<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 23, 1997
REGISTRATION NO. 333-21575
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 6 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)
<TABLE>
<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:
<TABLE>
<S> <C>
DAVID H. LIEBERMAN, 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
<TABLE>
<CAPTION>
================================================================================================================
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>
Units................................... 700,000 $6.20 $4,340,000 $1,315
Common Stock, $.001 par value........... 700,000 -- -- --
Class A Warrants........................ 1,400,000 -- -- --
- ----------------------------------------------------------------------------------------------------------------
Common Stock, $.001 par value,
underlying Class A Warrants(2)(7)..... 1,400,000 $4.00 $5,600,000 $1,697
- ----------------------------------------------------------------------------------------------------------------
Representative's Securities(3).......... 70,000 $.001 $70 --
- ----------------------------------------------------------------------------------------------------------------
Representative's Units.................. 70,000 $8.06 $564,200 $171
- ----------------------------------------------------------------------------------------------------------------
Common Stock, $.001 par value contained
in Representative's
Securities(4)(7)...................... 70,000 -- -- --
- ----------------------------------------------------------------------------------------------------------------
Class A Warrants contained in
Representative's Securities(4)(7)..... 140,000 -- -- --
- ----------------------------------------------------------------------------------------------------------------
Common Stock, $.001 par value underlying
Class A Warrants contained in
Representative's Securities(5)(7)..... 140,000 $7.30 $1,022,000 $310
- ----------------------------------------------------------------------------------------------------------------
Common Stock, $.001 par value, owned by
Selling Securityholders(6)(8)......... 861,167 $6.00 $5,167,002 $1,566
- ----------------------------------------------------------------------------------------------------------------
Total................................... -- $16,693,272 $5,059
================================================================================================================
</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) Reserved for issuance upon exercise of the Common Stock Purchase Warrants.
(3) Issued to the Representative entitling the Representative to purchase one
share of Common Stock ("Representative's Stock Warrants") and two Common
Stock Class A Purchase Warrants ("Representative's Warrants") for each ten
of such securities sold in the offering.
(4) Reserved for issuance upon exercise of Representative's Securities.
(5) Reserved for issuance upon exercise of the Warrants underlying the
Representative's Warrants.
(6) Represents shares of Common Stock offered by Selling Securityholders.
(7) 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.
(8) 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.
================================================================================
<PAGE> 2
MIKE'S ORIGINAL, INC.
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
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 JULY 23, 1997
PRELIMINARY PROSPECTUS
MIKE'S ORIGINAL, INC.
700,000 UNITS
Mike's Original, Inc. (the "Company"), a Delaware corporation, is offering
700,000 units (the "Units"). Each Unit consists of one share of common stock
(the "Common Stock"), $.001 par value, and two Redeemable Common Stock Class A
Purchase Warrants (the "Warrants" or "Class A Warrants"). The Common Stock and
the Class A Warrants comprising each Unit will not trade separately from the
Unit until the earlier of ninety (90) days from the date of this Prospectus or
the determination by Millennium Securities Corp. ("Millennium"), in its sole
discretion, to permit such separate trading. At the time such separate trading
is permitted, the Units may be delisted from separate trading on the OTC
Bulletin Board. See "Description of Securities."
The Class A Warrants shall be exercisable commencing on the date of this
Prospectus. Each Class A Warrant entitles the holder to purchase one share of
Common Stock, at $4.00 per share, during the three year period commencing on the
date of this Prospectus. See "Description of Securities." 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 bid price
per share of Common Stock is at least $10.00 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 Warrants during
the one year period commencing on the date of this Prospectus shall require the
consent of Millennium. See "Description of Securities."
Prior to this offering, there has been no public market for the Units,
Common Stock or Warrants. The price of the Units, Common Stock and exercise
price of the Warrants have been determined by negotiations between the Company
and IAR Securities Corp. (the "Representative"), as representative of the
underwriters (the "Underwriters"). For additional information regarding the
factors considered in determining the initial public offering prices, see
"Underwriting."
The Company has applied for listing its Units, Common Stock and Warrants 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 399,917 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 Securityholders 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 Millennium. 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.
<TABLE>
<CAPTION>
=========================================================================================================
UNDERWRITING DISCOUNTS AND
PRICE TO PUBLIC COMMISSIONS(1) PROCEEDS TO COMPANY(2)
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------
Per Unit................... $6.20 $.62 $5.58
- ---------------------------------------------------------------------------------------------------------
Total...................... $4,340,000 $434,000 $3,906,000
=========================================================================================================
</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 ($130,200) and (b) a
security, purchasable at a nominal price, giving it the right to acquire
70,000 Units at $8.06 per Unit (the "Representative's Purchase Option"). 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 $130,200. See "Use of Proceeds" and "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 UNITS, COMMON
STOCK AND/OR THE CLASS A WARRANTS, INCLUDING 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
fourteen (14) 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 -- Finance and has entered into an agreement to hire a
Vice-President -- Marketing and Sales on completion of this offering, 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 3,200 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 past operations. The Company currently has five
(5) employees.
Net sales for the three month period ended March 31, 1997 were $356,000, a
decrease of 34% from the three month period ended March 31, 1996. This decrease
resulted from a build-up of inventory by Kraft-Pizza in 1996 as well as the
Company's severely limited working capital in 1997 which has adversely impacted
its ability to purchase products from its manufacturer to fill customer orders
and has further limited its ability to engage in marketing and advertising
programs to promote additional sales.
4
<PAGE> 7
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 the primary facility which manufactured 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
<TABLE>
<S> <C>
Securities Offered by the Company(1)......... 700,000 Units
Price Per Unit............................... $6.20
Shares of Common Stock Outstanding After
Offering(2)(3)............................. 3,229,929 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)
Units...................................... MIKSU
Common Stock............................... MIKS
Warrants................................... MIKSW
Risk Factors................................. Purchase of Units 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) 399,917 shares of Common Stock owned by the Investors. See "Selling
Securityholders."
(2) Assumes no exercise of: (i) the Class A Warrants offered hereby as part of
the Units; (ii) the Representative's Purchase Option to purchase up to
70,000 Units; (iii) the Class A Warrants purchasable by the Representative
upon exercise of the Representative's Purchase Option; (iv) outstanding
options under the Company's 1995 Long Term Incentive Plan; (v) outstanding
options under the Company's 1996 Non-Qualified Stock Option Plan; and (vi)
outstanding warrants in connection with interim loans. Gives effect to
conversion of debt and accrued interest into an aggregate of 320,288 shares
of Common Stock, which occurred in April, May and June 1997 and the issuance
of 280,000 shares of Common Stock in 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 Units, 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."
(5) The Common Stock and the Class A Warrants comprising each Unit will not
trade separately from the Unit until the earlier of 90 days from the date of
this Prospectus or the determination by Millennium, in its sole discretion,
to permit such separate trading. At the time such separate trading is
permitted, the Units may be delisted from separate trading on the OTC
Bulletin Board.
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. The financial information as of and for the periods ended December 31,
1996 and 1995 and March 31, 1995 has been derived from audited financial
statements. The financial information as of March 31, 1997 and the three months
ended March 31, 1997 and 1996 has been derived from information prepared by the
Company. See "Financial Statements."
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31, DECEMBER 31, MARCH 31,
1997 1996 1995 1995
----------- ------------ ------------ ---------
<S> <C> <C> <C> <C>
Total assets............................... $ 620,032 $ 443,232 $ 400,014 $ 555,132
Current liabilities........................ 3,360,826 2,897,727 1,901,644 704,978
Long-term liabilities net of current
portion(1)............................... 961,394 541,916 255,722 288,333
Stockholders' deficit...................... (3,702,188) (2,996,411) (1,757,352) (438,179)
</TABLE>
STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
FISCAL
THREE MONTHS ENDED FISCAL YEAR NINE MONTHS YEAR
--------------------------- ENDED ENDED ENDED
MARCH 31, MARCH 31, DECEMBER 31, DECEMBER 31, MARCH 31,
1997 1996 1996 1995 1995
----------- ---------- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C>
Net sales.................... $ 356,314 $ 543,174 $ 2,392,258 $ 2,312,144 $1,086,106
Net loss..................... (1,485,217)(2) (516,974) (4,050,547)(3) (1,614,858) (719,380)
Loss per Common Share(4)..... $(0.54) $(0.23) $(1.65) $(0.74) $(0.43)
Weighted Average Common
Shares Outstanding(4)...... 2,774,113 2,231,298 2,461,244 2,180,536 1,654,908
</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 $1,004,000 of non-cash items, $225,000 of which is
attributable to the value of issuances of stock for professional services
rendered, and $779,000 of which is attributable to the value of additional
stock issuable on conversion of certain outstanding indebtedness.
(3) 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."
(4) 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 March 31, 1997 had an accumulated deficit,
stockholders' equity deficit and working capital deficit of $8,124,220,
$3,702,188 and $3,064,976, respectively. The Company also will continue to have
a deficit in stockholders' equity after this offering. A significant portion of
the Company's losses 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. Losses have continued through the
three months ended March 31, 1997 primarily because of the Company's lack of
working capital which has adversely impacted its ability to purchase products
from its manufacturer to fill customer orders and the impact of higher product
costs and sales to certain retailers at reduced prices. 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 continuing losses since inception, its deficiency in working
capital at December 31, 1996 and other factors, 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 substantially 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 Units, 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 and approximately 76% for the three months ended March
31, 1997. 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 $931,825. Pursuant to agreements, as amended, with this
manufacturer, $710,000 of this indebtedness is collateralized by all of the
assets of the Company. Approximately $595,000 of this indebtedness is payable
from the proceeds of this offering. Approximately $135,000 is due in December
1997, 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."
8
<PAGE> 11
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 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 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.
9
<PAGE> 12
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 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 $1,458,314 of the proceeds of
this offering, which represents 41.9% 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 65.1% of the outstanding shares of Common Stock and, after
completion of this offering, will own 52.5% 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. Although Mr. Rosen has entered into an employment
agreement with the Company, there can be no assurance that he will remain in the
employ of or continue to provide services to the Company. The loss of his
services 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 one legal matter with an aggregate potential liability of approximately
$60,000. If decisions unfavorable to the Company result from this matter, the
Company's working capital will be negatively impacted by the payment of this
judgment. The Company has recently negotiated a settlement with J.W. Messner,
Inc. on a $125,000 claim, $40,000 of which is payable from the proceeds of this
offering, $43,000 is due June 1998, and $43,000 is due December 1998. 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
10
<PAGE> 13
of the Company. In addition, another director, Martin Pilossoph, is the
father-in-law of Michael Rosen. Upon 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 Units, Common Stock or Class A
Warrants. Although the Company has applied for listing its Units, Common Stock
and Class A Warrants for quotation on the OTC Bulletin Board, there can be no
assurance that an active market will develop for the Units, Common Stock or the
Class A Warrants or, if developed, that it can be maintained. The Common Stock
and the Class A Warrants comprising each Unit will not trade separately from the
Unit until the earlier of 90 days from the date of this Prospectus or the
determination by Millennium in its sole discretion, to permit such trading. At
the time such separate trading is permitted, the Units may be delisted from
separate trading on the OTC Bulletin Board. The initial public offering price of
the Units and 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 average 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 $10.00 and further provided that
any redemption during the one year period commencing on the date of this
Prospectus shall require the consent of Millennium. 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 $6.14 or 102% per share. The present shareholders of the
Company have acquired their respective equity interests at a cost substantially
11
<PAGE> 14
below the offering price. Accordingly, the public investors will bear a
disproportionate risk of loss per share. See "Dilution."
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 13,988,388 shares of Common
Stock authorized but unissued and not reserved for specific purposes including
2,781,683 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) the exercise of certain warrants to
purchase 122,500 shares of Common Stock, and (vi) the possible issuance of up to
115,850 shares to the Company's former product manufacturers and a product
advertiser. 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."
12
<PAGE> 15
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 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 $1,458,314 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 Units, Common Stock or Warrants becomes
subject to the penny stock rules, investors in this offering may find it more
difficult to sell such securities 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 Units offered hereby
(after deducting underwriting discounts and estimated offering expenses) are
estimated to be $3,476,000. 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)........... $ 1,458,314 41.9%
Repayment of Indebtedness(2)................................ $ 2,017,686 58.1%
---------- -----
$ 3,476,000 100.0%
========== =====
</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. These proceeds can also be used by the Company
for future unspecified acquisitions, even though the Company has no present
intention to make any such acquisition. 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
March 31, 1997 and certain accounts payable as follows: (i) $595,795 for
open accounts payable, including payments to present product manufacturer;
(ii) $264,804 to Steven A. Cantor, the Company's largest stockholder
including interest at 8% per annum; (iii) $133,951 to holders of Second
Private Placement Notes including interest at 12% per annum; (iv) $6,772 in
payment of interest on the Convertible Notes; (v) $594,163 to a product
manufacturer including interest at 9.25% per annum; (vi) $140,749 to a
product manufacturer including interest at 10% per annum; (vii) $15,805 to a
product manufacturer including interest at 8% per annum; (viii) $27,939 to a
product advertiser including interest at 10%; (ix) salaries to a former
employee of $12,500 accrued through March 31, 1997; and (x) $25,208 in
payment of a short-term loan received in March 1997; (xi) $150,000 in
payment of three interim loans received in May and June 1997; and (xii)
$50,000 in payment of an interim demand loan received during May 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 (approximately $1,189,000), were used for
working capital purposes, including payment of then existing trade payables.
Approximately $683,000 of this indebtedness will be paid from these proceeds.
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.
14
<PAGE> 17
DILUTION
As of March 31, 1997, the net negative tangible book value of the Company
was ($4,002,576) or ($2.07) 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 1,929,641, the number of shares of Common Stock
outstanding on March 31, 1997, (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 March 31, 1997, the net negative tangible book
value per share of Common Stock owned by the Company's current stockholders
would have increased by $3,724,207 or $1.93 per share after giving effect to
this offering without any additional investment on their part and the purchasers
of the Units offered hereby would have incurred an immediate dilution of $6.14
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.................... (2.07)
Increase per share attributable to new investors................... 1.93
-----
Adjusted net tangible book value per share after this offering....... $(.14)
-----
Dilution per share to new investors(1)............................... $6.14
=====
</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
------------ ---------- ----------
<S> <C> <C> <C>
Number of Shares of Common Stock Purchased..... 1,929,641 700,000 2,629,641
Percentage of Outstanding Common Stock After
Offering..................................... 73.4% 26.6% 100%
Gross Consideration Paid....................... $ 4,232,860 $4,200,000 $8,432,860
Percentage of Consideration Paid............... 50.2% 49.8% 100%
Average Consideration Per Share of Common
Stock(1)..................................... $2.19 $6.00 $3.21
</TABLE>
- ---------------
(1) Assumes that $6.00 of the purchase price of the Units is attributable to the
Common Stock.
(2) Assumes no exercise of (i) the Class A Warrants offered hereby; (ii) the
Representative's Purchase Option to purchase up to 70,000 Units; (iii) the
Class A Warrants purchasable by the Representative upon exercise of the
Representative's Purchase Option; or (iv) 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 320,288 shares of Common Stock, which occurred
in April, May and June 1997 and the issuance of 280,000 shares of Common
Stock in April and May 1997. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
15
<PAGE> 18
CAPITALIZATION
The following table sets forth the cash and capitalization of the Company
as of March 31, 1997 and the as adjusted capitalization which gives effect to
the consummation of this offering as if it occurred on March 31, 1997. This
table should be read in conjunction with the financial statements and related
notes included elsewhere in this prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1997
------------------------------
ACTUAL AS ADJUSTED(1)
----------- --------------
<S> <C> <C>
Cash and cash equivalents........................................ $ 15,636 1,833,950(5)
Short-term borrowings and current portion of capital lease
obligations
Accounts payable............................................... 862,350 426,515
Accrued Expenses............................................... 740,423 683,686
Convertible notes(2)(3)........................................ 325,000 325,000
Notes payable(2)............................................... 50,000 25,000
Notes payable to related parties............................... 407,500 30,000
Obligations under capital leases............................... 9,861 9,861
Notes payable trade............................................ 932,388 180,787
Line of credit................................................. 22,251 22,251
Accrued interest on notes...................................... 11,053 0
----------- -----------
Total short-term borrowings and current portion of capital
lease obligations........................................... 3,360,826 1,703,140
----------- -----------
Long term notes payable and capital lease obligations
Notes payable to related parties............................ 486,250 486,250
Accrued interest............................................ 61,656 61,656
Notes payable............................................... 413,486 413,486
Obligations under capital leases............................ -- --
----------- -----------
Total long term notes payable and capital lease obligations.... $ 961,392 $ 961,392
----------- -----------
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,
1,929,641 shares (actual) and 2,604,641 shares, as
adjusted(2)(3)(4)(6)........................................ 1,929 2,604
Additional paid-in capital....................................... 4,420,103 7,895,430
Accumulated deficit.............................................. (8,124,220) (8,124,220)
----------- -----------
Total stockholders' equity (deficit)........................ $(3,702,188) $ (226,186)
----------- -----------
Total capitalization................................... $ 620,030 $ 2,438,348
=========== ===========
</TABLE>
- ---------------
(1) Adjusted to give effect to the consummation of this offering as if it
occurred on March 31, 1997.
