) month period following the Effective Date, upon written notice as provided
in Section 6.02 below and notice to IAR, which notice to IAR shall be given
concurrently with the Company's decision to deliver notices to Noteholders
provided for in Section 6.02 below, as a whole at any time or in part from time
to time, by lot, in any proportion as the Company in its sole discretion shall
determine, at the office of the Warrant Agent, upon notice as below provided, at
the price of $.01 per Warrant (the "IPO Redemption Price"), provided, (i) the
closing bid quotation of the Common Stock as quoted by the OTC Bulletin Board;
(ii) the last reported sale price, regular way, or if no such reported sale has
occurred on any such day, the average of the closing bid and asked prices,
regular way, on the principal national securities exchange on which the Common
Stock is listed or admitted to trading, or (iii) if not so quoted or reported,
the average of the bid and asked prices as furnished by two members of the NASD
selected for that purpose, in any such case has been at least two hundred
percent (200%) of the then exercise Warrant Price of the IPO Warrants on each
of the twenty (20) consecutive trading days ending on the third (3rd) day prior
to the day on which notice is given (the "Closing Price").
6.02. Date Fixed for, and Notice of, Redemption. In the event the
Company shall elect to redeem all or any part of the IPO Warrants, the Company
shall fix a date for the redemption (the "Redemption Date") not more than sixty
(60) days and not less than thirty (30) days following the date upon which
notice is given to the registered holders of the IPO Warrants to be redeemed, at
their respective addresses then appearing on the registration books. Nothing
herein shall limit the rights of registered holders to exercise the IPO Warrants
in accordance with Article III of this Agreement at any time prior to the date
fixed for redemption. Written notice by first class mail shall be given by the
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Company to all Holders of IPO Warrant Certificates, as the case may be, to be
redeemed by the Warrant Agent not more than sixty (60) days and not less than
thirty (30) days prior to the Redemption Date. Each such notice of redemption
will specify the Redemption Date and the Redemption Price. The notice will state
that payment of the Redemption Price will be made by the Warrant Agent upon
presentation and surrender of the IPO Warrant Certificates representing such IPO
Warrants to the Warrant Agent at its principal office, and will also state that
the right to exercise the IPO Warrants will terminate at 5:00 p.m., New York
City time, on the Redemption Date. Failure to mail the notice of redemption to
any Holder or any defect therein, however, shall not affect the validity of the
redemption of the remaining IPO Warrants. The Company will also make prompt
public announcement of such redemption by news release.
6.03. Payment of Redemption Price. On or prior to the opening of
business on the Redemption Date (as defined in Section 6.01 hereof), the Company
shall deposit with the Warrant Agent funds in form satisfactory to the Warrant
Agent sufficient to purchase all the IPO Warrants which are to be redeemed.
Payment of the Redemption Price shall be made by the Warrant Agent upon
presentation and surrender of the Warrant Certificates representing such IPO
Warrants to the Warrant Agent at its principal office.
6.04. Limited Redemption Rights. Notwithstanding anything contained in
this Agreement to the contrary, nothing in this Article VI shall apply to or
include the IAR Warrants, which IAR Warrants shall not be redeemable hereunder.
ARTICLE VII
Other Provisions Relating to
Rights of Holders of Warrants
7.01. No Rights as Stockholder Conferred by Warrants. A Warrant does
not entitle the registered holder thereof to any of the rights of a stockholder
of the Company, including, without limitation, the right to receive dividends or
other distributions, exercise any preemptive rights to vote or to consent or to
receive notice as shareholders in respect of the meetings of shareholders or the
election of directors of the Company or any other matter.
7.02. Lost, Stolen, Mutilated, or Destroyed Warrants. If any Warrant is
lost, stolen, mutilated, or destroyed, the Company and the Warrant Agent may on
such terms as to indemnity or otherwise as the Company may in its discretion
impose (which shall, in the case of a mutilated Warrant Certificate, include the
surrender thereof), issue a new Warrant Certificate of like denomination, tenor,
and date as the Warrant so lost, stolen, mutilated, or destroyed. Any such new
Warrant Certificate shall constitute an original contractual obligation of the
Company, whether or not the allegedly lost, stolen, mutilated, or destroyed
Warrant shall be at any time enforceable by anyone.
7.03. Reservation of Common Stock. The Company shall at all times
reserve and keep available a number of its authorized but unissued shares of
Common Stock that will be sufficient to permit the exercise in full of all
outstanding Warrants covered by this Agreement.
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7.04 Registration of Common Stock. Prior to the commencement of the
Exercise Period, the Company shall have the Registration Statement on file with
the Securities and Exchange Commission for the registration of the Common Stock
issuable upon exercise of the Warrants, and shall use good faith efforts with
due diligence to maintain such Registration Statement current, until the
expiration of the Warrants in accordance with the provisions of this Agreement,
whether by filing an appropriate post-effective amendment thereto or otherwise.
ARTICLE VIII
Concerning the Warrant Agent and Other Matters
8.01. Payment of Taxes. The Company will from time to time pay on or
before the due date therefor, all taxes and charges that may be imposed upon the
Company or the Warrant Agent in respect of the issuance or delivery of shares of
Common Stock upon the exercise of Warrants, but the Company shall not be
obligated to pay any transfer taxes in respect of the Warrants or such shares.
8.02. Resignation, Consolidation, or Merger of Warrant Agent.
8.02.1. The Warrant Agent, or any successor to it hereafter appointed,
may resign its duties and be discharged from all further duties and liabilities
hereunder after giving sixty (60) days' notice to the Company. If the office of
the Warrant Agent becomes vacant by resignation or incapacity to act or
otherwise, the Company shall appoint in writing a successor Warrant Agent in
place of the Warrant Agent. If the Company shall fail to make such appointment
within a period of thirty (30) days after receiving notification of such
resignation or incapacity by the Warrant Agent or by the holder of a Warrant
(who shall, with such notice, submit his Warrant for inspection by the Company),
then the holder of any Warrant may apply to the Supreme Court of the State of
New York for the County of New York for the appointment of a successor Warrant
Agent.
8.02.2. Any successor Warrant Agent, whether appointed by the Company
or by such court, shall be a corporation organized and existing under the laws
of the State of New York, in good standing and having its principal office in
the Borough of Manhattan, City and State of New York, and authorized under such
laws to exercise corporate trust powers and subject to supervision or
examination by Federal or state authority. After appointment, any successor
Warrant Agent shall be vested with all the authority, powers, rights,
immunities, duties, and obligations of its predecessor Warrant Agent with like
effect as if originally named as Warrant Agent hereunder, without any further
act or deed. The predecessor Warrant Agent shall execute and deliver, at the
expense of the Company, an instrument transferring to such successor Warrant
Agent all the authority, powers, and rights of such predecessor Warrant Agent
hereunder and the successor Warrant Agent shall execute and deliver an
instrument accepting the same. Upon request of any successor Warrant Agent, the
Company and the predecessor Warrant Agent shall make, execute, acknowledge, and
deliver any and all instruments in writing in order to more fully and
effectually vest in and confirm to such successor Warrant Agent all such
authority, powers, rights, immunities, duties, and obligations.
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8.02.3. In the event a successor Warrant Agent shall be appointed, the
Company shall give notice thereof to the predecessor Warrant Agent and the
Transfer Agent for the Common Stock not later than the effective date of any
such appointment.
8.02.4. Any corporation into which the Warrant Agent may be merged or
with which it may be consolidated or any corporation resulting from any merger
or consolidation to which the Warrant Agent shall be a party may be the
successor Warrant Agent under this Agreement upon delivery to the Company of an
agreement whereby such successor shall assume all obligations of the Warrant
Agent hereunder.
8.03. Fees and Expenses of Warrant Agent.
8.03.1 The Company shall pay the Warrant Agent reasonable remuneration
for its services as such Warrant Agent hereunder and will promptly reimburse the
Warrant Agent for all expenditures that the Warrant Agent may reasonably incur
in the execution of its duties hereunder.