(2) Does not include (i) the conversion of a $100,000 Convertible Note in April
1997 which was converted into 78,431 shares of Common Stock, and (ii) the
conversion of a $25,000 of short-term loan in April 1997, which was
converted into 12,500 shares of Common Stock.
(3) Does not include the conversion during April 1997 of (i) a $225,000
Convertible Note into 200,000 shares of Common Stock and (ii) $32,100 of
notes payable and accrued interest owed as of March 31, 1997 into 16,050
shares of Common Stock.
(4) 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.
(5) Does not include the receipt of $150,000 in short-term loans received in May
and June 1997 which has been included under "Use of Proceeds."
(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) 30,000 shares of Common Stock to the Company's
current product manufacturer in connection with its manufacturing agreement
and (iii) 100,000 shares of Common Stock to the Company's legal counsel.
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. The financial information as of and for the periods ended December 31,
1996 and 1995 and March 31, 1995 has been derived from audited financial
statements. The financial information as of March 31, 1997 and the three months
ended March 31, 1997 and 1996 has been derived from information prepared by the
Company. 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>
MARCH 31, DECEMBER 31, DECEMBER 31, MARCH 31,
1997 1996 1995 1995
----------- ------------ ------------ ---------
<S> <C> <C> <C> <C>
Total assets............................... $ 620,032 $ 443,232 $ 400,014 $ 555,132
Current liabilities........................ 3,360,826 2,897,727 1,901,644 704,978
Long-term liabilities net of current
portion(1)............................... 961,394 541,916 255,722 288,333
Stockholders' deficit...................... (3,702,188) (2,996,411) (1,757,352) (438,179)
</TABLE>
STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED FISCAL YEAR NINE MONTHS FISCAL YEAR
MARCH 31, ENDED ENDED ENDED
------------------------- DECEMBER 31, DECEMBER 31, MARCH 31,
1997 1996 1996 1995 1995
----------- --------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Net sales................... $ 356,314 $ 543,174 $ 2,392,258 $ 2,312,144 $ 1,086,106
Net loss.................... (1,485,217)(2) (516,974) (4,050,547)(3) (1,614,858) (719,380)
Loss per Common Share(4).... $(0.54) $(0.23) $(1.65) $(0.74) $(0.43)
Supplemental net loss per
common share(4)(5)........ $(0.42) -- $(1.27) -- --
Weighted Average Common
Shares Outstanding(4)..... 2,774,113 2,231,298 2,461,244 2,180,536 1,654,908
</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 $1,004,000 of non-cash items, $225,000 of which is
attributable to the value of issuances of stock for professional services
rendered, and $779,000 of which is attributable to the value of additional
stock issuable on conversion of certain outstanding indebtedness.
(3) 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."
(4) 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.
(5) 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 to interest expense 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 March 31, 1997 had an accumulated deficit and working capital deficit of
$8,124,220 and $3,064,976, 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 $672,000 to supermarket and other food chain
retailers and product advertising, promotion and marketing expenses of
approximately $1,687,000. Losses have continued through the three months ended
March 31, 1997 primarily because of the Company's lack of working capital and
its inability to purchase products from its manufacturer to fill customer orders
and the impact of higher product costs and sales to certain retailers at reduced
prices. 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
<TABLE>
<CAPTION>
THREE THREE FISCAL NINE TWELVE
MONTHS ENDED MONTHS ENDED YEAR ENDED MONTHS ENDED MONTHS ENDED
MARCH 31, MARCH 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1996 1995 1995
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Sales....................... $ 356,314 $ 543,174 $ 2,392,258 $ 2,312,144 $ 2,593,077
Cost of Sales................... 305,364 380,688 1,439,635 1,312,792 1,498,411
------------ ------------ ------------ ------------ ------------
Gross Profit.................... 50,950 162,486 952,623 999,352 1,094,666
Operating Expenses
Selling and Shipping.......... 249,765 459,367 2,596,500 1,864,890 2,175,619
General and Administrative.... 442,681 203,933 2,193,602 717,315 1,006,182
Research and Development...... 9,720 12,214 70,632 19,529 19,529
------------ ------------ ------------ ------------ ------------
Total Operating Expenses........ 702,166 675,514 4,860,734 2,601,734 3,201,330
------------ ------------ ------------ ------------ ------------
Loss from Operations............ (651,216) (513,028) (3,908,111) (1,602,382) (2,106,664)
Net Interest Expense............ 834,001 3,946 142,436 12,476 30,458
------------ ------------ ------------ ------------ ------------
Net Loss........................ $(1,485,217) $ (516,974) $ (4,050,547) $(1,614,858) $(2,137,122)
============ ============ ============ ============ ============
</TABLE>
19
<PAGE> 22
<TABLE>
<CAPTION>
AS PERCENT OF SALES
------------------------------------------------------------------------
THREE THREE FISCAL NINE TWELVE
MONTHS ENDED MONTHS ENDED YEAR ENDED MONTHS ENDED MONTHS ENDED
MARCH 31, MARCH 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1996 1995 1995
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Sales................................. 100.00% 100.00% 100.00% 100.00% 100.00%
Cost of Sales............................. 85.70% 70.09% 60.18% 56.78% 57.79%
------------ ------- ------- ------ ------
Gross Profit.............................. 14.30% 29.91% 39.82% 43.22% 42.21%
Operating Expenses
Selling and Shipping.................... 70.10% 84.57% 108.54% 80.66% 83.90%
General and Administrative.............. 124.24% 37.54% 91.70% 31.02% 38.80%
Research and Development................ 2.73% 2.25% 2.95% 0.84% 0.75%
------------ ------- ------- ------ ------
Total Operating Expenses.................. 197.06% 124.36% 203.19% 112.52% 123.46%
------------ ------- ------- ------ ------
Loss from Operations...................... (182.76)% (94.45)% (163.36)% (69.30)% (81.24)%
Net Interest Expense...................... 234.06% 0.73% 5.95% 0.54% 1.17%
------------ ------- ------- ------ ------
Net Loss.................................. (416.83)% (95.18)% (169.32)% (69.84)% (82.42)%
============ ======= ======= ====== ======
</TABLE>
20
<PAGE> 23
Three Months Ended March 31, 1997 Compared to Three Months Ended March 31,
1996
Net sales for the three months ended March 31, 1997 were approximately
$356,000, a decrease of 34.4% from approximately $543,000 for the three months
ended March 31, 1996. This decrease resulted from the initial fill of product
into the distributors inventory pipeline which took place early in 1996 as well
as the Company's limited working capital in 1997 which adversely impacted its
ability to purchase product from its manufacturer to fill existing customer
orders and limited its ability to engage in marketing and advertising programs
to promote additional sales. The proceeds from this offering should enable the
Company to substantially increase sales in its existing retail outlets through
advertising, marketing and promoting the product to its customer base.
Gross profit for the three months ended March 31, 1997 declined 69% to
$51,000 from $162,000 for the three months ended March 31, 1996. Gross profit as
a percentage of sales for the three months ended March 31, 1997 declined to 14%
of net sales compared to 30% for the three months ended March 31, 1996. The
decrease in gross profit dollars is primarily attributable to the decline in net
sales and gross profit percentage. Gross profit as a percentage of net sales
declined partly as a result of higher raw material costs associated with the
manufacture of the Company's ice cream products and reduced selling prices to
certain area retailers. The Company expects this trend to reverse itself due to
a recent decline in the cost of raw materials as well as the Company
concentrating its efforts on sales to retailers at higher gross profit margins.
General and administrative expenses ("G&A") for the three months ended
March 31, 1997 increased 117% to $443,000 from $204,000 for the three months
ended March 31, 1996. This increase was principally from professional fees
incurred during the three months ended March 31, 1997 in the form of Common
Stock to be issued to legal counsel for services rendered to the Company which,
although restricted, has been valued by the Company at $225,000 based upon a 25%
discount from the public offering price. The Company continues to incur
significant general and administrative expenses in support of its efforts to
introduce and market its products in the retail marketplace and to gain market
share.
Selling and shipping expenses for the three months ended March 31, 1997
decreased 45% to $250,000 from $459,000 for the three months ended March 31,
1996. The decrease was primarily from decreases in retail introductory programs
from $235,000 to $50,000 and store and media price reduction coupons and media
events from $151,000 to $84,000 offset by increases in advertising programs with
store chains from $11,000 to $66,000. The Company continues to incur significant
selling and shipping expenses in support of its efforts to introduce and market
its products in the retail marketplace and to gain market share.
Interest expense, net of interest income, for the three months ended March
31, 1997 increased to $834,000 from $4,000 for the three months ended March 31,
1996. The increase was primarily attributable to non-cash charges of $779,000 in
the three months ended March 31, 1997 for the convertibility of short term loans
and notes to various vendors into the Company's Common Stock and the issuance of
Common Stock to a vendor and a lender in connection with the obligations to them
as well as additional borrowings from related parties subsequent to March 31,
1996 and the conversion of open accounts payable into interest-bearing notes.
Net loss for the three months ended March 31, 1997 increased to $1,485,000
as compared to a net loss of $517,000 for the three months ended March 31, 1996.
The net loss is attributed to the aforementioned increases in general and
administrative expenses, higher interest expense as well as lower net sales and
gross profits offset by the decrease in selling and shipping expenses.
21
<PAGE> 24
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 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
22
<PAGE> 25
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.
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
23
<PAGE> 26
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 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
24
<PAGE> 27
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, which historically have not resulted in sales sufficient to
offset these expenditures. As a result of the Company's limited operating
resources, the Company also has been unable to participate in certain programs
which may have increased sales. This offering is an 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
believes 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 $413,000) 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 May and June 1997, the Company received $150,000 in short-term loans
evidenced by three promissory notes; one in the principal amount of $100,000 and
two each in the principal amount of $25,000. In connection therewith, each
noteholder received warrants to purchase shares of Common Stock at an exercise
price of $3.00 per share; 50,000 warrants for the $100,000 loan and 12,500
warrants for each $25,000 loan.
In May and June 1997, the Company issued 13,307 shares of Common Stock to
three vendors in exchange for $39,921 of indebtedness.
In April and May 1997, the Company reached agreements with three vendors to
extend obligations totalling $347,550 until December 31, 1998. These obligations
are convertible, in whole or in part, into 115,850 shares of Common Stock.
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, since not paid by April 30, 1997, 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 May 31, 1997, $179,232 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.
25
<PAGE> 28
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 annum. $134,283 with
accrued interest is payable on the earlier of (i) July 20, 1997 or the closing
of this offering. 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
26
<PAGE> 29
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 holders 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. $595,000 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 July
31, 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.
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
27
<PAGE> 30
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.
The following schedule lists the principal and interest payments due during
the twelve month period immediately following the date of this Prospectus:
<TABLE>
<CAPTION>
PRINCIPAL PAYMENT
DUE DATE INTEREST BALANCE OWING AFTER REPAYMENT TERMS
OF NOTE RATE AT 3/31/97 OFFERING NEXT 12 MONTHS
---------- -------- ---------- ----------- -----------------------
<S> <C> <C> <C> <C> <C>
Penn Traffic Company... See Terms Prime +1% $ 710,275 $ 115,275 $595,000 principal
balance with accrued
interest is payable on
July 31, 1997 or from
proceeds of offering;
balance, including
interest, is payable in
December 1997
Crystal Cream & See Terms 10.00% $ 230,283 $ 96,000 $134,283 principal
Butter............... balance with accrued
interest is payable on
July 31, 1997 or from
proceeds of offering;
balance, including
interest, is payable in
December 1998
DariGold, Inc.......... 5/1/97 8.00% $ 30,000 0 Payable $5,000 per
month including
interest, balance due
May 1, 1997 or from
proceeds of offering
PIA Merchandising...... See Terms 10.00% $ 8,497 $ 8,497 Payable $1,000 per
month including
interest until paid in
full (assumed February
1998)
Demo Deluxe............ See Terms 10.00% $ 27,318 0 Payable in full from
proceeds of offering
News America FSI, See Terms 10.00% $ 60,000 $ 30,000 $30,000 principal
Inc. ................ balance with accrued
interest is payable
from the proceeds of
this offering; balance,
including interest, is
payable in December
1998.
</TABLE>
28
<PAGE> 31
<TABLE>
<CAPTION>
PRINCIPAL PAYMENT
DUE DATE INTEREST BALANCE OWING AFTER REPAYMENT TERMS
OF NOTE RATE AT 3/31/97 OFFERING NEXT 12 MONTHS
---------- -------- ---------- ----------- -----------------------
<S> <C> <C> <C> <C> <C>
Annette Cantor......... 2/1/98 6.00% $ 100,000 $ 100,000 Payable at due date
together with accrued
interest
Elizabeth Pilossoph.... 2/1/98 6.00% $ 25,000 $ 25,000 Payable at due date
together with accrued
interest
Steven A. Cantor....... See Terms 8.00% $ 253,750 0 $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
Suzanne Frank.......... 7/31/97 10.00% $ 25,000 0 Payable at due date
together with accrued
interest or from
proceeds of offering
Alan Brooks............ 7/31/97 12.00% $ 100,000 0 Payable at due date
together with accrued
interest or from
proceeds of offering
Jeffrey Streader....... 7/31/97 12.00% $ 25,000 0 Payable at due date
together with accrued
interest or from
proceeds of offering
Mr. and Mrs. Ronald
Nilson............... 7/31/97 12.00% $ 25,000 0 Payable at due date
together with accrued
interest or from
proceeds of offering
</TABLE>
29
<PAGE> 32
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 fourteen (14) 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 -- Finance and has entered into an agreement to hire a
Vice-President -- Marketing and Sales on completion of this offering, 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 3,200 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 three month period ended March 31, 1997 were $356,000, a
decrease of 34% from the three month period ended March 31, 1996. This decrease
resulted from a build-up of inventory by Kraft-Pizza in 1996 as well as the
Company's severely limited working capital in 1997 which has adversely impacted
its ability to purchase products from its manufacturer to fill customer orders
and has further limited its ability to engage in marketing and advertising
programs to promote additional sales.
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.
30
<PAGE> 33
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.
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 is marketed under the tradename "Sorbet Blends." The "Sorbet
Blends" consist of a nearly equal mixture of sorbet and cheesecake
31
<PAGE> 34
ice cream and have been introduced in two flavors, "Raspberry Romance" and
"Lemon Lace." These products have approximately half the calories and fat
content of the Company's other pint varieties, and are being test marketed in
California.
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 May 31, 1997,
$179,232 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
32
<PAGE> 35
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.
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)", "Chocolate Tidbits(TM)",
"Sorbet Blends(TM)", "Raspberry Romance(TM)" and "Lemon Lace(TM)." It also has
filed a patent application on its formulated process to manufacture cheesecake
ice cream.
33
<PAGE> 36
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 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 five 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 of 1996 and the first
quarter of calendar 1997, 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 December 1996, the Company entered into a stipulation of entry of
judgment with Crystal Cream & Butter Co. ("Crystal Cream"), whereby the Company
acknowledged an obligation in the amount of $539,482 to Crystal Cream. Entry of
the judgment has been stayed as long as the Company continues to make payments
with respect to this obligation. Based on payments made to date, this obligation
has been reduced to $230,283 (excluding $15,500 of open accounts payable) of
which $134,283 is due and payable from the proceeds of this offering and the
balance is payable in December 1998. See "Note N" of Notes to Financial
Statements.
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.
34
<PAGE> 37
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
Michael Mitchell................. 57 Vice-President -- Marketing and Sales
(nominee)
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.
Michael Mitchell has been appointed as Vice-President -- Marketing and
Sales effective on the closing of this offering. From 1989 to date, Mr. Mitchell
has been an independent consultant under the name Mitchell Associates. From 1986
to 1989, Mr. Mitchell was Vice President of Dunkirk Ice Cream in Dunkirk, New
York. From 1980 to 1985, he served in various capacities for Atlantic
Processing, including Sales and Operations Manager of their ice cream division.
From 1979 to 1980, Mr. Mitchell was Vice President -- Sales and Marketing for
Schraffts Ice Cream. Mr. Mitchell has over thirty years experience in the ice
cream industry and has specialized in successfully developing troublesome
operations.
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, Maryland. Mr. Rosenberg also is a director of EcoTyre Technologies,
Inc., a publicly owned manufacturer of remolded tires.
35
<PAGE> 38
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 $50,000 or 10% of the officer's salary and bonus.
(3) Represents ten-year options granted in May 1996 and September 1996 pursuant
to the Company's 1995 Long Term Incentive Plan.
(4) Represents the nine month period ended December 31,1995.
36
<PAGE> 39
(5) Represents the fiscal year ended March 31, 1995.
(6) Mr. Kelly resigned as an officer and director of the Company on September
16, 1996. His long-term compensation represents ten year options granted in
February 1995 which were terminated due to his resignation.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table sets forth all stock options granted to the executive
officers named in the Executive Compensation table during the fiscal year ended
December 31, 1996.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------------------------------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO
OPTIONS/SARS EMPLOYEES IN EXERCISE OR BASE
NAME GRANTED(#) FISCAL YEAR PRICE ($/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.
Michael Mitchell
The Company also has entered into an employment agreement with Michael
Mitchell. This agreement provides that Mr. Mitchell will serve as Vice President
of the Company, and will receive as compensation therefor an annual base salary
of $115,000 per year, up to $25,000 in travel expenses, 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 one year from the effective date of this
offering and provides that if Mr. Mitchell is terminated after the initial term
other than for "cause" (as defined), or dies or becomes permanently disabled,
the Company
37
<PAGE> 40
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. Mitchell 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.
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
38
<PAGE> 41
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. 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.
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
39
<PAGE> 42
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.
40
<PAGE> 43
PRINCIPAL STOCKHOLDERS
The following table sets forth the beneficial ownership of the Company's
Common Stock as of June 6, 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% 8.3%
Rachelle Rosen(1)........................................ 283,333(3) 10.4% 8.3%
Steven A. Cantor(1)...................................... 432,295(4) 16.2% 12.9%
Annette Cantor........................................... 298,650 11.9% 9.2%
Frederic D. Heller(1).................................... 16,667 * *
Michael Mitchell......................................... 0(5) * *
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 7.1% 5.6%
Michael Jones(10)........................................ 146,342 5.8% 4.5%
The Moshe Isaac Foundation(11)........................... 200,000 7.9% 6.2%
Food Commodities Limited(12)............................. 266,667 10.5% 8.3%
All officers and directors as a group (6 persons)........ 370,833(7) 13.4% 10.7%
</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) Does not include options to purchase 66,667 shares of Common Stock granted
under the 1996 Non-Qualified Plan, which are not exercisable within sixty
(60) days from the date hereof.
(6) Includes options to purchase 23,333 shares of Common Stock granted under
the Non-Qualified Plan.
(7) Includes 246,667 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.
41
<PAGE> 44
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,
42
<PAGE> 45
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.
43
<PAGE> 46
SELLING SECURITYHOLDERS
This Prospectus may also be used for the possible offering of additional
shares of Common Stock owned by the Selling Securityholders. The Selling
Securityholders have agreed that the shares of Common Stock owned by such
persons registered for resale hereunder may not be sold for twenty-four (24)
months from the date of this Prospectus without the prior written consent of
Millennium. The Company will not receive any proceeds from such sales.
Millennium 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 --
Alan Bush............................... 33,333 33,333 --
Sally Miglio............................ 15,000 15,000 --
Paul Rubin.............................. 7,500 7,500 --
Barry Weintraub......................... 7,500 7,500 --
J. Scott Murphy......................... 7,500 7,500 --
Raymond Hancock......................... 7,500 7,500 --
Jane Kirschner.......................... 3,750 3,750 --
David and Elaine Johnson................ 3,750 3,750 --
Glenn Koebel............................ 3,750 3,750 --
Irving Wagner........................... 3,750 3,750 --
</TABLE>
44
<PAGE> 47
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP NUMBER OF SHARES BENEFICIAL OWNERSHIP
STOCKHOLDER PRIOR TO OFFERING OFFERED AFTER OFFERING*
- ---------------------------------------- -------------------- ---------------- --------------------
<S> <C> <C> <C>
Frederic D. Heller(2)................... 16,667 16,667 --
Food Commodities Limited................ 266,667 266,667 --
The Moshe Isaac Foundation(3)........... 200,000 200,000 --
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 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) 700,000
shares of Common Stock, and (ii) 1,400,000 Class A Warrants.
45
<PAGE> 48
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.
Units
The securities offered hereby consist of Units, with each Unit including
one share of the Company's Common Stock and two redeemable Class A Warrants.
Prior to this offering, there has been no public market for the Units, Common
Stock or Class A Warrants. The Common Stock and the Class A Warrants comprising
each Unit will not trade separately from the Unit until the earlier of 90 days
from the date of this Prospectus or the determination by Millennium, in its sole
discretion, to permit such separate trading. At the time such separate trading
is permitted, the Units may be delisted from separate trading on the OTC
Bulletin Board.
Common Stock
General. The Company has 20,000,000 authorized shares of Common Stock,
2,529,929 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 3,229,929 shares of Common Stock outstanding. Of these shares,
the 700,000 shares sold in this offering 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 861,167 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
46
<PAGE> 49
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 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.
809,772 of the shares of restricted stock presently outstanding have been
held at least one year. Accordingly, commencing three months 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 861,167 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 Millennium. 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 included in the Units 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. Following the earlier of 90 days after
the date of this Prospectus or earlier if permitted by Millennium in its sole
discretion, each Class A Warrant will be separately transferable. Each Class A
Warrant 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 $4.00
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. Following the earlier of 90 days after the date of
this Prospectus or earlier if permitted by Millennium in its sole discretion,
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
47
<PAGE> 50
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.
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 average closing bid price
of the Common Stock for twenty (20) consecutive trading days ending three (3)
days of the notice of redemption has equaled or exceeded $10.00 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
48
<PAGE> 51
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.
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.
49
<PAGE> 52
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 Units set forth opposite its name. All 700,000 Units
offered must be purchased by the several Underwriters if any are purchased. The
Units 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
UNDERWRITER OF UNITS
--------------------------------------------------------------------------- --------
<S> <C>
IAR Securities Corp........................................................
Millennium Securities Corp.................................................
-------
Total............................................................ 700,000
=======
</TABLE>
The Representative has advised the Company that the Underwriters propose to
offer the Units to the public at the offering price set forth on the cover page
of this Prospectus. The Representative has further advised the Company that the
Underwriters propose to offer the Units 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 Units 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 agreed to indemnify the Underwriters 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 Underwriters a non-accountable expense
allowance of 3% of the aggregate offering price (of which $50,000 has already
been received) with respect to the Units offered hereby.
The Company has also agreed to pay the Underwriters 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 Underwriters 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 the
Representative's Purchase Option to purchase 70,000 Units at an exercise price
of $8.06 per Unit. Other than a higher exercise price and the redemption
feature, the Warrants offered to the public hereby 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 $7.80 per share or 130% of the price of the Common Stock
offered to the public 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
50
<PAGE> 53
compensation. The Company has agreed to register (or file a post-effective
registration amendment with respect to any registration statement registering)
the securities underlying the Representative's Purchase Option 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 securities
underlying the Representative's Purchase Option 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 Millennium, except for the exercise of the Warrants or
currently outstanding stock options.
Prior to this offering, there has been no market for the Units, Common
Stock or the Warrants. Although the Company will apply to list the Units, 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. The Common Stock and the Class A
Warrants comprising each Unit will not trade separately from the Unit until the
earlier of 90 days from the date of this Prospectus or the determination by
Millennium, in its sole discretion, to permit such separate trading. At the time
such separate trading is permitted, the Units may be delisted from separate
trading on the OTC Bulletin Board.
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.
51
<PAGE> 54
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, 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.
52
<PAGE> 55
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-22
</TABLE>
F-1
<PAGE> 56
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 Note H, as to
which the date is June 20, 1997,
and Note C-10, as to which the
date is July 21, 1997)
F-2
<PAGE> 57
MIKE'S ORIGINAL, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, ---------------------------
1997 1996 1995
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS
Cash........................................................ $ 15,636 $ 32,523 $ 15,716
Accounts receivable, less allowance for doubtful accounts of
$20,751 (unaudited), $20,751 and $6,888 at March 31, 1997,
December 31, 1996 and 1995, respectively.................. 191,417 61,219 153,402
Inventories................................................. 88,797 247,608 176,885
Other receivables........................................... -- 16,589 --
-------- -------- --------
Total current assets................................. 295,850 357,939 346,003
FIXED ASSETS, NET............................................. 11,724 14,478 25,494
OTHER ASSETS
Deferred offering costs..................................... 294,592 45,000 --
Trademarks and organizational costs, net of accumulated
amortization of $12,713 (unaudited) $11,787 and $8,085 at
March 31, 1997, December 31, 1996 and 1995,
respectively.............................................. 5,798 6,724 10,426
Security deposits........................................... 12,068 18,091 18,091
Other....................................................... -- 1,000 --
-------- -------- --------
$ 620,032 $ 443,232 $ 400,014
======== ======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable............................................ $ 862,350 $ 1,104,336 $ 1,468,610
Accrued expenses and other liabilities...................... 740,423 140,629 249,772
Notes payable to related parties............................ 253,750 253,750 125,000
Subordinated notes payable -- stockholders.................. 153,750 153,750 --
Note payable -- convertible................................. 325,000 225,000 --
Notes payable -- trade...................................... 932,388 980,821 49,114
Note payable................................................ 50,000 -- --
Accrued interest payable to related parties................. 11,053 5,978 --
Line of credit.............................................. 22,251 23,506 --
Obligations under capital lease............................. 9,861 9,957 9,148
-------- -------- --------
Total current liabilities............................ 3,360,826 2,897,727 1,901,644
ACCRUED COMPENSATION EXPENSE.................................. -- -- 158,333
OBLIGATIONS UNDER CAPITAL LEASE............................... -- 3,611 13,567
NOTES PAYABLE -- TRADE........................................ 413,486 -- --
NOTES PAYABLE TO RELATED PARTIES.............................. 486,250 486,250 55,000
ACCRUED INTEREST PAYABLE TO RELATED PARTIES................... 61,658 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;
1,929,641 shares (unaudited), 1,892,641 shares and
1,362,160 shares issued and outstanding at March 31, 1997,
December 31, 1996 and 1995, respectively.................. 1,929 1,892 1,362
Additional paid-in capital.................................. 4,420,103 4,000,700 829,742
Deferred financing costs.................................... -- (360,000) --
Accumulated deficit......................................... (8,124,220) (6,639,003) (2,588,456)
-------- -------- --------
(3,702,188) (2,996,411) (1,757,352)
-------- -------- --------
$ 620,032 $ 443,232 $ 400,014
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE> 58
MIKE'S ORIGINAL, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS
MARCH 31, YEAR ENDED ENDED
------------------------- DECEMBER 31, DECEMBER 31,
1997 1996 1996 1995
----------- --------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Sales, net............................. $ 356,314 $ 543,174 $ 2,392,258 $ 2,312,144
Cost of sales.......................... 305,364 380,688 1,439,635 1,312,792
----------- --------- ----------- -----------
Gross profit......................... 50,950 162,486 952,623 999,352
Operating expenses
Selling and shipping................. 249,765 459,367 2,596,500 1,864,890
General and administrative........... 442,681 203,933 2,193,602 717,315
Research and development............. 9,720 12,214 70,632 19,529
----------- --------- ----------- -----------
702,166 675,514 4,860,734 2,601,734
----------- --------- ----------- -----------
Loss from operations................. (651,216) (513,028) (3,908,111) (1,602,382)
Interest expense....................... (834,604) (4,358) (142,983) (12,954)
Interest income........................ 603 412 547 478
----------- --------- ----------- -----------
NET LOSS............................. $(1,485,217) $(516,974) $ (4,050,547) $ (1,614,858)
----------- --------- ----------- -----------
Net loss per share..................... $ (.54) $ (.23) $ (1.65) $ (.74)
----------- --------- ----------- -----------
Weighted average common shares
outstanding.......................... 2,774,113 2,231,298 2,461,244 2,180,536
=========== ========= =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 59
MIKE'S ORIGINAL, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
<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)
Amortization of imputed interest --
convertible debt (unaudited)....... 360,000 360,000
Imputed interest -- convertible
debt -- (unaudited)................ 252,940 252,940
Issuance of common stock for imputed
interest (unaudited)............... 37,000 37 166,463 166,500
Net loss (unaudited)................. (1,485,217) (1,485,217)
--------- ------ ---------- ----------- ----------- -----------
Balance at March 31, 1997
(unaudited)........................ 1,929,641 $1,929 $4,420,103 $ -- $(8,124,220) $ (3,702,188)
========= ====== ========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-5
<PAGE> 60
MIKE'S ORIGINAL, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS
MARCH 31, YEAR ENDED ENDED
------------------------- DECEMBER 31, DECEMBER 31,
1997 1996 1996 1995
----------- ----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net loss........................................... $(1,485,217) $ (516,974) $(4,050,547) $(1,614,858)
Adjustments to reconcile net loss to net cash used
in operating activities
Imputed interest................................. 779,440 -- 15,000 --
Depreciation and amortization...................... 3,680 3,644 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.............................. (130,198) 9,597 78,320 (33,513)
Inventories...................................... 158,811 87,510 (70,723) 10,043
Prepaid expenses................................. -- -- (4,500) 22,941
Other current assets............................. 16,589 (16,589) --
Accounts payable................................. 163,330 159,958 812,163 975,711
Accrued expenses and other liabilities........... 374,472 (10,217) 79,717 240,629
----------- ----------- ----------- -----------
Net cash used in operating activities....... (119,093) (266,482) (1,743,886) (320,055)
----------- ----------- ----------- -----------
Cash flows from investing activities
Intangible assets.................................. -- -- -- (916)
Security deposit................................... 6,023 -- -- (14,023)
Other assets....................................... 1,000 -- (1,000) --
----------- ----------- ----------- -----------
Net cash used in investing activities....... 7,023 -- (1,000) (14,939)
----------- ----------- ----------- -----------
Cash flows from financing activities
Proceeds from convertible note payable............. 100,000 325,000 225,000 --
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........................ 50,000 -- -- --
Proceeds from notes payable to related parties..... -- -- 560,000 --
Payment of notes payable to related parties........ -- -- -- (75,000)
Payment of capital lease obligations............... (3,707) (2,215) (9,147) (5,682)
Payment of notes payable........................... (40,263) -- (244,730) --
Proceeds from line of credit....................... -- -- 24,134 --
Payment of line of credit.......................... (1,255) -- (628) --
Payment of deferred offering costs................. (9,592) -- -- --
----------- ----------- ----------- -----------
Net cash provided by financing activities... 95,183 322,785 1,761,693 167,503
----------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH............. (16,887) 56,303 16,807 (167,491)
Cash at beginning of period.......................... 32,523 15,716 15,716 183,207
----------- ----------- ----------- -----------
Cash at end of period................................ $ 15,636 $ 72,019 $ 32,523 $ 15,716
=========== =========== =========== ===========
</TABLE>
The accompanying notes are in integral part of these statements.