8.03.2 The Company agrees to perform, execute, acknowledge, and deliver
or cause to be performed, executed, acknowledged, and delivered all such further
and other acts, instruments, and assurances as may reasonably be required by the
Warrant Agent for the carrying out or performing of the provisions of this
Agreement.
8.04. Liability of Warrant Agent.
8.04.1 Whenever in the performance of its duties under this Agreement
the Warrant Agent shall deem it necessary or desirable that any fact or matter
be proved or established by the Company prior to taking or suffering any action
hereunder, such fact or matter (unless other evidence in respect thereof be
herein specifically prescribed) may be deemed to be conclusively proved and
established by a statement signed by the President of the Company and delivered
to the Warrant Agent. The Warrant Agent may rely upon such statement for any
action taken or suffered in good faith by it pursuant to the provisions of this
Agreement.
8.04.2 The Warrant Agent shall be liable hereunder only for its own
negligence, bad faith or willful misconduct. The Company agrees to indemnify the
Warrant Agent and save it harmless against any and all liabilities, including
judgments, costs and reasonable counsel fees, for anything done or omitted by
the Warrant Agent in the execution of this Agreement except as a result of the
Warrant Agent's negligence, willful misconduct, or bad faith.
8.04.3 The Warrant Agent shall have no responsibility with respect to
the validity of this Agreement or with respect to the validity or execution of
any Warrant (except its countersignature thereof), nor shall it be responsible
for any breach by the Company of any covenant or condition contained in this
Agreement or in any Warrant. The Warrant Agent shall not be responsible to make
any adjustments required under the provisions of Article IV or responsible for
the manner, method, or amount of any such adjustment or the ascertaining of the
existence of facts that would require any such adjustment, nor shall it by any
act hereunder be deemed to make any representation or warranty as to the
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authorization or reservation of any shares of Common Stock to be issued pursuant
to this Agreement or any Warrant or as to whether any shares of Common Stock
will when issued be validly issued and fully paid and nonassessable.
8.05. Acceptance of Agency. The Warrant Agent hereby accepts the agency
established by this Agreement and agrees to perform the same upon the terms and
conditions herein set forth and among other things, shall account promptly to
the Company with respect to Warrants exercised and concurrently account for, and
remit to the Company, all moneys received by the Warrant Agent for the purchase
of shares of the Company's Common Stock through the exercise of Warrants.
8.06. Purchase of Warrants by the Company. The Company shall have the
right, except as limited by law, other agreement or herein, to purchase or
otherwise acquire Warrants at such times, in such manner and for such
consideration as it may deem appropriate.
ARTICLE IX
Miscellaneous Provisions
9.01. Successors. All the covenants and provisions of this Agreement by
or for the benefit of the Company or the Warrant Agent shall bind and inure to
the benefit of their respective successors and permitted assigns.
9.02. Notices. Any notice, statement or demand or other communication
authorized or permitted by this Agreement shall be in writing and signed and
shall be deemed given or made as and when sent by registered or certified mail,
postage prepaid addressed to the parties at their above addresses or such other
address as a party may hereafter specify in the manner for the giving of notice
herein.
9.03. Applicable Law: Amendment. The validity, interpretation, and
performance of this Agreement and of the Warrants shall be governed in all
respects by the laws of the State of New York, without regard to its conflicts
of laws principles. This Agreement and the Warrants may be amended only in
writing. The Warrant Agent may, without the consent or concurrence of any
Holder, by supplemental agreement or otherwise, join with the Company in making
any changes or corrections in this Agreement that they shall reasonably believe
(i) are required to cure any ambiguity or to correct any defective or
inconsistent provision or clerical omission or mistake or manifest error herein
contained; (ii) add to the covenants and agreements of the Company or the
Warrant Agent in this Agreement such further covenants and agreements thereafter
to be observed, or (iii) result in the surrender of any right or power reserved
to or conferred upon the Company or the Warrant Agent in this Agreement, but
which changes or corrections do not or will not adversely affect, alter or
change the rights, privileges or immunities of the Holders of Warrant
Certificates.
9.04. Persons having rights under this Agreement. Nothing in this
Agreement expressed and nothing that may be implied from any of the provisions
hereof is intended, or shall be construed, to confer upon, or give to, any
person or corporation other than the parties hereto and the registered holders
of the Warrants and, as the context implies, IAR, any right, remedy, or claim
under or by reasons of this
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<PAGE> 13
Agreement or of any covenant, condition, stipulation, promise, or agreement
hereof. All covenants, conditions, stipulations, promises, and agreements
contained in this Agreement shall be for the sole and exclusive benefit of the
parties hereto and their successors and assigns and of the registered holder of
the Warrants.
9.05. Examination of Warrant Agreement. A copy of this Agreement shall
be available at all reasonable times at the office of the Warrant Agent in the
Borough of Manhattan, City and State of New York, for inspection by the
registered holder of any Warrant. The Warrant Agent may require any such holder
to submit his Warrant for inspection by it.
9.06. Counterparts. This Agreement may be executed in any number of
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and all such counterparts shall together constitute but one and
the same instrument.
9.07. Effect of Headings. The Article and Section headings herein are
for convenience only and are not part of this Agreement and shall not affect the
interpretation thereof.
IN WITNESS WHEREOF, this Agreement has been duly executed by the
parties hereto under their respective corporate seals as of the day and year
first above written.
MIKE'S ORIGINAL, INC.
By: _______________________________
Michael Rosen
President
AMERICAN STOCK TRANSFER & TRUST
COMPANY
By: ________________________________
Name:
Title:
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<PAGE> 14
Exhibit A
[FORM OF WARRANT CERTIFICATE]
No.
Certificate for _____ Warrants
NOT EXERCISABLE BEFORE 9:30 A.M.,
NEW YORK CITY TIME, ON _________,
1997 OR AFTER 5:00 P.M., NEW YORK
CITY TIME, ON _____________, 2000
MIKE'S ORIGINAL, INC.
CLASS A COMMON STOCK PURCHASE WARRANT CERTIFICATE
THIS CERTIFIES that
or registered assigns is the registered holder (the "Registered Holder") of the
number of Class A Warrants set forth above, each of which represents the right
to purchase one fully paid and nonassessable share of Common Stock, par value
$.001 per share (the "Common Stock"), of Mike's Original, Inc., a Delaware
corporation (the "Company"), at the initial exercise price (the "Warrant Price")
of $6.00 at any time after the shares of Common Stock issuable upon exercise of
the Warrants evidenced hereby have been registered under the Securities Act of
1933, as amended, or such other action as may be required by Federal or state
law relating to the issuance or distribution of securities shall have been
taken, but not after the Expiration Date hereinafter referred to, by
surrendering this Warrant Certificate, with the form of election to purchase set
forth hereon duly executed with signatures guaranteed as provided below, at the
office maintained pursuant to the Warrant Agreement hereinafter referred to for
that purpose by American Stock Transfer & Trust Company, or its successor as
warrant agent (any such warrant agent being herein called the "Warrant Agent"),
and by paying in full the Warrant Price, plus transfer taxes, if any. Payment of
the Warrant Price shall be made in United States currency, by certified check or
money order payable to the order of the Company.
Upon certain events provided for in the Warrant Agreement, the
Warrant Price and the number of shares of Common Stock issuable upon the
exercise of each Warrant are required to be adjusted.