F-6
<PAGE> 61
MIKE'S ORIGINAL, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
(INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1996 IS UNAUDITED)
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 fourteen 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 March 31, 1997, has a stockholders' deficit and a working capital
deficit of $3,702,188 (unaudited) and $3,064,976 (unaudited), respectively. At
December 31, 1996, the Company had 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. Further, the Company is continuing to incur losses from operations.
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 March 31, 1997 and 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 $22,251 (unaudited) and $23,506 was outstanding at
March 31, 1997 and December 31, 1996, respectively. 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 $4,340,000. 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 public offering
of shares. It is anticipated that the net proceeds of this Offering of
$3,476,000 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
F-7
<PAGE> 62
MIKE'S ORIGINAL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1996 IS UNAUDITED)
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 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.) In May and June 1997,
the Company obtained additional debt financing in the amount of $150,000. (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 $93,824 (unaudited) $142,011 (unaudited),
$527,540 and $129,373 for the three months ended March 31, 1997 and 1996, 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. OTHER ASSETS
Costs relating to trademark and organizational expenditures have been
deferred and are being amortized on a straight-line basis over five years. Costs
relating to the Company's planned initial public offering have
F-8
<PAGE> 63
MIKE'S ORIGINAL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1996 IS UNAUDITED)
been deferred and will be applied against the proceeds of the Offering. In the
event the Offering is unsuccessful, such costs will be charged to operations.
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 March 31, 1997, and December 31, 1996
and 1995.
8. ADVERTISING
Advertising costs are charged to operations when incurred. Advertising
costs charged to operations were $66,331 (unaudited), $10,500 (unaudited),
$346,000 and $92,000 for the three months ended March 31, 1997 and 1996, the
year ended December 31, 1996 and 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 718,332 shares of the Company's common stock
with an average exercise price of $1.57 issued within a one-year period
preceding the Company's planned initial public offering, warrants to purchase
75,000 shares of the Company's common stock with an exercise price of $3.00 and
422,831 shares issuable upon the conversion of notes payable (Notes H and O).
The incremental common equivalent shares of 869,139 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 net loss per common 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
700,000 units (the "Units"). Each Unit consists of one share of common stock,
$.001 par value and two redeemable common stock purchase warrants. Had the
proposed
F-9
<PAGE> 64
MIKE'S ORIGINAL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1996 IS UNAUDITED)
public offering occurred on January 1, 1996, the reported net loss per common
share for the three months ended March 31, 1997 would have decreased $.12 to
$.42 and for the year ended December 31, 1996 would have decreased $.38 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.
12. INTERIM FINANCIAL INFORMATION
The interim financial data as of March 31, 1997 and for the three-month
periods ended March 31, 1997 and 1996, is unaudited. The information reflects
all adjustments, consisting only of normal recurring adjustments that, in the
opinion of management, are necessary to present fairly the financial position
and results of operations of the Company for the periods indicated. Results of
operations for the interim periods are not necessarily indicative of the results
of operations for the full year.
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 $733 (unaudited), $1,383 (unaudited), $64,685
and $1,468 during the three months ended March 31, 1997 and 1996, 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 $405,316 (unaudited), $1,176,437
and $53,114 during the three months ended March 31, 1997, the year ended
December 31, 1996 and the nine month period ended December 31, 1995,
respectively. In addition, during the three months ended March 31, 1997 and the
year ended December 31, 1996, $240,000 (unaudited) and $45,000, respectively, of
accrued costs associated with the initial public offering were deferred and will
be deducted from the proceeds of the Offering.
NOTE E -- INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1995
MARCH 31, -------- --------
1997
-----------
(UNAUDITED)
<S> <C> <C> <C>
Finished goods.................................... $11,508 $ 97,536 $176,885
Raw materials..................................... 77,289 150,072 --
------- -------- --------
$88,797 $247,608 $176,885
======= ======== ========
</TABLE>
F-10
<PAGE> 65
MIKE'S ORIGINAL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1996 IS UNAUDITED)
NOTE F -- FIXED ASSETS
Fixed assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1995
MARCH 31, -------- --------
1997
-----------
(UNAUDITED)
<S> <C> <C> <C>
Computer equipment................................ $29,447 $ 29,447 $ 29,447
Office equipment.................................. 6,000 6,000 6,000
------- -------- --------
35,447 35,447 35,447
Less accumulated depreciation..................... 23,723 20,969 9,953
------- -------- --------
$11,724 $ 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 $15,657 (unaudited), $14,557 and $10,157 at
March 31, 1997, and 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 $22,991 (unaudited),
$21,491 and $15,491 at March 31, 1997, 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 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 $5,049 (unaudited), $4,674 and $3,174 at March
31, 1997, and 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
F-11
<PAGE> 66
MIKE'S ORIGINAL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1996 IS UNAUDITED)
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 $8,334 (unaudited) and $5,833
at March 31, 1997 and December 31, 1996, respectively.
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 overallotment option, the balance otherwise payable in
90 days will be payable from such proceeds. The Company has not, to date,
renegotiated the terms of this loan with the lender and such amounts remain
outstanding. Accrued interest payable related to these borrowings amounts to
$11,053 (unaudited) and $5,978 at March 31, 1997 and December 31, 1996,
respectively.
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 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 $9,625 (unaudited) and $5,500 at March 31, 1997 and
December 31, 1996, respectively.
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
F-12
<PAGE> 67
MIKE'S ORIGINAL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1996 IS UNAUDITED)
rates ranging from prime to 10% and is payable monthly. The balance of these
notes was $510 (unaudited), $4,583 and $49,114 at March 31, 1997, December 31,
1996 and 1995, respectively. Accrued interest payable related to these
borrowings amounts to $445 at March 31, 1997 and December 31, 1996 and is
included in accrued expenses. These notes were due to be paid in full by
November 1, 1996. At March 31, 1997, the remaining outstanding balance is due to
one lender. The Company has not, to date, renegotiated the terms of this loan
with the lender and such amounts remain outstanding.
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 March 31, 1997 and December 31, 1996. Accrued interest payable
related to this note amounts to $19,163 (unaudited) and $2,738 at March 31, 1997
and December 31, 1996, respectively, 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 $135,275 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, in April 1997, 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 the Company's common stock at a conversion rate
of $3.00 principal amount for each share of common stock at the option of the
holder at any time prior to maturity. In June 1997, the Company renegotiated the
terms of this agreement as the initial public offering was not completed by June
1, 1997. The renegotiated terms provide that if the initial public offering is
not completed by July 15, 1997, all amounts will then become immediately due and
payable in full. In addition, the balance due to the lender from the proceeds of
the Company's initial public offering was increased to $595,000 and the
principal balance of the convertible note due December 31, 1998 was reduced to
$201,000. The remaining balance of $135,275 is payable on December 31, 1997.
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 March 31, 1997 and
December 31, 1996. Accrued interest payable related to this note amounts to
$6,467 (unaudited) and $876 at March 31, 1997 and December 31, 1996,
respectively, 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 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 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
F-13
<PAGE> 68
MIKE'S ORIGINAL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1996 IS UNAUDITED)
such amount into 32,000 shares of the Company's common stock at any time prior
to maturity. The lender agreed to extend the maturity date of the promissory
notes originally due on June 1, 1997 to July 31, 1997.
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 Company has not, to date, renegotiated the terms of the second
promissory note with the lender. The balance of these notes was $38,497
(unaudited) and $55,680 at March 31, 1997 and December 31, 1996, respectively.
Accrued interest payable related to these borrowings amounts to $1,255
(unaudited) and $285 at March 31, 1997 and December 31, 1996, respectively, and
is included in accrued expenses.
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. 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 period this note first becomes convertible. Interest expense of $360,000 was
recognized by the Company during the three months ended March 31, 1997 which
represented the amortization of the imputed interest associated with this
transaction. 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. Interest expense of $252,940 representing the difference between the
estimated fair value of the Company's common stock and the conversion price was
recognized during the three months ended March 31, 1997.
In March 1997, the Company issued a $50,000 promissory note to an investor
bearing interest at the rate of 10% per annum. This note is payable on demand on
or after May 12, 1997. As additional consideration for this loan, the Company
issued the lender 2,000 shares of its common stock. These shares were valued at
$4.50 per share, the estimated fair market value of the stock at the date of
issuance. On April 3, 1997, the lender converted $25,000 of the outstanding note
balance into 12,500 shares of the Company's common stock. An interest charge of
$31,250 representing the difference between the estimated fair value of the
Company's common stock and the value the Company ascribed to these shares on the
date of issuance was recognized by the Company upon conversion. In June 1997,
the lender agreed to extend the maturity date of the outstanding note balance to
the earlier of July 31, 1997 or the completion of the Company's proposed initial
public offering.
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
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
F-14
<PAGE> 69
MIKE'S ORIGINAL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1996 IS UNAUDITED)
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.
In May and June 1997, the Company issued three promissory notes to
investors bearing interest at the rate of 12% per annum in the aggregate
principal amount of $150,000. These notes are payable in full the earlier of:
(i) July 31, 1997 or (ii) on the date of an initial public offering. In
connection with these transactions, the Company issued an aggregate of 75,000
warrants, expiring July 31, 2000, to these investors to purchase 75,000 shares
of the Company's common stock at a price of $3.00 per share.
NOTE I -- ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities include the following:
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, ---------------------
1997 1996 1995
----------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Accrued payroll................................... $ 49,267 $ 28,000 $ 95,399
Accrued distribution fee.......................... 45,869 7,921 129,373
Distributors' deposits............................ 48,545 46,739 --
Accrued interest payable -- other................. 47,229 12,969 --
Professional fees payable......................... 549,513 45,000 25,000
-------- -------- --------
$ 740,423 $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>
THREE MONTHS ENDED PERIOD ENDED
MARCH 31, DECEMBER 31,
----------------------- -------------------------
1997 1996 1996 1995
--------- --------- ----------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Tax expense (benefit) at statutory
Federal income tax rates........ $(505,000) $(176,000) $(1,377,000) $(669,000)
Nondeductible compensation........ -- -- 128,000 --
Net operating loss not currently
utilizable...................... 505,000 176,000 1,249,000 669,000
--------- --------- ----------- ---------
$ -- $ -- $ -- $ --
========= ========= =========== =========
</TABLE>
F-15
<PAGE> 70
MIKE'S ORIGINAL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1996 IS UNAUDITED)
The tax effects of temporary differences and loss carryforwards giving rise
to deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, -------------------------
1997 1996 1995
----------- ----------- ---------
(UNAUDITED)
<S> <C> <C> <C>
Net operating loss and other carryforwards... $ 2,084,000 $ 1,814,000 $ 835,000
Bad debts.................................... 7,000 7,000 2,000
Depreciation/amortization.................... 2,000 2,000 1,000
Deferred compensation........................ 276,000 276,000 32,000
Other deferred assets........................ 45,000 20,000 --
----------- ----------- ---------
Gross deferred tax asset..................... 2,414,000 2,119,000 870,000
Deferred tax asset valuation allowance....... (2,414,000) (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 March 31, 1997 and December 31, 1996, the Company had net operating
losses available to carry forward of approximately $6,113,000 (unaudited) and
$5,320,000, respectively, for tax purposes. Such net operating loss
carryforwards expire through the year ending 2012. 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, 1995 and 1994. 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
F-16
<PAGE> 71
MIKE'S ORIGINAL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1996 IS UNAUDITED)
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.
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 March 31, 1997 and
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 $12,301 (unaudited) and $7,688 at March 31,
1997 and December 31, 1996, respectively. 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. These shares were valued at $4.50 per share, the estimated fair market
value of the stock at the date of issuance. Pursuant to the agreement, the
manufacturer has agreed to provide $250,000 of 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
F-17
<PAGE> 72
MIKE'S ORIGINAL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1996 IS UNAUDITED)
is not paid, the Company will be obligated to issue an additional 30,000 shares
of its common stock to the manufacturer. These additional shares were issued to
the manufacturer in May 1997.
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 Statement of Financial
Accounting Standards No. 123 ("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.
Had compensation cost for employees been determined based on the fair value
at the grant dates consistent with the methodology 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:
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
1997 1996
------------------ ------------
(UNAUDITED)
<S> <C> <C>
Net loss
As reported........................................ $ (1,485,217) $ (4,050,547)
Pro forma.......................................... (1,673,799) (4,581,047)
Net loss per share
As reported........................................ $ (.54) $ (1.65)
Pro forma.......................................... (.60) (1.86)
</TABLE>
The Company's net loss and net loss per share for the three months ended
March 31, 1996 and the nine-month period ended December 31, 1995 would not have
been impacted as no stock options were issued by the Company durin these
periods.
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. (See Note O for issuance of
additional stock options in May 1997.)
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. As of December 31, 1996, the
Company has granted 396,666 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. (See
Note O for cancellation of stock options in June 1997.)
F-18
<PAGE> 73
MIKE'S ORIGINAL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1996 IS UNAUDITED)
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 of 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.
A summary of stock option activity related to the Company's Plans is as
follows:
<TABLE>
<CAPTION>
WEIGHTED 1996
1995 PLAN AVERAGE NONQUALIFIED PLAN
----------------------- EXERCISE -----------------------
SHARES PRICE RANGE PRICE SHARES PRICE RANGE
------- ----------- -------- ------- -----------
<S> <C> <C> <C> <C> <C>
Outstanding at 1/1/96......... -- --
Granted....................... 256,667 $ 1.50-3.00 $ 1.69 396,666 $1.50
------- -------
Outstanding at 12/31/96....... 256,667 1.50-3.00 1.69 396,666
Granted (unaudited)........... -- 81,666 1.50
------- -------
Outstanding at 3/31/97
(unaudited)................. 256,667 1.50-3.00 1.69 478,332 1.50
======= =======
Exercisable at 3/31/97
(unaudited)................. 256,667 1.50-3.00 1.69 --
======= =======
</TABLE>
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 76% (unaudited), 79% (unaudited), 79% and 22%
of the Company's sales for the three months ended March 31, 1997 and 1996, the
year ended December 31, 1996 and the nine months ended December 31, 1995,
respectively. This distributor accounted for 81% (unaudited), 57% and 94% of the
Company's net accounts receivable at March 31, 1997, December 31, 1996 and 1995,
respectively.
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.
F-19
<PAGE> 74
MIKE'S ORIGINAL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1996 IS UNAUDITED)
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. (See Note O for resignation of this
employee effective June 20, 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 of 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
$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.
F-20
<PAGE> 75
MIKE'S ORIGINAL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1996 IS UNAUDITED)
In November 1996, this consulting agreement was superseded 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. At March 31, 1997, accrued compensation payable
to this consultant aggregated approximately $31,000 In April 1997 the Company
recognized a charge to operations of approximately $644,000 based upon the
estimated fair market value of the shares issued 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 aggregated $22,251 (unaudited) and $23,506 at March 31,
1997 and December 31, 1996, respectively.
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 a proceeding 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 $245,783 (unaudited) and $276,283 at March
31, 1997 and December 31, 1996, respectively.
Furthermore, the Company is subject to an action in which the plaintiff
seeks damages in the amount of $61,510 plus interest accrued, costs and
attorneys fees arising from advertising and promotion services which the
plaintiff claims to have performed for the Company. Although no assurances can
be given, the Company believes it has meritorious defenses to this action and
will defend itself vigorously.
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.
F-21
<PAGE> 76
MIKE'S ORIGINAL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1996 IS UNAUDITED)
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 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 March and April of 1997. These shares
were valued at $4.50 per share, the estimated fair value of the stock at the
date of issuance and, accordingly, $225,000 was charged to operations during the
three months ended March 31, 1997. An additional charge of $225,000 will be
charged to operations during the second quarter of 1997.
On May 28, 1997, the Company entered into a Stipulation and Order of
Settlement in connection with an action that was commenced against the Company
in the United States District Court for the Eastern District of New York. As
part of this settlement, the Company acknowledged that it is indebted to the
plaintiff in an amount equal to $125,936 plus interest. The settlement
establishes a schedule for the Company's payment of the outstanding balance to
the plaintiff. The Company had accrued for amounts owed to the plaintiff in this
matter. At December 31, 1996, such accrual amounted to approximately $119,000
and was included in accounts payable. At March 31, 1997, approximately $86,000
of this balance was reclassified as noncurrent based on the terms of the
settlement agreement.
In June 1997, the Company issued 13,307 shares of its common stock to
certain individuals in settlement of amounts owed to these individuals
aggregating $39,921. An interest charge of approximately $20,000 representing
the difference between the estimated fair value of the Company's common stock
and the value the Company ascribed to these shares on the date of issuance will
be recognized by the Company in the second quarter of 1997.
Effective June 20, 1997, the Vice President of Sales and Marketing resigned
his employment with the Company. At the time of the resignation, 66,667 options
to purchase shares of the Company's common stock at an option price of $1.50
were cancelled. These cancelled options have not been included in the
calculation of net loss per common share. (See Note C-10.)
On June 11, 1997, the Company's Board of Directors approved the appointment
of an individual to act as Vice President -- Marketing commencing on the
effective date of the Company's initial public offering.
F-22
<PAGE> 77
======================================================
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
of Financial Condition and Results
of Operations....................... 19
Business.............................. 30
Management............................ 35
Principal Stockholders................ 41
Certain Transactions.................. 42
Selling Securityholders............... 44
Description of Securities............. 46
Underwriting.......................... 50
Legal Matters......................... 52
Experts............................... 52
Change in Accountants................. 52
Available Information................. 52
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 Units, 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.
======================================================
======================================================
700,000 UNITS
MIKE'S ORIGINAL, INC.
--------------------
PROSPECTUS
--------------------
IAR SECURITIES CORP.
MILLENNIUM
SECURITIES CORP.
, 1997
======================================================
<PAGE> 78
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........................ 80,200
Miscellaneous............................................................. 15,208
--------
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> 79
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 April 1997, the Company issued 16,050 shares of Common Stock to
three holders of subordinated notes in exchange for $32,100 of indebtedness.
16. 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.
17. In May and June 1997, the Company issued 13,307 shares of Common Stock
to three vendors in exchange for $39,921 of indebtedness.
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.(**)
</TABLE>
II-2
<PAGE> 80
<TABLE>
<S> <C>
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.(**)
10.6 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.(**)
10.19 Employment Agreement dated July 16, 1997 between the Registrant and Michael
Mitchell.(**)
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
II-3
<PAGE> 81
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.
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> 82
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. 6 to this
registration statement to be signed on its behalf by the undersigned, in
Jericho, New York on the 21st day of July, 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 July 21, 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> 83
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.(**)
10.6 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.(**)
10.19 Employment Agreement dated July 16, 1997 between the Registrant and
Michael Mitchell.**
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
700,000 Units
Each Unit Consisting of
One (1) Share of Common Stock and
Two (2) Class A Common Stock Purchase Warrants
MIKE'S ORIGINAL, INC.
UNDERWRITING AGREEMENT
New York, New York
________ __, 1997
IAR Securities Corp.
99 Wall Street
New York, New York 10005
Attn: Mr. Isaac Rabinowitz
President
Ladies and Gentlemen:
Mike's Original, Inc., a Delaware corporation (the "Company"), confirms
its agreement with IAR Securities Corp. ("IAR") and each of the underwriters
named in Schedule A hereto (collectively, the "Underwriters", which term shall
also include any underwriter substituted as hereinafter provided in Section 14),
for whom IAR is acting as representative (in such capacity, IAR shall
hereinafter be referred to as "you" or the "Representative"), with respect to
the sale by the Company and the purchase by the Underwriters, acting severally
and not jointly, of the respective numbers of units (the "Units"), each Unit
consisting of one (1) share (the "Shares") of the Company's common stock, $0.001
par value per share (the "Common Stock"), and two (2) Redeemable Common Stock
Class A Purchase Warrants (the "Warrants") set forth in said Schedule A. The
700,000 Units, consisting of a total of 700,000 Shares together with the
1,400,000 Warrants and 1,400,000 Shares of Common Stock underlying the Warrants
(the "Warrant Shares") are hereinafter collectively referred to as the "Firm
Securities". The Common Stock and Warrants comprising each Unit will not trade
separately from the Unit until the earlier of 90 days from the date of the
Prospectus or the determination by Millennium Securities Corp. ("Millennium"),
in its sole discretion, to permit such separate trading. Each Warrant is
exercisable commencing the date of this Agreement until three years after the
date of this Agreement, unless previously redeemed by the Company, at an initial
exercise price of $4.00
<PAGE> 2
for one share of Common Stock. For a period of three (3) years from the date of
this Agreement, the Warrants may be redeemed by the Company, upon ten (10)
business days' prior written notice to IAR, if the Company shall have given not
less than thirty (30) days' and not more than sixty (60) days' prior written
notice to the holders thereof at a redemption price of $0.01 per Warrant at any
time, provided, the average reported closing bid quotation of the Common Stock
equals or exceeds $10.00 per share (subject to adjustment as provided in the
Warrant Agreement dated ___________ 1997 between the Company and American Stock
Transfer & Trust Company) for a period of twenty (20) consecutive trading days
ending on the third trading day prior to the date of the notice of redemption.
Any redemption prior to one year from the effective date shall require the
consent of Millennium. (The Firm Securities are sometimes collectively referred
to herein as the "Securities"). The Company also proposes to issue and to sell
to you for the sum of $250.00 an Option (the "RPO") for the purchase of up to an
additional 70,000 Shares and 140,000 Warrants. The Shares, Warrants and Warrant
Shares issuable upon exercise of the RPO are hereinafter referred to as the
"Representative's Securities." Neither the Representative's Securities nor any
of the securities underlying the Representative's Securities shall be redeemable
by the Company but the Representative's Securities and the securities underlying
the Representative's Securities shall otherwise be identical to the Firm
Securities. The RPO will be exercisable between the first and fifth anniversary
dates of the Effective Date as below defined (the "RPO Exercise Term"). You
agree that during the one year period from the Effective Date, IAR will not
transfer the Representative's Securities except to IAR's officers or partners or
to any underwriters or selected dealers or their officers or partners. The RPO
shall be exercisable at a price per Share equal to 130% of the public offering
price of the Units and for the Warrants, at a price per Warrant equal to 130% of
the public offering price of the Shares and shall be exercisable at any time and
from time to time, in whole or in part, during the RPO Exercise Term. The RPO
contains the terms and conditions substantially as set forth in Exhibit 4.4 to
the Registration Statement. The shares of the Common Stock issuable upon
exercise of the Warrants (including the Warrants issuable upon exercise of the
RPO) are hereinafter referred to as the "Warrant Shares." The Firm Securities,
the Shares, the Warrants, the Representative's Securities and the Warrant Shares
are more fully described in the Registration Statement and the Prospectus
referred to below.
1. Representations and Warranties of the Company. The Company
represents and warrants to, and agrees with, each of the Underwriters as of the
date hereof, and the Closing Date as follows:
(a) The Company has prepared and filed with the Securities and
Exchange Commission (the "Commission"), a registration statement, and an
amendment or amendments thereto, on Form SB-2, including any related preliminary
prospectus (the "Preliminary Prospectus"), for the registration of the Firm
Securities, Representative Securities as well as the Shares more fully described
in the Prospectus under the heading "Selling Security holders", under the
Securities Act of 1933, as amended (the "Act"), which registration statement and
amendment or amendments have been prepared by the Company in conformity with the
requirements of the Act, and the Rules and Regulations, as defined below. The
Company will promptly file a further amendment to the registration statement in
the form heretofore delivered to the Underwriters but will not file any other
2
<PAGE> 3
amendment thereto to which the Underwriters shall have objected in writing after
having been furnished with a copy thereof. Except as the context may otherwise
require, the registration statement, as amended, on file with the Commission at
the time the registration statement becomes effective (including the prospectus,
financial statements, schedules, exhibits and all other documents filed as a
part thereof or incorporated therein (including, but not limited to those
documents or information incorporated by reference therein) and all information
deemed to be a part thereof as of such time pursuant to paragraph (b) of Rule
430(A) of the Regulations) and as further amended by any post effective
amendment declared effective prior to the Closing Date, is hereinafter called
the "Registration Statement", and the form of prospectus in the form first filed
with the Commission pursuant to Rule 424(b) of the Regulations, is hereinafter
called the "Prospectus." For purposes hereof, "Rules and Regulations" shall mean
the rules and regulations adopted by the Commission under either the Act or the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), as applicable.
The Preliminary Prospectus, Registration Statement and Prospectus are sometimes
referred to herein as the "Offering Documents".
(b) Neither the Commission nor any state regulatory authority
has issued any order preventing or suspending the use of any Preliminary
Prospectus, the Registration Statement or the Prospectus or any part of any
thereof and no proceedings for a stop order suspending the effectiveness of the
Registration Statement or any of the Company's securities have been instituted
or are pending or threatened. Each of the Preliminary Prospectus, the
Registration Statement and the Prospectus at the time of filing thereof
conformed with the requirements of the Act and the Rules and Regulations, and
none of the Preliminary Prospectus, the Registration Statement or the Prospectus
at the time of filing thereof contained an untrue statement of a material fact
or omitted to state a material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which they
were made, not misleading.
(c) When the Registration Statement becomes effective and at
all times subsequent thereto until the Closing Date and any Additional Closing
Date (as defined in Section 5 hereof) and during such longer period as the
Prospectus may be required to be delivered in connection with sales by the
Underwriters or a dealer, the Registration Statement and the Prospectus
contained, and as amended by any amendment or supplement thereto, will contain,
all statements which are required to be stated therein in accordance with the
Act and the Rules and Regulations, and will conform to the requirements of the
Act and the Rules and Regulations; neither the Registration Statement nor the
Prospectus, as amended or supplemented by any amendment or supplement thereto,
nor any such amendment or supplement thereto, will contain any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
(d) The Company has been duly organized and is validly
existing as a corporation in good standing under the laws of the state of its
incorporation. The Company does not own an interest in any firm, association,
corporation, partnership, trust, joint venture or other business entity. The
Company is duly qualified and licensed for the transaction of business and in
good standing as
3
<PAGE> 4
a foreign corporation in each jurisdiction in which its ownership or leasing of
any properties or the conduct of its business ("Business") requires such
qualification or licensing, except for jurisdictions where the failure to be so
registered or qualified would not have a material adverse effect on the
Company's Business, assets, prospects, earnings, properties, condition
(financial or otherwise) or results of operation of the Company (herein referred
to as a "Material Adverse Effect"). The Company has all requisite power and
authority (corporate and other), and has obtained any and all necessary and
material authorizations, approvals, orders, licenses, certificates, franchises
and permits of and from all government or regulatory officials and bodies
(including, without limitation, those having jurisdiction over building,
factory, environmental or similar matters) to own or lease its properties and
conduct its Business (collectively, the "Approvals"); the Company is and has
been doing business in, and on each Closing Date will be in, compliance with all
such Approvals, and all Federal, state, local and foreign laws, rules and
regulations; and the Company has not received any notice of proceedings relating
to the revocation or modification of any such Approval, which, singly or in the
aggregate, if the subject of an unfavorable decision, ruling or finding, which
would have a Material Adverse Effect.
(e) The Company has a fully authorized, issued and outstanding
capitalization as set forth in the Prospectus under "Capitalization" and
"Description of Securities" and will have the capitalization set forth therein
on the Closing Date after giving effect to the Closing, and the Company is not a
party to or bound by any instrument, agreement or other arrangement providing
for the issuance of any capital stock, rights, warrants, options or other
securities, except for this Agreement and as described in the Prospectus. The
offers and sales of all securities of the Company outstanding on the date hereof
and/or immediately prior to the Closing Date were at all relevant times either
registered under the Securities Act and the applicable state securities or Blue
Sky laws, or exempt from such registration. No holder of any of the Company's
securities has any rights, "demand," "piggyback" or otherwise, to have such
securities registered (including without limitation on the Registration
Statement) or to demand the filing of a registration statement except as
specifically described in the Prospectus. No holder of any outstanding
securities of the Company has any rights of rescission with respect to the
offering and sale of such securities. The Firm Securities and the
Representative's Securities (collectively, hereinafter sometimes referred to as
the "Securities") and all other securities issued or issuable by the Company
conform or, when issued and paid for, will conform, in all respects to all
statements with respect thereto contained in the Offering Documents. All issued
and outstanding securities of the Company have been duly authorized and validly
issued and are fully paid and non-assessable, and the holders thereof are not
subject to personal liability by reason of being such holders; and none of such
securities were issued in violation of the preemptive rights of any holders of
any security of the Company or similar contractual rights granted by the
Company. The Securities are not and will not be subject to any preemptive or
other similar rights of any stockholder, have been duly authorized and, when
issued, paid for and delivered in accordance with the terms hereof, will be
validly issued, fully paid and non-assessable; the holders thereof will not be
subject to any personal liability solely by reason of being such holders; all
corporate action required to be taken for the authorization, issuance and sale
of the Securities has been duly and validly taken, and the certificates
representing the Securities will be in due and proper form. Upon the issuance
and delivery pursuant to the terms hereof of the Securities
4
<PAGE> 5
to be sold by the Company hereunder, the Underwriters or the Representative, as
the case may be, will acquire good and marketable title to such securities free
and clear of any lien, charge, claim, encumbrance, pledge, security interest,
defect or other restriction or right of equity of any kind whatsoever.
(f) The financial statements of the Company are true and
complete and fairly present the financial position of the Company at the
respective dates and for the respective periods to which they apply and such
financial statements have been prepared in conformity with generally accepted
accounting principles and the Rules and Regulations, consistently applied
throughout the periods involved and are in accordance with the books and records
of the Company. No other financial statements are required by Form SB-2 or
otherwise to be included in the Registration Statement or the Prospectus. The
outstanding debt, the property, both tangible and intangible, and the business
of the Company conform in all respects to the descriptions thereof contained in
the Registration Statement and the Prospectus. Financial information set forth
in the Prospectus under the headings "Selected Financial Data,"
"Capitalization," and "Management's Discussion and Analysis of Financial
Condition and Results of Operations," fairly present, on the basis stated in the
Prospectus, the information set forth therein and have been derived from or
compiled on a basis consistent with that of the audited financial statements
included in the Prospectus. Except as otherwise stated in the Offering
Documents, since December 31, 1996, (I) the Company has not incurred any
liabilities or obligations, direct or contingent, not in the ordinary course of
business, or entered into any transaction not in the ordinary course of
business, which is material to the business of the Company, and there has not
been any change in the capital stock of, or any incurrence of long-term debt by,
the Company, or any issuance of options, warrants or other rights to purchase
the capital stock of the Company, or any security or other instrument which by
its terms is convertible into, exercisable for or exchangeable for capital stock
of the Company and (ii) there has not occurred any Material Adverse Effect or
any development involving a prospective Material Adverse Effect. The Company has
not become a party to, and neither the business nor the property of the Company
has become the subject of, any litigation which, if adversely determined, would
have a Material Adverse Effect whether or not in the ordinary course of
business.
(g) The Company has filed all federal tax returns and all
state and municipal and local tax returns (whether relating to income, sales,
franchise, real or personal property or other types of taxes) required to be
filed under the laws of the United States and applicable states, and has paid in
full all taxes which have become due pursuant to such returns or claimed to be
due by any taxing authority or otherwise due and owing; provided, however, that
the Company has not paid any tax, assessment, charge, levy or license fee that
it contests in good faith and by proper proceedings, which it has disclosed in
writing to the Representative and for which adequate reserves for the accrual of
same are maintained if required by generally accepted accounting principles.
Each of the tax returns heretofore filed by the Company correctly and accurately
reflects the amounts of its tax liability thereunder. The Company has withheld,
collected and paid all other levies, assessments, license fees and taxes
(including, without limitation, employment withholding taxes, FICA/social
security and similar employee taxes) to the extent required and, with respect to
payments, to the extent that the same have become due and payable.
5
<PAGE> 6
(h) No transfer tax, stamp duty or other similar tax is
payable by or on behalf of the Underwriters in connection with (I) the issuance
by the Company of the Securities; (ii) the purchase by the Underwriters of the
Securities from the Company and the purchase by the Representative of the
Representative's Securities from the Company; (iii) the consummation by the
Company of any of its obligations under this Agreement, or (iv) resales of the
Securities in connection with the distribution contemplated hereby.