The Warrants, or any portion thereof, are subject to call for
redemption by the Company at a call price of $0.01 per Warrant, upon written
notice to IAR Securities Corp. (which notice shall be given to IAR Securities
Corp. not less than ten (10) days prior to the date notice of such redemption is
first given by the Company to the Registered Holders) and upon no more than
sixty (60) days and no less than thirty (30) days notice to the Registered
Holders, provided that the "Closing Price" (as defined in
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<PAGE> 15
the Warrant Agreement) per share of the Common Stock shall have been greater
than or equal to 200% of the then-current Warrant Price for a period of 20
consecutive trading days ending on the third day prior to the date that the
notice of such call (the "Call Notice") is given by the Company to the Warrant
Agent and subject to certain other conditions. Notwithstanding anything
contained in this paragraph to the contrary, nothing in this paragraph shall
apply to or include the Warrants issued to IAR Securities Corp., which Warrants
shall not be redeemable hereunder.
No Warrant may be exercised after 5:00 P.M., New York City time,
on the expiration date (the "Expiration Date") which will be the earlier of (i)
_______________, 2000 or (ii) the close of business on the Redemption Date.
After the Expiration Date, all Warrants evidenced hereby shall thereafter become
void.
Prior to the Expiration Date, subject to any applicable laws,
rules, or regulations restricting transferability and to any restriction on
transferability that may appear on this Warrant Certificate in accordance with
the terms of the Warrant Agreement hereinafter referred to, the Registered
Holder shall be entitled to transfer this Warrant Certificate in whole or in
part upon surrender of this Warrant Certificate at the office of the Warrant
Agent maintained for that purpose with the form of assignment set forth hereon
duly executed, with signatures guaranteed by a member firm of a national
securities exchange, a commercial bank (not a savings bank or a savings and loan
association) or a trust company located in the United States, a member of the
National Association of Securities Dealers, Inc., or other eligible guarantor
institution which is a participant in a signature guarantee program (as such
terms are defined in Reg. 240.17Ad-15 under the Securities Exchange Act of 1934,
as amended) acceptable to the Warrant Agent. Upon any such transfer, a new
Warrant Certificate or Warrant Certificates representing the same aggregate
number of Warrants will be issued in accordance with instructions in the form of
assignment.
Upon the exercise of less than all of the Warrants evidenced by
this Warrant Certificate, there shall be issued to the Registered Holder a new
Warrant Certificate in respect of the Warrants not exercised.
Prior to the Expiration Date, the Registered Holder shall be
entitled to exchange this Warrant Certificate, with or without other Warrant
Certificates, for another Warrant Certificate or Warrant Certificates for the
same aggregate number of Warrants, upon surrender of this Warrant Certificate at
the office maintained for such purpose by the Warrant Agent.
No fractional shares will be issued upon the exercise of Warrants.
As to any final fraction of a share which the registered holder of one or more
Warrant Certificates, the rights under which are exercised in the same
transaction, would otherwise be entitled to purchase upon such exercise, the
Company shall pay the cash value thereof determined as provided in the Warrant
Agreement.
This Warrant Certificate is issued under and in accordance with a
Warrant Agreement between the Company and the Warrant Agent (the "Warrant
Agreement") and is subject to the terms and provisions contained in said Warrant
Agreement, to all of which terms and provisions the Registered Holder consents
by acceptance hereof.
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<PAGE> 16
This Warrant Certificate shall not entitle the Registered Holder
to any of the rights of a stockholder of the Company, including, without
limitation, the right to vote, to receive dividends and other distributions, or
to attend or receive any notice of meetings of stockholders or any other
proceedings of the Company.
This Warrant Certificate shall not be valid for any purpose until
it shall have been countersigned by the Warrant Agent.
IN WITNESS WHEREOF, the Company has caused this Warrant
Certificate to be duly executed under its facsimile corporate seal.
MIKE'S ORIGINAL, INC.
By: Michael Rosen
-------------------------------
President
Seal Attest:
Secretary
Countersigned: AMERICAN STOCK TRANSFER & TRUST
COMPANY
as Warrant Agent
Dated By
-16-
<PAGE> 17
[FORM OF]
ELECTION TO PURCHASE
The undersigned hereby irrevocably elects to exercise __________
of the Warrants represented by this Warrant Certificate and to purchase the
shares of Common Stock issuable upon the exercise of said Warrants, and requests
that certificates for such shares be issued and delivered as follows:
ISSUE TO:
(NAME)
(ADDRESS, INCLUDING ZIP CODE)
(SOCIAL SECURITY OR OTHER TAX IDENTIFICATION NUMBER)
DELIVER TO:
(NAME)
at
(ADDRESS, INCLUDING ZIP CODE)
If the number of Warrants hereby exercised is less than all the
Warrants represented by this Warrant Certificate, the undersigned requests that
a new Warrant Certificate representing the number of full Warrants not exercised
be issued and delivered as set forth below.
In full payment of the purchase price with respect to the Warrants
exercised and transfer taxes, if any, the undersigned hereby tenders payment of
$_________ by certified check or money order payable in United States currency
to the order of the Company.
Dated ____________________
Name of Warrant Holder: _______________________________________________________
Address: _________________________________________________________
__________________________________________________________
__________________________________________________________
Signature: _________________________________________________________
<PAGE> 18
[FORM OF] ASSIGNMENT
FOR VALUE RECEIVED, the undersigned hereby sells, assigns, and
transfers unto the Assignee named below all of the rights of the undersigned
represented by the within Warrant Certificate, with respect to the number of
Warrants set forth below:
Name of Assignee Address No. of Warrants
- ---------------- ------- ---------------
and does hereby irrevocably constitute and appoint ___________ Attorney to make
such transfer on the books of Mike's Original, Inc. maintained for that purpose,
with full power of substitution in the premises.
Dated:
SIGNATURE(S) GUARANTEED
By
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION
(Banks, Stock Brokers, Savings and Loan Associations, and Credit Unions) WITH
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM PURSUANT TO
S.E.C. RULE 17Ad-15.
Signature
---------
Signature
NOTICE: The signature(s) on this assignment must correspond with the name(s) as
written upon the face of the Certificate, in every particular, without
alteration or enlargement or any change whatever.
<PAGE> 1
Exhibit 4.3
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE SHARES
AND WARRANTS ISSUABLE UPON EXERCISE HEREOF HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
PURSUANT TO A REGISTRATION STATEMENT FILED WITH THE SECURITIES
AND EXCHANGE COMMISSION. HOWEVER, NEITHER THE WARRANTS NOR
SUCH SHARES MAY BE OFFERED OR SOLD EXCEPT PURSUANT TO (i) A
POST-EFFECTIVE AMENDMENT TO SUCH REGISTRATION STATEMENT, (ii)
A SEPARATE REGISTRATION STATEMENT UNDER SUCH ACT, OR (iii) AN
EXEMPTION FROM REGISTRATION UNDER SUCH ACT.
THE TRANSFER OF THIS WARRANT IS
RESTRICTED AS DESCRIBED HEREIN.
MIKE'S ORIGINAL, INC.
Warrant for the Purchase of
Common Stock and Warrants
No. 1 67,500 Shares
87,500 Warrants
THIS CERTIFIES that, for receipt in hand of $250.00 and other
value received, IAR SECURITIES CORP., 99 Wall Street, New York, NY 10005 (the
"Holder"), is entitled to subscribe for and purchase from MIKE'S ORIGINAL, INC.,
a Delaware corporation (the "Company"), upon the terms and conditions set forth
herein, at any time or from time to time after _____________, 1998, and before
5:00 P.M. on _______________, 2001, New York time (the "Exercise Period"),
67,500 Shares (the "Representative's Shares") of the Company's common stock, par
value $.001 per share (the "Common Stock") at a price of $7.30 per Share (the
"Share Exercise Price") and 87,500 common stock purchase warrants (the
"Representative's Warrants") at a price of $.26 per Warrant, to be issued
pursuant to a Warrant Agreement, dated as of ______________, 1997 (the "Public
Warrant Agreement") between the Company and American Stock Transfer & Trust
Company, as warrant agent (the "Warrant Agent"). This Warrant is the warrant or
one of the warrants (collectively, including any warrants issued upon the
exercise or transfer of any such warrants in whole or in part, the "Warrants")
issued pursuant to the Underwriting Agreement, dated ________________, 1997,
between the Company, and IAR Securities Corp., relating to the initial public
offering of 675,000 Shares of Common Stock and 875,000 Public Warrants (as
defined below). As used herein the term "this Warrant" shall mean and include
this Warrant and any Warrant or Warrants hereafter issued as a consequence of
the exercise or transfer of this Warrant in whole or in part. Neither this
Warrant nor any share of Representative's Shares or Representative's Warrants
issued on exercise hereof, nor any share of Common Stock issued upon exercise of
any such Representative's Warrants, may be sold, transferred, assigned or
hypothecated until ______________, 1998, except that this Warrant or any such
other securities may be transferred, in whole or in part, to (i) one or more
officers or partners of the Holder (or the officers or partners of any such
partner); (ii) any other underwriting firm or member of the selling group which
participated in the public offering which commenced on ____________, 1997 (or
the officers or partners of any such firm); (iii) a successor to the Holder, or
the officers or partners of such successor; (iv) a purchaser of substantially
all of the assets of the Holder; or (v) by operation of law; and the term the
"Holder" as used herein shall include any transferee to whom this Warrant has
been transferred in accordance with the above.
<PAGE> 2
Each Representative's Warrant be identical in all respects to
the warrants (the "Public Warrants") issued pursuant to the Public Warrant
Agreement and sold to the public.
1. This Warrant may be exercised during the Exercise Period,
as to the whole or any lesser number of whole Representative's Shares and/or
Representative's Warrants, by the surrender of this Warrant (with the election
at the end hereof duly executed) to the Company at its office at 131 Jericho
Turnpike, Jericho, NY 11753, or at such other place as is designated in writing
by the Company, together with (a) a certified or bank cashier's check payable to
the order of the Company in an amount equal to the Exercise Price multiplied by
the number of Representative's Shares and/or Representative's Warrants for which
this Warrant is being exercised (the "Aggregate Exercise Price"), (b) the
surrender to the Company of securities of the Company or any subsidiary of the
Company having a Current Market Price (as defined in Section 5(g) below) equal
to the Aggregate Exercise Price, (c) the acceptance by the Holder of a number of
Representative's Shares and/or Representative's Warrants equal to the number of
Representative's Shares and/or Representative's Warrants being purchased upon
such exercise, less that number of Representative's Shares and/or
Representative's Warrants having a Current Market Price (calculated, for the
purpose hereof as the Current Market Price of the underlying Representative's
Shares and Representative's Warrants) equal to the Aggregate Exercise Price, or
(d) any combination of the foregoing.
2. Upon each exercise of the Holder's rights to purchase
Representative's Shares and/or Representative's Warrants, the Holder shall be
deemed to be the holder of record of the Representative's Shares and/or
Representative's Warrants issuable upon such exercise, notwithstanding that the
transfer books of the Company shall then be closed or certificates representing
such Representative's Shares and/or Representative's Warrants (or the
Representative's Shares underlying such Representative's Shares and/or
Representative's Warrants) shall not then have been actually delivered to the
Holder. As soon as practicable after each such exercise of this Warrant, the
Company shall issue and deliver to the Holder a certificate or certificates for
the Representative's Shares and/or Representative's Warrants issuable upon such
exercise (or the Representative's Shares underlying such Representative's Shares
and/or Representative's Warrants), registered in the name of the Holder or its
designee. If this Warrant should be exercised in part only, the Company shall,
upon surrender of this Warrant for cancellation, execute and deliver a new
Warrant evidencing the right of the Holder to purchase the balance of the
Representative's Shares and/or Representative's Warrants (or portions thereof)
subject to purchase hereunder.
3. Any Warrants issued upon the transfer or exercise in part
of this Warrant shall he numbered and shall he registered in a Warrant Register
as they are issued. The Company shall be entitled to treat the registered holder
of any Warrant on the Warrant Register as the owner in fact thereof for all
purposes and shall not be bound to recognize any suitable or other claim to or
interest in such Warrant on the part of any other person, and shall not be
liable for any registration or transfer of Warrants which are registered or to
be registered in the name of a fiduciary or the nominee of a fiduciary unless
made with the actual knowledge that a fiduciary or nominee is committing a
breach of trust in requesting such registration or transfer, or with the
knowledge of such facts that its participation therein amounts to bad faith.
This Warrant shall be transferable only on the books of the Company upon
delivery thereof duly endorsed by the Holder or by his duly authorized attorney
or representative, or accompanied by proper evidence of succession, assignment,
or authority to transfer. In all cases of transfer by an attorney, executor,
administrator, guardian, or other legal representative, duly authenticated
evidence of his or its authority shall be produced. Upon any registration of
transfer, the Company shall deliver a new Warrant or Warrants to the person
entitled thereto. This Warrant may be exchanged, at the option of the Holder
thereof, for another Warrant, or other Warrants of different denominations, of
like tenor and representing in the aggregate the right to purchase a like number
of Representative's Shares and/or Representative's Warrants (or portions
thereof), upon surrender to the Company or its duly authorized agent.
Notwithstanding the foregoing, the Company shall have no obligation to cause
Warrants to be transferred on its books to any person if, in the opinion of
counsel to the Company, such transfer does not comply with the provisions of the
Securities Act of 1933, as amended (the "Act"), and the rules and regulations
thereunder.
4. The Company shall at all times reserve and keep available
out of its authorized and unissued Common Stock, solely for the purpose of
providing for the exercise of the Warrants and the Representative's Warrants,
such number of shares of Common Stock as shall, from time to time, be sufficient
therefor. The Company covenants that
2
<PAGE> 3
all shares of Common Stock issuable upon exercise of this Warrant and the
Representative's Warrants, upon receipt by the Company of the full payment
therefor, shall be validly issued, fully paid, nonassessable, and free of
preemptive rights.
5. (a) Upon the occurrence of any event (an "Event") as a
result of which an adjustment is made to the exercise price (the "Public
Exercise Price") of any of the Public Warrants, the number of Representative's
Shares issuable thereafter upon exercise of this Warrant shall be adjusted to
equal the number of Representative's Shares issuable prior to such Event
multiplied by a fraction, the numerator of which shall be the Public Exercise
Price in effect prior to such Event and the denominator of which shall be the
Public Exercise Price subsequent to such Event.
(b) Notwithstanding any other provision of this
Warrant, any adjustment of the exercise price and/or the number of the Warrant
Shares purchasable upon the exercise of the Representative's Warrants shall be
determined solely by the antidilution and other adjustment provisions contained
in the Public Warrant Agreement (which provisions are incorporated herein by
reference) as if such Representative's Warrants were and had been outstanding on
and from the date of original issuance of the Public Warrants.
(c) All calculations under this Section 5 shall be
made to the nearest cent or to the nearest one-thousandth of a share, as the
case may be.
(d) In any case in which this Section 5 shall require
that an adjustment in the number of Representative's Shares be made effective as
of a record date for a specified event, the Company may elect to defer, until
the occurrence of such event, issuing to the Holder, if the Holder exercised
this Warrant after such record date, the shares of Common Stock, if any,
issuable upon such exercise over and above the number of Representative's
Shares, if any, issuable upon such exercise on the basis of the number of
Representative's Shares in effect prior to such adjustment; provided, however,
that the Company shall deliver to the Holder a due bill or other appropriate
instrument evidencing the Holder's right to receive such additional shares upon
the occurrence of the event requiring such adjustment.
(e) Whenever there shall be an adjustment as provided
in this Section 5, the Company shall promptly cause written notice thereof to be
sent by registered mail, postage prepaid, to the Holder, at its address as it
shall appear in the Warrant Register, which notice shall be accompanied by an
officer's certificate setting forth the number of Representative's Shares
issuable as part of each Representative's Purchase Warrant and the exercise
price and the number of Warrant Shares purchasable upon the exercise of each
Representative's Warrant after such adjustment and setting forth a brief
statement of the facts requiring such adjustment and the computation thereof,
which officer's certificate shall be conclusive evidence of the correctness of
any such adjustment absent manifest error.