(i) The Company has, and at the Closing will have, good and
marketable title to, or valid and enforceable leasehold estates in, all items of
real property owned or leased by it, and good and marketable title to, or valid
and enforceable leases with respect to, all items of personal property (tangible
and intangible), free and clear of all liens, encumbrances, claims, security
interests, defects of title, and restrictions of any nature whatsoever, other
than those referred to in the Offering Documents and liens for taxes not yet due
and payable. The Company has adequately insured its tangible and/or real
properties, other than its intellectual properties, against loss or damage by
fire or other casualty (other than earthquake and flood) and maintains such
insurance in adequate amounts (such adequacy being measured by such types and
levels of insurance as are carried by companies conducting comparable volumes of
business of the nature carried on and proposed to be carried on by the Company),
on terms generally offered by reputable insurance carriers in New York State.
The Company (I) has not failed to give notice or present any insurance claims
with respect to any matter, including but not limited to the Company's business
and property under any such insurance policy in a due and timely manner; (ii)
does not have any disputes or claims against any underwriter of such insurance
policies or has not failed to pay any premiums due and payable thereunder, or
(iii) has not failed to comply with all conditions contained in such insurance
policies. To the best of the Company's knowledge, there are no facts or
circumstances under any such insurance policy which would relieve any insurer of
its obligation to satisfy in full any valid claim of the Company.
(j) There is no action, suit, proceeding, injury, arbitration,
investigation, litigation or governmental proceeding (including, without
limitation, those having jurisdiction over environmental or similar matters),
domestic or foreign, pending or, to the best knowledge of the Company,
threatened against, or involving the properties or business of, the Company in
or before any court, agency, tribunal, arbitrator, governmental authority or
other person with jurisdiction over the Company and/or its properties
(including, without limitation, those having jurisdiction over environmental or
similar matters) which (I) questions the validity of the capital stock of the
Company, this Agreement, the RPO, or the Warrant Agreement (as defined herein)
or of any action taken or to be taken by the Company pursuant to or in
connection with this Agreement or the Warrant Agreement, or (ii) is required
under the Act or the Rules and Regulations to be disclosed in the Registration
Statement and/or the Prospectus which is not so disclosed (and such proceedings
as are summarized in the Registration Statement and/or the Prospectus are
accurately summarized in all material respects).
(k) The Company is not in violation of its Certificate of
Incorporation or By-
6
<PAGE> 7
Laws. The Company has full legal right, power and authority to issue, deliver
and sell the Securities, to execute and deliver this Agreement, the Warrant
Agreement, and the RPO and to consummate the transactions provided for in each
such agreement; and this Agreement, the Warrant Agreement, and the RPO have each
been duly and properly authorized, executed and delivered by the Company. Each
of this Agreement, the Warrant Agreement, and the RPO constitutes a legal, valid
and binding agreement of the Company enforceable against the Company in
accordance with its respective terms, and none of the Company's issue and sale
of the RPO, the Securities or the execution, delivery or performance of this
Agreement, the Warrant Agreement or the RPO, the consummation of the
transactions contemplated herein and therein or the conduct of its current or
proposed business as described in the Offering Documents and any amendments or
supplements thereto, conflicts with or with the lapse of time will conflict
with, or results or with the lapse of time will result in, any breach or
violation of any of the terms or provisions of, or constitutes a default under,
or result in the creation or imposition of any lien, charge, claim, encumbrance,
pledge, security interest defect or other restriction or right of equity of any
kind whatsoever upon , any property or assets (tangible or intangible) of the
Company pursuant to or under the terms of, (I) the certificate of incorporation
or By-Laws of the Company; (ii) any license, contract, indenture, mortgage, deed
of trust, voting trust agreement, stockholders agreement, note, loan or credit
agreement or any other agreement or instrument to which the Company is a party
or by which it is or may be bound or to which its properties or assets (tangible
or intangible) is or may be subject, or any indebtedness; (iii) any statute,
judgment, decree, order, rule or regulation applicable to the Company of any
arbitrator, court, regulatory body or administrative agency or other
governmental agency or body (including, without limitation, those having
jurisdiction over environmental or similar matters), domestic or foreign, having
jurisdiction over the Company or any of its activities or properties; or (iv)
any permit, certification, registration, approval, consent, license or franchise
necessary for the Company to own or lease and operate any of its properties and
to conduct its business or the ability of the Company to make use thereof.
(l) No consent, approval, authorization or order of, and no
filing with, any court, regulatory body, government agency or other body,
domestic or foreign, is required for the issuance of the Securities or the RPO
as described in the Prospectus and the Registration Statement, the performance
of this Agreement, the Warrant Agreement or the RPO and the transactions
contemplated hereby and thereby, including without limitation, any waiver of any
preemptive, first refusal or other rights that any entity or person may have for
the issue and/or sale of any of the Securities, except such as (I) have been
made or obtained prior to the date hereof or (ii) may be obtained under the Act
or may be required under state securities or Blue Sky laws in connection with
the Underwriters' purchase and distribution of the Securities or the clearance
of such purchase, distribution and sale by the National Association of
Securities Dealers, Inc. (the "NASD").
(m) All executed agreements, contracts or other documents or
copies of executed agreements, contracts or other documents filed as exhibits to
the Registration Statement to which the Company is a party or by which it may be
bound or to which its assets, properties or business may be subject have been
duly and validly authorized, executed and delivered by the Company and
constitute the legal, valid and binding agreements of the Company enforceable
against the Company
7
<PAGE> 8
in accordance with their respective terms. There are no contracts or other
documents which are required by the Act to be described in the Registration
Statement or filed as exhibits to the Registration Statement which are not
described or filed as required, and the exhibits which have been filed are
complete and correct copies of the documents of which they purport to be copies.
The descriptions in the Registration Statement of such agreements, contracts and
other documents are accurate and fairly present the information required to be
disclosed in conformity with the Act and the Rules and Regulations. The
contracts so described are in full force and effect and the Company is not in
breach of any such agreement.
(n) Subsequent to the respective dates as of which information
is set forth in the Registration Statement and the Prospectus, and except as may
otherwise be indicated or contemplated herein or therein, the Company has not
(I) issued any securities or incurred any liability or obligation, direct or
contingent, for borrowed money; (ii) entered into any transaction other than in
the ordinary course of business, or (iii) declared or paid any dividend or made
any other distribution in respect of its capital stock of any class, and there
has not been any change in the capital stock or any change in the debt (long or
short term) or liabilities or material change in or affecting the general
affairs, management, financial operations, stockholders' equity or results of
the operations of the Company.
(o) No default by the Company (or to the Company's knowledge
by any other party) exists in the due performance of any term, covenant or
condition of any license, contract, indenture, mortgage, installment sale
agreement, license, permit, franchise, lease, deed of trust, voting trust
agreement, stockholders agreement, note, loan or credit agreement, purchase
agreement, or any other agreement or instrument evidencing an obligation for
borrowed money, or any other agreement or instrument to which the Company is a
party or by which the Company may be bound or to which the property or assets
(tangible or intangible) of the Company is subject or affected.
(p) The Company is in compliance with all Federal, state,
local, and foreign laws and regulations respecting employment and employment
practices, terms and conditions of employment and wages and hours. To the best
of the Company's knowledge, there are no pending investigations involving the
Company by the United States Department of Labor or any other governmental
agency responsible for the enforcement of such Federal, state, local, or foreign
laws and regulations. There is no unfair labor practice charge or complaint
against the Company pending before the National Labor Regulations Board or any
strike, picketing, boycott, dispute, slowdown or stoppage pending or, to the
best of the Company's knowledge, threatened against or involving the Company, or
any predecessor entity, and none has ever occurred. No representation question
exists respecting the employees of the Company, and no collective bargaining
agreement or modification thereof is currently being negotiated by the Company.
No grievance or arbitration proceeding is pending under any expired or existing
collective bargaining agreements of the Company. No labor dispute with the
employees of the Company exists or, to the best of the Company's knowledge, is
imminent.
(q) The Company does not maintain, sponsor or contribute to
any program or
8
<PAGE> 9
arrangement that is an "employee pension benefit plan," an "employee welfare
benefit plan," or a "multiemployer plan" as such terms are defined in sections
32(2) and 3(1) and 3(37), respectively, of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA") ("ERISA" Plans") The Company does not
maintain or contribute, now or at any time previously, to a defined benefit
plan, as defined in Section 3(35) of ERISA. The Company has never completely or
partially withdrawn from a "multiemployer plan."
(r) None of the Company, any of its employees, directors,
shareholders, or affiliates (within the meaning of the Rules and Regulations) of
any of the foregoing has taken or will take, directly or indirectly, any action
designed to or which has constituted or which might be expected to cause or
result in, under the Exchange Act, stabilization or manipulation of the price of
any security of the Company to facilitate the sale or resale of the Securities
or otherwise.
(s) The Company owns or possesses the requisite licenses
and/or enforceable rights to use, free and clear of all liens, charges, claims,
encumbrances, pledges, security interests, defects or other restrictions of any
kind whatsoever, all trademarks, trademark applications, service marks, service
names, trade names, patents and patent applications, copyrights and other rights
(collectively, "Intangibles") described as owned or used by it in the Offering
Documents and/or which are necessary for the conduct of its current business and
the business it proposes to conduct as described in the Offering Documents.
There is no proceeding or action by any person pertaining to, or proceeding or
claim pending or, to the best knowledge of the Company, threatened, and the
Company has not received any claim alleging, infringement directly or indirectly
attributable to the Company's use of its Intangibles with the rights of any
third party or any notice of conflict with the asserted rights of others which
challenges the exclusive right of the Company with respect to, any Intangibles
used in the conduct of the Company's present or proposed business. The Company's
current products, services and processes do not and to the best knowledge of the
Company its proposed products, services and processes do not, infringe on any
Intangibles of any third party. The Company has direct ownership and title, free
and clear of any liens, security interests, encumbrances or claims of others, to
all intellectual property (including all United States patents and United States
and foreign patent applications) and other proprietary rights, confidential
information and know-how. Except as set forth in the Offering Documents, the
Company is not obligated or under any liability whatsoever to make any payments
by way of royalties, fees or otherwise to any owner or licensee of, or other
claimant to, any patent, trademark, service mark, trade name, copyright,
know-how, technology or other intangible asset, with respect to the use thereof
or in connection with the conduct of the Company's business as now (or currently
proposed to be) conducted or otherwise. No unresolved claims or notices have
been asserted or given during the past three years by any person challenging the
use by the Company of any Intangible or challenging or questioning the validity,
enforceability or effectiveness of or the title to any Intangible or agreement
relating thereto nor to the Company's knowledge is there any action, suit,
investigation or proceeding by or before any court or other governmental entity
reasonably likely to have a Material Adverse Effect on the validity or
enforceability of, or the title or right of the Company to use, any Intangible.
(t) Grant Thornton LLP, whose report is filed with the
Commission as a part of
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<PAGE> 10
the Registration Statement, are independent certified public accountants as
required by the Act and the Rules and Regulations.
(u) The Company is not obligated to pay a finder's or broker's
fee to anyone in connection with the introduction of the Company to the
Representative or the consummation of the offering contemplated hereunder, other
than payments to the Representative. The Company has not paid or issued any
monies, securities or other compensation to any member of the National
Association of Securities Dealers, Inc. ("NASD"), or to any affiliate of such a
member during the previous twelve (12) months, except payments made to
Millennium Securities Corp. in connection with the Second Private Placement
Financing.
(v) The Securities have been approved for quotation on the OTC
Bulletin Board.
(w) Neither the Company nor any of its officers, employees,
agents or any other person acting on behalf of the Company, has, directly or
indirectly, given or agreed to give any money, gift or similar benefit (other
than legal price concessions to customers in the ordinary course of business) to
any customer, supplier, employee or agent of a customer or supplier, or official
employee of any governmental agency (domestic or foreign) or instrumentality of
any government (domestic or foreign) or any political party or candidate for
office (domestic or foreign) or other person who was, is, or may be in a
position to help or hinder the current or proposed business of the Company (or
assist the Company in connection with any actual or proposed transaction) which
(a) might subject the Company, or any other such person to any damage or penalty
in any civil, criminal or governmental litigation or proceeding (domestic or
foreign); (b) if not given in the past, might have had a Material Adverse
Effect, or (c) if not continued in the future, might cause a Material Adverse
Effect. The Company's internal accounting controls are sufficient to cause the
Company to comply with the Foreign Corrupt Practices Act of 1977, as amended.
(x) Except as disclosed in the Prospectus, no officer,
director or shareholder of the Company, or any "affiliate" or "associate" (as
these terms are defined in Rule 405 promulgated under the Rules and Regulations)
of any of the foregoing persons or entities has or has had, either directly or
indirectly, (I) an interest in any person or entity which (A) currently
furnishes or sells services or products which are furnished or sold or are
proposed to be furnished or sold by the Company, or (B) purchases from or sells
or furnishes to the Company any goods or services, or (ii) a beneficial interest
in any contract or agreement to which the Company is a party or by which it may
be bound or affected, which in any such case is required to be so disclosed.
Except as set forth in the offering documents, there are no existing agreements,
arrangements, understandings or transactions, or proposed agreements,
arrangements, understandings or transactions, between or among the Company on
the one hand, and any officer, director or shareholder owning in excess of 5% of
the Common Stock of the Company, or any affiliate or associate of any of the
foregoing persons or entities, on the other hand.
(y) The minute books of the Company contain a complete summary
of all meetings and actions of the directors and shareholders of the Company,
since the time of its incorporation, and
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<PAGE> 11
reflect all transactions referred to in such minutes accurately in all respects.
(z) No holders of any securities of the Company or of any
options, warrants or other convertible or exchangeable securities of the Company
has any anti-dilution rights with respect to any securities of the Company
except as described in the Prospectus.
(aa) The Company has entered into an agreement substantially
in the form filed as Exhibit 4.3 to the Registration Statement (the "Warrant
Agreement") with American Stock Transfer & Trust Company in form and substance
satisfactory to the Representative, with respect to the Warrants. The Warrant
Agreement has been duly and validly authorized by the Company and, assuming due
execution by the parties thereto other than the Company, constitutes a valid and
legally binding agreement of the Company, enforceable against the Company in
accordance with its terms, except (I) as such enforceability may be limited by
bankruptcy, insolvency, reorganization or similar laws affecting creditors'
rights generally; (ii) as enforceability of any indemnification provision may be
limited under the Federal and state securities laws, and (iii) that the remedy
of specific performance and injunctive and other forms of equitable relief may
be subject to equitable defenses and to the discretion of the court before which
any proceeding therefor may be brought.
(bb) The Company (I) has not filed a registration statement
which is the subject of any pending proceeding or examination under Section 8 of
the Securities Act, or is the subject of any refusal order or stop order
thereunder; (ii) is not subject to any pending proceeding under Rule 261 of the
Securities Act or any similar rule adopted under Section 3(b) of the Securities
Act, or to an order entered thereunder; (iii) has not been convicted of any
felony or misdemeanor in connection with the purchase or sale of any security or
involving the making of any false filing with the Commission; (iv) is not
subject to any order, judgment, or decree of any court of competent jurisdiction
temporarily, preliminarily or permanently restraining or enjoining, the Company
from engaging in or continuing any conduct or practice in connection with the
purchase or sale of any security or involving the making of any false filing
with the Commission; or (v) is not subject to a United States Postal Service
false representation order entered under Section 3005 of Title 39, United States
Code; or a temporary restraining order or preliminary injunction entered under
Section 3007 of Title 39, United States Code, with respect to conduct alleged to
have violated Section 3005 of Title 39, United States Code. None of the
Company's directors, officers, or beneficial owners of five percent (5%) or more
of any class of its equity securities (I) has been convicted of any felony or
misdemeanor in connection with the purchase or sale of any security involving
the making of a false filing with the Commission, or arising out of the conduct
of the business of an underwriter, broker, dealer, municipal securities dealer,
or investment advisor; (ii) is subject to any order, judgment, or decree of any
court of competent jurisdiction temporarily, preliminarily or permanently
enjoining or restraining, such person from engaging in or continuing any conduct
or practice in connection with the purchase or sale of any security, or
involving the making of a false filing with the Commission, or arising out of
the conduct of the business of an underwriter, broker, dealer, municipal
securities dealer, or investment adviser; (iii) is subject to an order of the
Commission entered pursuant to section 15(b), 15B(a) or 15B(c) of the Securities
Exchange Act of 1934 (the "1934 Act"), or is subject to an order of the
Commission entered pursuant to Section 203(e) or (f)
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<PAGE> 12
of the Investment Advisers Act of 1940; (iv) is suspended or expelled from
membership in, or suspended or barred from association with a member of, an
exchange registered as a national securities exchange pursuant to Section 6 of
the 1934 Act, an association registered as a national securities association
under Section 15A of the 1934 Act, or a Canadian securities exchange or
association for any act or omission to act constituting conduct inconsistent
with just and equitable principles of trade; or (v) is subject to a United
States Postal Service false representation order entered under Section 3005 of
Title 39, United States Code; or is subject to a restraining order or
preliminary injunction entered under Section 3007 of Title 39, United States
Code, with respect to conduct alleged to have violated Section 3005 of Title 39,
United States Code.
(cc) The Company is not, and the Closing will not be, in
violation of any law, rule, regulation, judgment or decree of any governmental
agency or court, domestic or foreign, having jurisdiction over the Company or
any of its properties or Business other than any violation which individually or
in the aggregate would not have a Material Adverse Effect.
(dd) None of the Company's obligations to any third party are
secured by any of the Company's outstanding securities.
(ee) Any certificate signed by any officer of the Company, and
delivered to the Underwriters or the Underwriters's Counsel (as defined herein)
shall be deemed a representation and warranty by the Company to the Underwriters
as to the matters covered thereby.
2. Purchase, Sale and Delivery of the Securities.
(a) On the basis of the representations, warranties, covenants
and agreements herein contained, but subject to the terms and conditions herein
set forth, the Company agrees to sell to each Underwriter, and each Underwriter,
severally and not jointly agrees to purchase from the Company, at a price of
$5.58 per Unit, that number of Firm Securities set forth in Schedule A opposite
the name of such Underwriter, subject to such adjustment as the Representative
in its discretion shall make to eliminate any sales or purchases of fractional
shares, plus any additional numbers of Firm Securities which such Underwriter
may become obligated to purchase pursuant to the provisions of Section 14
hereof. The initial public offering price per Unit shall be $6.20, comprising of
one Share and two Warrants.
(b) Payment of the purchase price and delivery of certificates
for the Firm Securities shall be made at the offices Beckman & Millman, P.C.,
116 John Street, New York, New York 10004, or at such other place as shall be
agreed upon by the Representative and the Company. Such delivery and payment
shall be made at 10:00 a.m. (New York City time) on the third business day
following the date on which the Registration Statement has been declared
effective (the "Effective Date") or at such earlier time and date or other time
and date as shall be agreed upon by the Representative and the Company not later
than third business days after such third business day (such time and date of
payment and delivery being herein called the "Closing Date"). Delivery of the
certificates for the Firm Securities shall be made to you, for the respective
accounts of the
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<PAGE> 13
Underwriters, against payment by you, for the respective accounts of the
Underwriters, of the purchase price for the Firm Securities by certified or
official bank checks payable in same day funds or by wire transfer of
immediately available funds, to the order of the Company. Certificates for the
Firm Securities shall be in definitive, fully registered form, shall bear no
restrictive legends (except with respect to Blue Sky resale restrictions) and
shall be in such denominations and registered in such names as the Underwriters
may request in writing at least two business days prior to the Closing Date. The
certificates for the Firm Securities shall be made available to the
Representative at such office or such other place as the Representative may
designate for inspection, checking and packaging no later than 9:30 a.m. on the
last business day prior to the Closing Date.
(c) The Additional Securities shall be purchased by the
Underwriter from the Company as provided herein. This option may be exercised
only to cover over-allotments in the sale of Shares and Warrants by the
Underwriter. This option may be exercised by you on the basis of the
representations, warranties, covenants, and agreements herein contained, but
subject to the terms and conditions herein set forth, at any time and from time
to time on or before the forty-fifth day following the date that the
Registration Statement is declared effective by the Commission, by written
notice by you to the Company. Such notice shall set forth the aggregate number
of Additional Securities as to which the option is being exercised, the name or
names in which the certificates for the Shares and Warrants (the "Additional
Securities") underlying such Additional Securities are to be registered, the
authorized denominations in which such Additional Securities are to be issued,
and the time and date, as determined by the Underwriter, when such Additional
Securities are to be delivered (each such time and date are herein called an
"Additional Closing Date") (references herein to the Closing Date shall mean the
Closing Date referred to in section 5(a) hereof and/or any Additional Closing
Date, if any, as the context requires, unless otherwise specifically provided
herein); provided, however, that no Additional Closing Date shall be earlier
than the Closing Date nor earlier than the second business day after the date on
which the notice of the exercise of the option shall have been given nor later
than the eighth business day after the date on which such notice shall have been
given.
(d) Payment of the purchase price of $5.58 per Unit and
delivery of certificates for the Additional Securities shall be made at the
offices Beckman & Millman, P.C., 116 John Street, New York, New York 10004, or
at such other place as shall be agreed upon by the Representative and the
Company. Delivery of the certificates for the Additional Securities shall be
made to you, for the respective accounts of the Underwriters, against payment by
you, for the respective accounts of the Underwriters, of the purchase price for
the Additional Securities by certified or official bank checks payable in same
day funds or by wire transfer of immediately available funds, to the order of
the Company. Certificates for the Additional Securities shall be in definitive,
fully registered form, shall bear no restrictive legends (except with respect to
Blue Sky resale restrictions) and shall be in such denominations and registered
in such names as the Underwriters may request in writing at least two business
days prior to the Closing Date. The certificates for the Additional Securities
shall be made available to the Representative at such office or such other place
as the Representative may designate for inspection, checking and packaging no
later than 9:30 a.m. on the last business day prior to the Additional Closing
Date.
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<PAGE> 14
You have advised the Company that each Underwriter has
authorized you to accept delivery of its Securities, to make payment and to
deliver a receipt therefor. You, individually and not as the Representative of
the Underwriters, may (but shall not be obligated to) make payment for any
Securities to be purchased by any Underwriter whose funds shall not have been
received by you by the Closing Date for the account of such Underwriter, but any
such payment shall not relieve such Underwriter from any of its obligations
under this Agreement.
3. Public Offering of the Securities. Immediately upon
effectiveness of the Registration Statement, the Underwriters shall make a
public offering of the Securities (other than to residents of or in any
jurisdiction in which qualification of the Securities is required and has not
become effective) at the price and upon the other terms set forth in the
Prospectus. The Representative may from time to time increase or decrease the
public offering price after distribution of the Securities has been completed to
such extent as the Representative, in its sole discretion deems advisable. The
Underwriters may enter into one of more agreements as the Underwriters, in each
of their sole discretion, deem advisable with one or more broker-dealers who
shall act as dealers in connection with such public offering.
4. Covenants of the Company. The Company covenants and agrees
with each of the Underwriters as follows:
(a) The Company shall use its best efforts to cause the
Registration Statement and any amendments thereto to become effective as
promptly as practicable and will not at any time, whether before or after the
Effective Date, file any amendment to the Registration Statement or supplement
to the Prospectus or file any document under the Act or Exchange Act before
termination of the offering of the Securities by the Underwriters of which the
Representative shall not previously have been advised and furnished with a copy,
to which the Representative shall have reasonably objected or which is not in
compliance with the Act, the Exchange Act or the Rules and Regulations.
(b) As soon as the Company is advised or obtains knowledge
thereof, the Company will advise the Representative and confirm the notice in
writing (I) when the Registration Statement as amended, becomes effective or, if
the provisions of Rule 430A promulgated under the Act will be relied upon, when
the Prospectus has been filed in accordance with said rule 430A and when any
post effective amendment to the Registration Statement becomes effective; (ii)
of the issuance by the Commission of any stop order or of the initiation, or the
threatening, of any proceeding, suspending the effectiveness of the Registration
Statement or any order preventing or suspending the use of the Preliminary
Prospectus or the Prospectus, or any amendment or supplement thereto, or the
institution of proceedings for that purpose; (iii) of the issuance by the
Commission or by any state securities commission of any proceedings for the
suspension of the qualification of any of the Securities for offering or sale in
any jurisdiction or the initiation, or the threatening, of any proceeding for
that purpose; (iv) of the receipt of any comments from the Commission, and (v)
of any request by the Commission for any amendment to the Registration Statement
or any amendment or supplement to the Prospectus or for additional information.
If the Commission or any state securities commission or authority shall enter a
stop order or suspend such
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<PAGE> 15
qualification at any time, the Company will make every effort to obtain promptly
the lifting of such order.
(c) The Company shall file the Prospectus (in form and
substance reasonably satisfactory to the Representative) or transmit the
Prospectus by a means reasonably calculated to result in filing with the
Commission pursuant to Rule 424(b) not later than the Commission's close of
business on the earlier of (I) the second business day following the execution
and delivery of this Agreement, and (ii) the third business day after the
Effective Date.
(d) The Company will give the Representative notice of its
intention to file or prepare any amendment to the Registration Statement
(including any revised prospectus which the Company proposes for use by the
Underwriters in connection with the offering of the Securities which differs
from the corresponding Prospectus on file at the Commission at the time the
Registration Statement becomes effective, whether or not such revised prospectus
is required to be filed pursuant to Rule 424(b) of the Rules and Regulations),
and will furnish the Representative with copies of any such amendment or
supplement within a reasonable amount of time prior to such proposed filing or
use, as the case may be, and will not file any such amendment to which the
Representative shall reasonably object.
(e) The Company shall use its best efforts, in cooperation
with the Representative, at or prior to the time the Registration Statement
becomes effective, to qualify the Securities for offering and sale under the
securities laws of such jurisdiction as the Representative may designate to
permit the continuance of sales and dealings therein for as long as may be
necessary to complete the distribution, and shall make such applications, file
such documents and furnish such information as may be required for such purpose.
In each jurisdiction where such qualification shall be effected, the Company
will, unless the Representative agrees that such action is not at the time
necessary or advisable, use best efforts to file and make such statements or
reports at such times as are or may reasonably be required by the laws of such
jurisdiction to continue such qualification.
(f) During the time when a prospectus is required to be
delivered under the Act, the Company shall use best efforts to comply with all
requirements imposed upon it by the Act and the Exchange Act, as now and
hereafter amended, and by the Rules and Regulations, as from time to time in
force, so far as necessary to permit the continuance of sales of or dealings in
the Securities in accordance with the provisions hereof and the Prospectus, or
any amendments or supplements thereto. If at any time when a prospectus relating
to the Securities or the Representative's Securities is required to be delivered
under the Act, any event shall have occurred as a result of which, in the
judgment of the Company, or in the opinion of counsel to the Underwriters, the
Prospectus, as then amended or supplemented, included an untrue statement of a
material fact or omits to state any material fact required to be stated therein
or necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, or if it is necessary at any time to
amend the Prospectus to comply with the Act, the Company will notify the
Representative promptly and prepare and file with the Commission an appropriate
amendment or supplement (in form and substance satisfactory to the Underwriters)
to correct such statement or omission or to
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<PAGE> 16
effect such compliance, and the Company will furnish to the Underwriters copies
of such amendment or supplement as soon as available and in such quantities as
the Underwriters may request.
(g) As soon as practicable, but in any event not later
than 45 days after the end of the 12-month period beginning on the day after the
end of the fiscal quarter of the Company during which the Effective Date occurs
(90 days in the event that the end of such fiscal quarter is the end of the
Company's fiscal year), the Company shall make generally available to its
security holders, in the manner specified in Rule 158(b) of the Rules and
Regulations, and to the Representative, an earnings statement which will be in
the detail required by, and will otherwise comply with, the provisions of
Section 11(a) of the Act and Rule 158(a) of the Rules and Regulations, which
statement need not be audited unless required by the Act, covering a period of
at least 12 consecutive months after the Effective Date.
(h) During the period of three years after the date
hereof, the Company will furnish to its shareholders, as soon as practicable,
annual reports (including financial statements audited by independent public
accountants) and unaudited quarterly reports of earnings, and will deliver to
the Representative:
(i) concurrently with furnishing such quarterly
reports to its shareholders, statements of
income of the Company for each quarter in
the form furnished to the Company's
shareholders and certified by the Company's
principal financial or accounting officer;
(ii) concurrently with furnishing such annual
reports to its shareholders, a balance sheet
of the Company as at the end of the
preceding fiscal year, together with
statements of operations, shareholders'
equity, and cash flows of the Company for
such fiscal year, accompanied by a copy of
the certification thereof by the Company's
independent certified public accountants;
(iii) as soon as they are available, copies of all
reports (financial or other) mailed to
shareholders;
(iv) as soon as practicable after the filing
thereof, copies of all reports and financial
statements furnished to or filed with the
Commission, the NASD or any securities
exchange, and
(v) every press release and every material news
item or article of interest to the financial
community in respect of the Company or its
affairs which was released or prepared by or
on behalf of the Company.
(i) The Company will maintain a transfer agent and, if
necessary under the jurisdiction of incorporation of the Company, a registrar
(which may be the same entity as the
16
<PAGE> 17
transfer agent) for its Common Stock and Warrants.
(j) The Company will furnish to the Representative or on the
Representative's order, without charge, at such place as the Representative may
designate, copies of each Preliminary Prospectus, and all amendments and
supplements thereto, including any Prospectus, the Registration Statement and
any pre-effective or post-effective amendments thereto (two of which copies will
be signed and will include all financial statements and exhibits), the
Prospectus and all amendments and supplements thereto, including any prospectus
prepared after the Effective Date, in each case as soon as available and in such
quantities as the Representative may request.
(k) On or before the Effective Date, the Company shall provide
the Representative with true copies of duly executed, legally binding and
enforceable agreements pursuant to which for a period of 24 months from the
effective date of the Registration Statement (or for such longer period not to
exceed 36 months as may be required under applicable state blue sky laws) each
of the Selling Security holders agrees that it or he or she will not directly or
indirectly, issue, offer to sell, grant an option for the sale of, assign,
transfer, pledge, hypothecate or otherwise encumber or dispose of any shares of
Common Stock or securities convertible into, exercisable or exchangeable for or
evidencing any right to purchase or subscribe for any shares of Common Stock
which are registered in the Registration Statement (either pursuant to Rule 144
of the Rules and Regulations or otherwise) or dispose of any beneficial interest
therein without the prior written consent of the Representative (collectively,
the "Lock-up Agreements"). On or before the Closing Date, the Company shall
deliver instructions to the transfer agent authorizing it to place appropriate
legends on the certificates representing the securities subject to the Lock-up
Agreements and to place appropriate stop transfer orders on the Company's
ledgers.
(l) None of the Company, any of its officers, directors,
shareholders or affiliates (within the meaning of the Rules and Regulations)
will take, directly or indirectly, any action designed to, or which might in the
future reasonably be expected to cause or result in, stabilization or
manipulation of the price of any securities of the Company.
(m) The Company shall timely file all such reports, forms or
other documents as may be required (including, but not limited to a Form SR as
may be required pursuant to Rule 463 under the Act) from time to time, under the
Act, the Exchange Act, and the Rules and Regulations, and all such reports,
forms and documents filed will comply as to form and substance with the
applicable requirements under the Act, the Exchange Act, and the Rules and
Regulations.
(n) The Company shall furnish to the Representative as early
as practicable prior to each of the date hereof, and the Closing Date but not
later than two business days prior thereto, a copy of the latest available
unaudited interim financial statements of the Company (which in no event shall
be as of a date more than 30 days prior to the effective date of the
Registration Statement) which have been read by the Company's independent public
accountants, as stated in their letters to be furnished pursuant to Section 9(g)
hereof.
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<PAGE> 18
(o) The Company shall cause the Securities to be quoted on OTC
Bulletin Board for a period of five years from the date hereof shall use its
best efforts to maintain such quotation of the Securities.
(p) For a period of three years from the Closing Date, at the
Representative's request, the Company shall furnish to the Representative at the
Company's sole expense, daily consolidated transfer sheets relating to the
Common Stock and Warrants.