(f) The Company shall not be required to issue
fractions of shares of Common Stock or other capital stock of the Company upon
the exercise of this Warrant. If any fraction of a share would be issuable on
the exercise of this Warrant (or specified portions thereof), the Company shall
purchase such fraction for an amount in cash equal to the same fraction of the
Current Market Price (as hereinafter defined) of such share of Common Stock on
the date of exercise of this Warrant.
(g) The "Current Market Price" per share of any
security on any date shall be deemed to be the average of the daily closing
prices for the 30 consecutive trading days immediately preceding the date in
question. The closing price for each day shall be the last reported sales price
regular way or, in case no such reported sale takes place on such day, the
closing bid price regular way, in either case on the principal national
securities exchange (including, for purposes hereof, the OTC Bulletin Board) on
which such security is listed or admitted to trading or, if such security is not
listed or admitted to trading on any national securities exchange, the highest
reported bid price for such security as furnished by the National Association of
Securities Dealers, Inc. through Nasdaq or a similar organization if Nasdaq is
no longer reporting such information. If on any such date the security is not
listed or admitted to trading on any national securities exchange and is not
quoted by Nasdaq or any similar organization, the fair value of a share of such
security on such date, as determined in good faith by the board of directors of
the Company, whose determination shall be conclusive absent manifest error,
shall be used.
3
<PAGE> 4
6. (a) In case of any consolidation with or merger of
the Company with or into another corporation (other than a merger or
consolidation in which the Company is the surviving or continuing corporation),
or in case of any sale, lease, or conveyance to another corporation of the
property and assets of any nature of the Company as an entirety or substantially
as an entirety, such successor, leasing, or purchasing corporation, as the case
may be, shall (i) execute with the Holder an agreement providing that the Holder
shall have the right thereafter to receive upon exercise of this Warrant solely
the kind and amount of shares of stock and other securities, property, cash, or
any combination thereof receivable upon such consolidation, merger, sale, lease,
or conveyance by a holder of the number of shares of Common Stock and the
Representative's Warrants for which this Warrant might have been exercised
immediately prior to such consolidation, merger, sale, lease, or conveyance and
(ii) make effective provision in its certificate of incorporation or otherwise,
if necessary, to effect such agreement. Such agreement shall provide for
adjustments which shall be as nearly equivalent as practicable to the
adjustments in Section 5.
(b) In case of a reclassification or change of the
shares of Common Stock issuable upon exercise of this Warrant (other than a
change in par value or from no par value to a specified par value, or as a
result of a subdivision or combination, but including any change in the shares
into two or more classes or series of shares), or in case of any consolidation
or merger of another corporation into the Company in which the Company is the
continuing corporation and in which there is a reclassification or change
(including a change to the right to receive cash or other property) of the
shares of Common Stock (other than a change in par value, or from no par value
to a specified par value, or as a result of a subdivision or combination, but
including any change in the shares into two or more classes or series of
shares), the Holder shall have the right thereafter to receive upon exercise of
this Warrant solely the kind and amount of shares of stock and other securities,
property, cash, or any combination thereof receivable upon such
reclassification, change, consolidation, or merger by a holder of the number of
shares of Common Stock and the Representative's Warrants for which this Warrant
might have been exercised immediately prior to such reclassification, change,
consolidation, or merger. Thereafter, appropriate provision shall be made for
adjustments which shall be as nearly equivalent as practicable to the
adjustments in Section 5.
(c) The above provisions of this Section 6 shall
similarly apply to successive reclassifications and changes of shares of Common
Stock and to successive consolidations, mergers, sales, leases, or conveyances.
7. In case at any time the Company shall propose
(a) to pay any dividend or make any distribution on
shares of Common Stock in shares of Common Stock or make any other distribution
(other than regularly scheduled cash dividends which are not in a greater amount
per share than the most recent such cash dividend) to all holders of Common
Stock; or
(b) to issue any rights, warrants, or other
securities to all holders of Common Stock entitling them to purchase any
additional shares of Common Stock or any other rights, warrants, or other
securities; or
(c) to effect any reclassification or change of
outstanding shares of Common Stock, or any consolidation, merger, sale, lease,
or conveyance of property, described in Section 6; or
(d) to effect any liquidation, dissolution, or
winding-up of the Company; or
(e) to take any other action which would cause an
adjustment to the Public Exercise Price;
then, and in any one or more of such cases, the Company shall give written
notice thereof, by registered mail, postage prepaid, to the Holder at the
Holder's address as it shall appear in the Warrant Register, mailed at least 15
days prior to (i) the date as of which the holders of record of shares of Common
Stock to be entitled to receive any such dividend, distribution, rights,
warrants, or other securities are to be determined, (ii) the date on which any
such reclassification, change of outstanding shares of Common Stock,
consolidation, merger, sale, lease, conveyance of property, liquidation,
4
<PAGE> 5
dissolution, or winding-up is expected to become effective, and the date as of
which it is expected that holders of record of shares of Common Stock shall be
entitled to exchange their shares for securities or other property, if any,
deliverable upon such reclassification, change of outstanding shares,
consolidation, merger, sale, lease, conveyance of property, liquidation,
dissolution, or winding-up, or (iii) the date of such action which would require
an adjustment to the Public Exercise Price.
8. The issuance of any shares or other securities upon the
exercise of this Warrant, and the delivery of certificates or other instruments
representing such shares or other securities, shall be made without charge to
the Holder for any tax or other charge in respect of such issuance. The Company
shall not, however, be required to pay any tax which may be payable in respect
of any transfer involved in the issue and delivery of any certificate in a name
other than that of the Holder and the Company shall not be required to issue or
deliver any such certificate unless and until the person or persons requesting
the issue thereof shall have paid to the Company the amount of such tax or shall
have established to the satisfaction of the Company that such tax has been paid.
9. (a) If, at any time during the six-year period commencing
on ____________, 1998, the Company shall file a registration statement (other
than on Form S-4, Form S-8, or any successor form) with the Securities and
Exchange Commission (the "Commission") while any Underwriters' Securities (as
hereinafter defined) are outstanding, the Company shall give all the then
holders of any Underwriters' Securities (the "Eligible Holders") at least 45
days prior written notice of the filing of such registration statement. If
requested by any Eligible Holder in writing within 30 days after receipt of any
such notice, the Company shall, at the Company's sole expense (other than the
fees and disbursements of counsel for the Eligible Holders and the underwriting
discounts, if any, payable in respect of the Underwriters' Securities sold by
any Eligible Holder), register or qualify all or, at each Eligible Holder's
option, any portion of the Underwriters' Securities of any Eligible Holders who
shall have made such request, concurrently with the registration of such other
securities, all to the extent requisite to permit the public offering and sale
of the Underwriters' Securities through the facilities of all appropriate
securities exchanges and the over-the-counter market, and will use its good
faith best efforts through its officers, directors, auditors, and counsel to
cause such registration statement to become effective as promptly as
practicable. Notwithstanding the foregoing, if the managing underwriter of any
such offering shall advise the Company in writing that, in its opinion, the
distribution of all or a portion of the Underwriters' Securities requested to be
included in the registration concurrently with the securities being registered
by the Company would materially adversely affect the distribution of such
securities by the Company for its own account, then any Eligible Holder who
shall have requested registration of his or its Underwriters' Securities shall
delay the offering and sale of such Underwriters' Securities (or the portions
thereof so designated by such managing underwriter) for such period, not to
exceed 60 days (the "Delay Period"), as the managing underwriter shall request,
provided that no such delay shall be required as to any Underwriters' Securities
if any securities of the Company are included in such registration statement and
eligible for sale during the Delay Period for the account of any person other
than the Company and any Eligible Holder unless the securities included in such
registration statement and eligible for sale during the Delay Period for such
other person shall have been reduced pro rata to the reduction of the
Underwriters' Securities which were requested to be included and eligible for
sale during the Delay Period in such registration. As used herein,
"Underwriters' Securities" shall mean the Warrants, the Representative's Shares,
the Representative's Warrants, and the Warrant Shares which, in each case, have
not been previously sold pursuant to a registration statement or Rule 144
promulgated under the Act.
(b) If, at any time during the four-year period
commencing on ____________, 1998, the Company shall receive a written request,
from Eligible Holders who in the aggregate own (or upon exercise of all Warrants
or Representative's Warrants then outstanding or issuable would own) a majority
of the total number of shares of Common Stock then included (or upon such
exercises would be included) in the Underwriters' Securities (the "Majority
Holders"), to register the sale of all or part of such Underwriters' Securities,
the Company shall, as promptly as practicable, prepare and file with the
Commission a registration statement sufficient to permit the public offering and
sale of the Underwriters' Securities through the facilities of all appropriate
securities exchanges and the over-all appropriate securities exchanges and the
over-the-counter market, and will use its good faith best efforts through its
officers, directors, auditors, and counsel to cause such registration statement
to become effective as promptly as practicable; provided, however, that the
Company shall only be obligated to file one such registration statement for
which all expenses incurred in connection with such registration (other than the
fees and disbursements of counsel for the Eligible Holders and
5
<PAGE> 6
underwriting discounts, if any, payable in respect of the Underwriters'
Securities sold by the Eligible Holders) shall be borne by the Company. Within
three business days after receiving any request contemplated by this Section
9(b), the Company shall give written notice to all the other Eligible Holders,
advising each of them that the Company is proceeding with such registration and
offering to include therein all or any portion of any such other Eligible
Holder's Underwriters' Securities, provided that the Company receives a written
request to do so from such Eligible Holder within 30 days after receipt by him
or it of the Company's notice.
(c) In the event of a registration pursuant to the
provisions of this Section 9, the Company shall use its best efforts to cause
the Underwriters' Securities so registered to be registered or qualified for
sale under the securities or blue sky laws of such jurisdictions as the Holder
or such holders may reasonably request; provided, however, that the Company
shall not be required to qualify to do business in any state by reason of this
Section 9(c) in which it is not otherwise required to qualify to do business.
(d) The Company shall keep effective any registration
or qualification contemplated by this Section 9 and shall from time to time
amend or supplement each applicable registration statement, preliminary
prospectus, final prospectus, application, document, and communication for such
period of time as shall be required to permit the Eligible Holders to complete
the offer and sale of the Underwriters' Securities covered thereby. The Company
shall in no event be required to keep any such registration or qualification in
effect for a period in excess of nine months from the date on which the Eligible
Holders are first free to sell such Underwriters' Securities; provided, however,
that, if the Company is required to keep any such registration or qualification
in effect with respect to securities other than the Underwriters' Securities
beyond such period, the Company shall keep such registration or qualification in
effect as it relates to the Underwriters Securities for so long as such
registration or qualification remains or is required to remain in effect in
respect of such other securities.
(e) In the event of a registration pursuant to the
provisions of this Section 9, the Company shall furnish to each Eligible Holder
such number of copies of the registration statement and of each amendment and
supplement thereto (in each case, including all exhibits), such reasonable
number of copies of each prospectus contained in such registration statement and
each supplement or amendment thereto (including each preliminary prospectus),
all of which shall conform to the requirements of the Act and the rules and
regulations thereunder, and such other documents, as any Eligible Holder may
reasonably request to facilitate the disposition of the Underwriters' Securities
included in such registration.
(f) In the event of a registration pursuant to the
provisions of this Section 9, the Company shall furnish each Eligible Holder of
any Underwriters' Securities so registered with an opinion of its counsel
(reasonably acceptable to the Eligible Holders) to the effect that (i) the
registration statement has become effective under the Act and no order
suspending the effectiveness of the registration statement, preventing or
suspending the use of the registration statement, any preliminary prospectus,
any final prospectus, or any amendment or supplement thereto has been issued,
nor has the Commission or any securities or blue sky authority of any
jurisdiction instituted or threatened to institute any proceedings with respect
to such an order, (ii) the registration statement and each prospectus forming a
part thereof (including each preliminary prospectus), and any amendment or
supplement thereto, complies as to form with the Act and the rules and
regulations thereunder, and (iii) such counsel has no knowledge of any material
misstatement or omission in such registration statement or any prospectus, as
amended or supplemented. Such opinion shall also state the jurisdictions in
which the Underwriters' Securities have been registered or qualified for sale
pursuant to the provisions of Section 9(c).
(g) In the event of a registration pursuant to the
provision of this Section 9, the Company shall enter into a cross-indemnity
agreement and a contribution agreement, each in customary form, with each
underwriter, if any, and, if requested, enter into an underwriting agreement
containing conventional representations, warranties, allocation of expenses, and
customary closing conditions, including, but not limited to, opinions of counsel
and accountants' cold comfort letters, with any underwriter who acquires any
Underwriters' Securities.
(h) The Company agrees that until all the
Underwriters' Securities have been sold under
6
<PAGE> 7
a registration statement or pursuant to Rule 144 under the Act, it shall keep
current in filing all reports, statements and other materials required to be
filed with the Commission to permit holders of the Underwriters' Securities to
sell such securities under Rule 144.
10. (a) Subject to the conditions set forth below, the Company
agrees to indemnify and hold harmless each Eligible Holder, its officers,
directors, partners, employees, agents, and counsel, and each person, if any,
who controls any such person within the meaning of Section 15 of the Act or
Section 20(a) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), from and against any and all loss, liability, charge, claim, damage, and
expense whatsoever (which shall include, for all purposes of this Section 10,
but not be limited to, attorneys' fees and any and all reasonable expense
whatsoever incurred in investigating, preparing, or defending against any
litigation, commenced or threatened, or any claim whatsoever, and any and all
amounts paid in settlement of any claim or litigation), as and when incurred,
arising out of, based upon, or in connection with (i) any untrue statement or
alleged untrue statement of a material fact contained (A) in any registration
statement, preliminary prospectus, or final prospectus (as from time to time
amended and supplemented), or any amendment or supplement thereto, relating to
the sale of any of the Underwriters' Securities, or (B) in any application or
other document or communication (in this Section 10 collectively called an
"application") executed by or on behalf of the Company or based upon written
information furnished by or on behalf of the Company filed in any jurisdiction
in order to register or qualify any of the Underwriters' Securities under the
securities or blue sky laws thereof or filed with the Commission or any
securities exchange; or any omission or alleged omission to state a material fit
required to be stated therein or necessary to make the statements therein not
misleading, unless such statement or omission was made in reliance upon and in
conformity with written information furnished to the Company with respect to
such Eligible Holder by or on behalf of such person expressly for inclusion in
any registration statement, preliminary prospectus, or final prospectus, or any
amendment or supplement thereto, or in any application, as the case may be, or
(ii) any breach of any representation, warranty, covenant, or agreement of the
Company contained in this Warrant. The foregoing agreement to indemnify shall be
in addition to any liability the Company may otherwise have, including
liabilities arising under this Warrant.
If any action is brought against any Eligible Holder
or any of its officers, directors, partners, employees, agents, or counsel, or
any controlling persons of such person (an "indemnified party") in respect of
which indemnity may be sought against the Company pursuant to the foregoing
paragraph, such indemnified party or parties shall promptly notify the Company
in writing of the institution of such action (but the failure so to notify shall
not relieve the Company from any liability other than pursuant to this Section
10(a)) and the Company shall promptly assume the defense of such action,
including the employment of counsel (reasonably satisfactory to such indemnified
party or parties) and payment of expenses. Such indemnified party or parties
shall have the right to employ its or their own counsel in any such case, but
the fees and expenses of such counsel shall be at the expense of such
indemnified party or parties unless the employment of such counsel shall have
been authorized in writing by the Company in connection with the defense of such
action or the Company shall not have promptly employed counsel reasonably
satisfactory to such indemnified party or parties to have charge of the defense
of such action after written request therefor by the party seeking
indemnification or such indemnified party or parties shall have reasonably
concluded that there may be one or more legal defenses available to it or them
or to other indemnified parties which are different from those available to the
Company, in any of which events such fees and expenses shall be borne by the
Company and the Company shall not have the right to direct the defense of such
action on behalf of the indemnified party or parties. Anything in this Section
10 to the contrary notwithstanding, the Company shall not be liable for any
settlement of any such claim or action effected without its written consent,
which shall not be unreasonably withheld. The Company shall not, without the
prior written consent of each indemnified party that is not released as
described in this sentence, settle or compromise any action, or permit a default
or consent to the entry of judgment in or otherwise seek to terminate any
pending or threatened action, in respect of which indemnity may be sought
hereunder (whether or not any indemnified party is a party thereto), unless such
settlement, compromise, consent, or termination includes an unconditional
release of each indemnified party from all liability in respect of such action.
The Company agrees promptly to notify the Eligible Holders of the commencement
of any litigation or proceedings against the Company or any of its officers or
directors in connection with the sale of any Underwriters' Securities or any
preliminary prospectus, prospectus, registration statement, or amendment or
supplement thereto, or any application relating to any sale of any Underwriters'
Securities.
7
<PAGE> 8
(b) The Holder agrees to indemnify and hold harmless
the Company, each director of the Company, each officer of the Company who shall
have signed any registration statement covering Underwriters' Securities held by
the Holder, each other person, if any, who controls the Company within the
meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, and its
or their respective counsel, to the same extent as the foregoing indemnity from
the Company to the Holder in Section 10(a), but only with respect to statements
or omissions, if any, made in any registration statement, preliminary
prospectus, or final prospectus (as from time to time amended and supplemented),
or any amendment or supplement thereto, or in any application, in reliance upon
and in conformity with written information furnished to the Company with respect
to the Holder by or on behalf of the Holder expressly for inclusion in any such
registration statement, preliminary prospectus, or final prospectus, or any
amendment or supplement thereto, or in any application, as the case may be. If
any action shall be brought against the Company or any other person so
indemnified based on any such registration statement, preliminary prospectus, or
final prospectus, or any amendment or supplement thereto, or in any application,
and in respect of which indemnity' may be sought against the Holder pursuant to
this Section 10(b), the Holder shall have the rights and duties given to the
Company, and the Company and each other person so indemnified shall have the
rights and duties given to the indemnified parties, by the provisions of Section
10(a).
(c) To provide for just and equitable contribution,
if (i) an indemnified party makes a claim for indemnification pursuant to
Section 10(a) or 10(b) (subject to the limitations thereof) but it is found in a
final judicial determination, not subject to further appeal, that such
indemnification may not be enforced in such case, even though this Agreement
expressly provides for indemnification in such case, or (ii) any indemnified or
indemnifying party seeks contribution under the Act, the Exchange Act or
otherwise, then the Company (including for this purpose any contribution made by
or on behalf of any director of the Company, any officer of the Company who
signed any such registration statement, any controlling person of the Company,
and its or their respective counsel), as one entity, and the Eligible Holders of
the Underwriters' Securities included in such registration in the aggregate
(including for this purpose any contribution by or on behalf of an indemnified
party), as a second entity, shall contribute to the losses, liabilities, claims,
damages, and expenses whatsoever to which any of them may be subject, on the
basis of relevant equitable considerations such as the relative fault of the
Company and such Eligible Holders in connection with the facts which resulted in
such losses, liabilities, claims, damages, and expenses. The relative fault, in
the case of an untrue statement, alleged untrue statement, omission, or alleged
omission, shall be determined by, among other things, whether such statement,
alleged statement, omission, or alleged omission relates to information supplied
by the Company or by such Eligible Holders, and the parties' relative intent,
knowledge, access to information, and opportunity to correct or prevent such
statement, alleged statement, omission, or alleged omission. The Company and the
Holder agree that it would be unjust and inequitable if the respective
obligations of the Company and the Eligible Holders for contribution were
determined by pro rata or per capita allocation of the aggregate losses,
liabilities, claims, damages, and expenses (even if the Holder and the other
indemnified parties were treated as one entity for such purpose) or by any other
method of allocation that does not reflect the equitable considerations referred
to in this Section 10(c). In no case shall any Eligible Holder be responsible
for a portion of the contribution obligation of all Eligible Holders in excess
of its pro rata share based on the number of shares of Common Stock owned (or
which would be owned upon exercise of all Underwriters' Securities) by it and
included in such registration as compared to the number of shares of Common
Stock owned (or which would be owned upon exercise of all Underwriters'
Securities) by all Eligible Holders and included in such registration. No person
guilty of a fraudulent misrepresentation (within the meaning of Section 11(f) of
the Act) shall be entitled to contribution from any person who is not guilty of
such fraudulent misrepresentation. For purposes of this Section 10(c), each
person, if any, who controls any Eligible Holder within the meaning of Section
15 of the Act or Section 20(a) of the Exchange Act and each officer, director,
partner, employee, agent, and counsel of each such Eligible Holder or control
person shall have the same rights to contribution as such Eligible Holder or
control person and each person, if any, who controls the Company within the
meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, each
officer of the Company who shall have signed any such registration statement,
each director of the Company, and its or their respective counsel shall have the
same rights to contribution as the Company, subject in each case to the
provisions of this Section 10(c). Anything in this Section 10(c) to the contrary
notwithstanding, no party shall be liable for contribution with respect to the
settlement of any claim or action effected without its written consent. This
Section 10(c) is intended to supersede any right to contribution under the Act,
the Exchange Act or otherwise.
8
<PAGE> 9
11. Unless registered pursuant to the provisions of Section 9
hereof, the Representative's Shares issued upon exercise of the Warrants and the
Warrant Shares issued on exercise of the Representative's Warrants shall be
subject to a stop transfer order and the certificate or certificates evidencing
such Warrant Shares shall bear the following legend:
9
<PAGE> 10
"THE [SHARES] [WARRANTS] REPRESENTED BY THIS
CERTIFICATE [AND THE SHARES ISSUABLE UPON EXERCISE
THEREOF] HAVE BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, PURSUANT TO A REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION. HOWEVER, SUCH [SHARES] [WARRANTS AND
SHARES] MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO
(i) A POST-EFFECTIVE AMENDMENT TO SUCH REGISTRATION
STATEMENT, (ii) A SEPARATE REGISTRATION STATEMENT
UNDER SUCH ACT, OR (iii) AN EXEMPTION FROM
REGISTRATION UNDER SUCH ACT."
12. Upon receipt of evidence satisfactory to the Company of
the loss, theft, destruction, or mutilation of any Warrant (and upon surrender
of any Warrant if mutilated), and upon reimbursement of the Company's reasonable
incidental expense, and execution of such form of lost Warrant affidavit and
indemnity as the Company shall reasonably require, the Company shall execute and
deliver to the Holder thereof a new Warrant of like date, tenor, and
denomination.
13. The Holder of any Warrant shall not have, solely on
account of such status, any rights of a stockholder of the Company, either at
law or in equity, or to any notice of meetings of stockholders or of any other
proceedings of the Company, except as provided in this Warrant.
14. This Warrant shall be construed in accordance with the
laws of the State of New York applicable to contracts made and performed within
such State, without regard to principles of conflicts of law.
Dated: , 1997
------------
MIKE'S ORIGINAL, INC.
By:
------------------------------------------
Michael Rosen
Chairman/President and Chief Executive Officer
[Seal]
- -----------------------------------
Rachelle Rosen
Secretary
10
<PAGE> 11
FORM OF ASSIGNMENT
(To be executed by the registered holder if such holder desires to transfer the
attached Warrant.)
FOR VALUE RECEIVED, hereby
sells, assigns, and transfers unto ____________ a Warrant to purchase _______
shares of Common Stock, par value $.001 per share, and _______common stock
purchase warrants of Mike's Original, Inc. (the "Company"), together with all
right, title, and interest therein, and does hereby irrevocably constitute and
appoint __________________________ attorney to transfer such Warrant on the
books of the Company, with full power of substitution.
Dated: ____________________
Signature_____________________________
NOTICE
The signature on the foregoing Assignment must correspond to
the name as written upon the face of this Warrant in every particular, without
alteration or enlargement or any change whatsoever.
-i-
<PAGE> 12
To: Mike's Original, Inc.
131 Jericho Turnpike
Jericho, New York 11753
ELECTION TO EXERCISE
The undersigned hereby exercises his or its rights to purchase ______
Representative's Shares and/or Representative's Warrants covered by the within
Warrant and tenders payment herewith in the amount of $____________in accordance
with the terms thereof, and requests that certificates for such securities be
issued in the name of, and delivered to:
- -----------------------------------------
- -----------------------------------------
- ---------------------------------------------------------------------
(Print Name, Address and Social Security
or Tax Identification Number)
and, if such number of Representative's Shares and/or Representative's Warrants
shall not be all the Representative's Shares and/or Representative's Warrants
covered by the within Warrant, that a new Warrant for the balance of the
Representative's Shares and/or Representative's Warrants covered by the within
Warrant be registered in the name of, and delivered to, the undersigned at the
address stated below.
Dated: Name
--------------------- ------------------------------------
(Print)
Address:
-------------------
----------------------------------
(Signature)
-ii-
<PAGE> 1
Exhibit 10.18
FINANCIAL CONSULTING AGREEMENT
This Agreement is made and entered into as of the __ day of _____ 1997,
between Mike's Original, Inc., a Delaware corporation (the "Company") and
Millennium Securities Corp., a New York corporation (the "Consultant").
In consideration of and for the mutual promises and covenants contained
herein, and for other good and valuable consideration, the receipt of which is
hereby acknowledged, the parties agree as follows:
1. Duties of Consultant. During the term of this Agreement, the
Consultant will provide the Company with such consulting service, as the Company
and it, in its professional judgment and experience, shall determine, provided
that the Consultant shall not be required to undertake duties not reasonably
within the scope of the consulting advisory service in which it is engaged
generally. In performance of these duties, the Consultant shall provide the
Company with the benefits of its best judgment and efforts. It is understood and
acknowledged by the parties that the value of the Consultant's advice is not
measurable in any quantitative manner, and that the amount of time spent
rendering such consulting advice shall be determined according to the
Consultant's reasonable discretion.
The Consultant's duties may include, but will not necessarily be
limited to business and financing advice concerning mergers, acquisitions, joint
venture transactions and other corporate combinations, as well as performing
such other services as the Company shall require, which efforts are generally
related to rendering business, financial and management advice to the Company.
2. No Limitation to Consultant's Outside Activities. The Company
acknowledges that the Consultant and/or its affiliates are in the business of
providing service and consulting advice (of
<PAGE> 2
all types contemplated by this Agreement) to others. Nothing herein contained
shall be construed to limit or restrict the Consultant in conducting such
business with respect to others, or in rendering such advice to others.
3. Indemnification. The Consultant shall not be subject to liability to
the Company or to any officer, director, employee, shareholder or creditor of
the Company, for any act or omission in the course of or connected with the
rendering or providing advice hereunder other than for its gross negligence or
wilful misconduct.
The Company agrees to defend, indemnify and hold harmless the
Consultant from and against any and all costs, expenses and liability (including
attorney's fees paid in the defense of the Consultant) which may in any way
result from services rendered by the Consultant pursuant to or in any connection
with this Agreement other than any such liabilities resulting from the
Consultant's gross negligence or wilful misconduct.
4. Expenses. The Company shall reimburse the Consultant, within five
(5) business days of its request, for any and all reasonable out-of-pocket
expenses incurred by it, including hotel, food and associated expenses, all
charges for travel, long-distance telephone calls and other expenses spent on
the Company's behalf. The Company's prior written consent shall be required for
expenses in excess of $300.00.
5. Consideration. In consideration for the services to be rendered to
the Company by the Consultant, the Company shall pay the Consultant an annual
sum of Ten Thousand Dollars ($10,000.00) for the four (4) year term of the
Financial Consulting Agreement, which aggregate amount of Forty Thousand Dollars
($40,000.00) shall be paid at closing of the Company's
2
<PAGE> 3
registration statement filed with the Securities and Exchange Commission on Form
SB-2, File No. 333-21575.
6. Severability. Every provision of this Agreement is intended to be
severable. If any term or provision hereof is deemed unlawful or invalid for any
reason whatsoever, such unlawfulness or invalidity shall not affect the validity
of the remainder of this Agreement.
7. Miscellaneous.
(a) Any notice or other communication between parties hereto shall be
sufficiently given if sent by certified or registered mail, postage prepaid, if
to the Company, addressed to it at Mike's Original, Inc., Jericho, New York
11753, or if to Millennium Securities Corp., to it at 110 E. 59th Street, 6th
Floor, New York, New York 10022, or to such address as may hereafter be
designated in writing by one party to the other. Such notice or other
communication shall be deemed to be given on the date mailed.
(b) This Agreement embodies the entire Agreement and understanding
between the Company and the Consultant and supersedes any and all negotiations,
prior discussions and preliminary and prior agreements and understandings
(written or oral) related to the subject matter hereof.
(c) This Agreement has been duly authorized, executed and delivered by
and on behalf of the Company.
(d) This Agreement shall be construed and interpreted in accordance
with the laws of the State of New York without giving effect to the conflict of
laws rules thereunder.
3
<PAGE> 4
(e) This Agreement and the rights hereunder may not be assigned by
either party (except by operation of law) and shall be binding upon and inure to
the benefit of the parties and their respective successors, assigns and legal
representatives.
4
<PAGE> 5
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date hereof.
MIKE'S ORIGINAL, INC.
By:
--------------------------
Michael Rosen, President
MILLENNIUM SECURITIES CORP.
By:
--------------------------
Name:
Title:
5
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated April 17, 1997, (except for Notes B, C-10
and O, as to which the date is May 9, 1997) which includes an explanatory
paragraph discussing the factors described in Note B to the financial
statements about the Company's ability to continue as a going concern,
accompanying the financial statements of Mike's Original, Inc. contained in the
Registration Statement on Form SB-2 and Prospectus. We consent to the use of
the aforementioned report in the Registration Statement and Prospectus, and to
the use of our name as it appears under the caption "Experts."
GRANT THORNTON LLP
Melville, New York
May 9, 1997
<PAGE> 1
Exhibit 25.1
SIGNATURES
In accordance with the requirements of the Securities Act, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in Jericho, New York on
the 6th day of February, 1997.
MIKE'S ORIGINAL, INC.
By: /s/ Michael Rosen
----------------------------------------
Michael Rosen, Chairman of the Board,
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes an appoints Michael Rosen, his true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this Registration Statement and to file the same, with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act, this
registration statement was signed by the following persons in the capacities
indicated on February 6, 1997.
SIGNATURES TITLE
---------- -----
/s Michael Rosen Chairman of the Board, Chief Executive
- ---------------------------------
Michael Rosen Officer, President
/s/ Frederic D. Heller Vice President-Finance,
- ---------------------------------
Frederic D. Heller Chief Financial Officer and Director
/s/ Martin Pilossoph Director
- ---------------------------------
Martin Pilossoph
/s/ Arthur G. Rosenberg Director
- ---------------------------------
Arthur G. Rosenberg