(q) Until the completion of the distribution of the Securities
but in no event more than 25 days after the Effective Date, the Company shall
not without prior written consent of the Representative, issue, directly or
indirectly any press release or other communication or hold any press conference
with respect to the Company or its activities or the offering contemplated
hereby.
(r) Until the earlier to occur of (I) the seventh anniversary
of the date hereof, and (ii) the sale to the public of the Representative's
Securities, the Company will not take any action or actions which may prevent or
disqualify the Company's use of Form S-1 (or other appropriate form) for the
registration under the Act of the Representative's Securities.
(s) For a period of not less than two years from the Closing
Date, the Company will recommend and use its best efforts to elect the
Representative's designee (the "Designee") at the Representative's option,
either as a member of or a non-voting observer to the Company's Board of
Directors; such Designee, if elected or appointed, shall attend meetings of the
Board and receive no more or less compensation than is paid to other directors
of the Company and shall be entitled to receive reimbursement for all reasonable
expenses incurred in attending such meetings, including, but not limited to,
food, lodging and transportation. To the extent permitted by law, the Company
will agree to indemnify the Representative and the Designee for the actions of
such Designee as a director of the Company. The Company shall include each of
the Representative and the Designee as an insured under the insured policy
referred to in Section 7(gg) of this agreement. If the Representative does not
exercise its option to designate a member of or an advisor to the Company's
Board of Directors, the Representative shall nevertheless have the right to send
a representative (who need not be the same individual from meeting to meeting,
although the Representative shall endeavor to send the same representative to
each meeting to observe such meeting of the Board of Directors. The Company
agrees to give the Representative notice of each such meeting not later than it
gives such notice and provides such items to the other directors.
(t) The Company agrees that any and all future transactions
between the Company and its officers, directors, principal shareholders and the
affiliates of the foregoing persons will be on terms no less favorable to the
Company than could reasonably be obtained in arm's length transactions with
independent third parties, and that any such transactions also be approved by a
majority of the Company's outside independent directors disinterested in the
transaction, if any.
(u) Until the offering contemplated hereby has been completed
or terminated, if there shall occur any event relating to or affecting, among
other things, the Company or any affiliate
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<PAGE> 19
thereof, or the operations of the Company as described in the Offering
Documents, as a result of which it is necessary, in the opinion of counsel for
the Representative or counsel for the Company, to amend or supplement the
Offering Documents in order that the Offering Documents will not contain an
untrue statement of a material fact or omit to state a material fact necessary
in order to make the statements therein, in the light of the circumstances under
which they were made, not misleading, the Company shall immediately prepare and
furnish to the Representative a reasonable number of copies of an appropriate
amendment of or supplement to the Offering Documents, in form and substance
satisfactory to counsel for the Representative.
(v) The Company shall apply the net proceeds from the sale of
the Securities in the manner, and subject to the conditions, substantially as
set forth under "Use of Proceeds" in the Prospectus.
(w) The Company shall be responsible for, and shall pay, all
expenses directly and necessarily incurred in connection with this Offering,
including, but not limited to, the costs of preparing, printing, mailing and
filing, where necessary, the Offering Documents and all amendments and
supplements thereto; the Company's legal and accounting fees, transfer agent
fees and the blue sky fees, filing fees and disbursements of the
Representative's counsel in connection with blue sky matters, as well as the
fees and expenses of the Representative as set forth in Section 8(b) hereof.
(x) Except as disclosed in the Offering Documents the Company
has not prior to the date hereof issued and irrespective of such disclosure will
not hereafter issue, any of the Company's Common Stock, or Preferred Stock(as
defined in the Offering Documents) or securities exercisable or convertible into
any of such securities or enter into any agreement therefor in satisfaction of
any obligation or indebtedness of the Company arising out of any agreement to
which the Company is a party or by which the Company is bound now or for a
period of one year after the Effective Date.
(aa) Until one (1) year from the date hereof, the maximum
number of shares of capital stock of the Company issuable under its 1995 Long
Term Incentive Plan and 1996 Non-Qualified Stock Option Plan shall not exceed
2,000,000 without the prior written consent of the Representative.
(bb) Except as contemplated hereby during the period
commencing on the date hereof and ending on the Closing Date, the Company shall
not, without prior notice to and consent of the Representative, (a) issue any
securities or incur any liability or obligation except the purchase of
inventory, equipment and machinery for the Company's manufacturing operations as
described in the Offering Documents, (b) enter into any transaction not in the
ordinary course of business, or (c) declare or pay any dividend on its capital
stock.
(cc) The Company shall for a period of no less than five years
from the date hereof cause and/or take all action necessary to maintain no less
than two (2) outside directors on the Company's Board of Directors.
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<PAGE> 20
(dd) For a period of three (3) years from the date hereof, the
Company shall register with and remain covered by the Corporation Records
Service published by Standard and Poors Corporation.
5. Payment of Expenses.
(a) The Company hereby agrees to pay on the first Closing Date
all expenses and fees (other than fees of Underwriters' counsel, except as
provided in subclause (iv) of this section 8(a)) incident to the performance of
the obligations of the Company under this Agreement and the Warrant Agreement,
including, without limitation, (I) the fees and expenses of accountants and
counsel for the Company; (ii) all costs and expenses incurred in connection with
the preparation, duplication, printing (including mailing and handling charges),
filing, delivery and mailing (including the payment of postage with respect
thereto) of the Registration Statement and the Prospectus and any amendments and
supplements thereto and the duplication, mailing (including the payment of
postage with respect thereto) and delivery of this Agreement, the Agreement
Among Underwriters, the Selected Dealer Agreement, the Powers of Attorney, and
related documents, including the cost of all copies thereof and of the
Preliminary Prospectus and of the Prospectus and any amendments thereof or
supplements thereto supplied to the Underwriters and such dealers as the
Underwriters may request; (iii) the printing, engraving, issuance and delivery
of the Securities; (iv) the qualification of the Securities under state
securities or "Blue Sky" laws, including the costs of printing and mailing the
"Preliminary Blue Sky Memorandum," the "Supplemental Blue Sky Memorandum" if
any, and disbursements and fees of counsel to the Underwriters in connection
therewith (such fees and disbursements to be so reimbursed not to exceed $35,000
in the aggregate; (v) the fees and disbursements of Underwriter's counsel in
connection with the qualification with the NASD of the terms of the transaction
relating to underwriting compensation; (vi) advertising costs and expenses,
including but not limited to costs and expenses in connection with the "road
show," information meetings and presentations, and "tombstone" advertisement
expenses; (vii) fees and expenses of the transfer agent and registrar, and
(viii) the fees payable to the Commission, the NASD and OTC Bulletin Board
including the fees and expenses incurred in connection with the listing of the
Securities on the OTC Bulletin Board.
(b) The Company further agrees that, in addition to the
expenses payable pursuant to subsection (a) of this Section 8, it will pay to
the Representative on the Closing Date by certified or bank cashier's check or,
at the election of the Representative, by deduction from the proceeds of the
offering contemplated herein a non-accountable expense allowance equal to three
percent (3%) of the gross proceeds received by the Company from the sale of the
Securities, it being acknowledged that $50,000 of said amount has already been
delivered to the Representative.
6. Conditions of the Underwriters' Obligations. The obligations
of the Underwriters hereunder shall be subject to the continuing accuracy of the
representations and warranties of the Company herein as of the date hereof and
as of each Closing Date, as if they had been made on and as of each Closing
Date, the accuracy on and as of each Closing Date of the statements of officers
of the Company made pursuant to the provisions hereof, and the performance by
the Company on
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<PAGE> 21
and as of each Closing Date of its covenants and obligations hereunder and to
the following further conditions:
(a) The Registration Statement shall have become effective not
later than 5:00 p.m. New York time, on the date subsequent to the date of this
Agreement or such later date and time as shall be consented to in writing by the
Representative, and, at the Closing Date no stop order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceedings for that purpose shall have been instituted or shall be pending or
contemplated by the Commission and any request on the part of the Commission for
additional information shall have been complied with to the reasonable
satisfaction of the Representative. If the Company has elected to rely upon Rule
430A of the Rules and Regulations, the price of the Shares and Warrants and any
price-related information previously omitted from the effective Registration
Statement pursuant to such Rule 430A shall have been transmitted to the
Commission for filing pursuant to Rule 424(b) of the Rules and Regulations
within the prescribed time period, and prior to the Closing Date the Company
shall have provided evidence satisfactory to the Representative of such timely
filing, or a post-effective amendment providing such information shall have been
promptly filed and declared effective in accordance with the requirements of
Rule 430A of the Rules and Regulations.
(b) The Registration Statement, or any amendment thereto,
shall not contain an untrue statement of a material fact or omit to state a
material fact which is required to be stated therein or is necessary to make the
statements therein not misleading, or the Prospectus, or any supplement thereof,
shall not contain an untrue statement of a material fact, or omit to state a
material fact which is required to be stated therein or is necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
(c) At each of the Effective Date and each Closing Date, the
Underwriters shall have received the opinion of Blau, Kramer, Wactlar &
Lieberman, P.C. (the "Firm") counsel to the Company, dated the Effective Date
and each Closing Date, respectively, addressed to the Underwriters and in form
and substance satisfactory to IAR, to the effect that:
(i) the Company (A) has been duly organized and is
validly existing as a corporation in good standing
under the laws of the jurisdiction of its
incorporation; (B) is duly qualified and licensed for
the transaction of business and in good standing as a
foreign corporation in every jurisdiction in which
its ownership, leasing, licensing or use of property
and assets or the conduct of its Business makes such
qualification necessary except where the failure to
be so qualified does not now have and will not in the
future have a Material Adverse Effect; and (c) has
all requisite corporate power and authority, has
obtained any and all material authorizations,
approvals, orders, licenses, certificates, franchises
and permits of and from all governmental or
regulatory officials and bodies, to own or lease its
properties and conduct its Business. The disclosures
in the
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<PAGE> 22
Registration Statement concerning the
effects of Federal, state and local laws,
rules and regulations on the Company's
business as currently conducted and as
contemplated are accurate in all respects
and do not omit to state a fact necessary to
make the statements contained therein not
misleading in light of the circumstances in
which they were made;
(ii) the Firm has not been engaged to perform
legal services in connection with any
transaction whereby the Company would
acquire an interest in any corporation,
partnership, joint venture, trust or other
business entity;
(iii) the Company has a duly authorized, issued
and outstanding capitalization as set forth
in the Prospectus (and any amendment or
supplement thereto) under the heading
"Capitalization" and except as set forth in
the Prospectus, the Company is not a party
to or bound by any instrument, agreement or
other arrangement providing for it to issue
any capital stock, rights, warrants, options
or other securities. The Securities and all
other securities issued or issuable by the
Company have been duly authorized; all
outstanding shares of Common Stock have been
fully paid for and are non-assessable, and
the Securities when issued, paid for and
delivered in accordance with the terms
hereof and of the Warrant Agreement, will be
validly issued fully paid and
non-assessable. The Securities conform to
the description thereof in the Prospectus.
All corporate action required to be taken
for the authorization, issue and sale of the
Securities has been duly and validly taken.
The Representative's Securities constitute
valid and binding obligations of the Company
to issue and sell, upon exercise thereof and
payment therefor, the number and type of
securities of the Company called for
thereby. Upon the issuance and delivery
pursuant to this Agreement, the Warrant
Agreement and the RPO of the Securities and
Representative's Securities, as applicable,
the Underwriters will acquire title to the
Firm Securities, and the Representative will
acquire title to the Representative's
Securities, free and clear of any pledge,
lien, charge, claim, encumbrance, pledge,
security interest, or other restriction or
equity of any kind whatsoever. No transfer
tax is payable by or on behalf of the
Underwriters in connection with (A) the
issuance by the Company of the Securities;
(B) the purchase by the Underwriters and the
Representative of the Firm Securities and
the Representative's Securities,
respectively, from the Company;(C)the
consummation by the Company of any of its
obligations under this Agreement, the
Warrant Agreement or the RPO or (D) resales
of the Firm Securities
22
<PAGE> 23
in connection with the distribution
contemplated hereby;
(iv) the Registration Statement has become
effective under the Act, and, if applicable,
filing of all pricing information has been
timely made in the appropriate form under
Rule 430A, and to counsel's knowledge no
stop order suspending the effectiveness of
the Registration Statement or preventing the
use of the preliminary prospectus or any
part of any thereof has been issued and no
proceeding for that purpose has been
instituted or is pending, or is threatened
or contemplated under the Act;
(v) counsel does not know of any agreements,
contracts or other documents required by the
Act to be described in the Registration
Statement and the Prospectus or to be filed
as exhibits to the Registration Statement
(or required to be filed under the Exchange
Act if upon such filing they would be
incorporated, in whole or in part, by
reference therein) which are not so
described or filed; the descriptions in the
Registration Statement and the Prospectus
and any supplement or amendment thereto of
contracts and other documents to which the
Company is a party or by which it is bound,
incorporated by reference into the
Prospectus and any supplement or amendment
thereto, are accurate and fairly present in
all material respects the information
required to be presented therein; to
counsel's knowledge there is no action,
arbitration, suit, proceeding, inquiry,
investigation, litigation, governmental,
legal or other proceeding (including,
without limitation those having jurisdiction
over environmental or similar matters),
domestic or foreign, pending or threatened
against the Company, or involving the
properties or business of the Company which
is required to be disclosed in the
Registration Statement which is not so
disclosed. No Federal, state or local
statute or regulation required to be
described in the Prospectus is not described
as required;
(vi) the Company has full corporate power and
authority to enter into each of this
Agreement, the RPO and the Warrant Agreement
and to consummate the transactions
contemplated therein; and each of this
Agreement, the RPO and the Warrant Agreement
has been duly authorized, executed and
delivered by or on behalf of the Company.
Each of this Agreement, the RPO and the
Warrant Agreement, assuming due
authorization, execution and delivery by
each other party thereto, constitutes a
legal, valid and binding agreement of the
Company enforceable against the Company in
accordance with its respective terms (except
as such enforceability may be limited by
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<PAGE> 24
applicable bankruptcy, insolvency,
reorganization, moratorium or other laws of
general application relating to or affecting
enforcement of creditors' rights generally
and the application of general equitable
principles in any action, legal or
equitable, and except as to those provisions
relating to indemnity or contribution as to
which no opinion is expressed). None of the
Company's execution, delivery or performance
of this Agreement, the Warrant Agreement,
the RPO, or the conduct of its Business will
result in any breach or violation of any of
the terms or provisions of, or conflicts or
will conflict with or constitutes or will
constitute a default under, or result in the
creation or imposition of any lien, charge,
claim, encumbrance, pledge, security
interest, defect or other restriction or
equity of any kind whatsoever upon, any
property or assets (tangible or intangible)
of the Company pursuant to the terms of (A)
the articles of incorporation or by-laws of
the Company; (B) any material license,
contract, indenture, mortgage, deed of
trust, voting trust agreement, shareholders
agreement, note, loan or credit agreement or
any other agreement or instrument to which
the Company is a party or by which it is or
may be bound or to which any of its
properties or assets (tangible or
intangible) is or may be subject; (c) any
Federal, state or local statute, judgment,
decree, order, rule or regulation applicable
to the Company of any arbitrator, court,
regulatory body or administrative agency or
other governmental agency or body, domestic
or foreign, having jurisdiction over the
Company or any of its properties, or (D)
have any Material Adverse Effect on any
permit, certification, registration,
approval, consent, license or franchise
necessary for the Company to own or lease
and operate any of its properties and to
conduct its Business or the ability of the
Company to make use thereof;
(vii) the Firm has not been engaged to provide
legal services with respect to, nor does the
Firm have any knowledge of, any breach of or
a default under, any term or provision of
any license, contract, indenture, mortgage,
installment sale agreement, deed of trust,
lease, voting trust agreement, shareholders'
agreement, note, loan or credit agreement or
any other agreement or instrument evidencing
any obligation for borrowed money, or any
other agreement or instrument to which the
Company is a party or by which the Company
may be bound or to which the property or
assets (tangible or intangible) of the
Company is subject or affected. The Company
is not in violation of any term or provision
of its certificate of incorporation or
by-laws or, to counsel's knowledge in
violation of any franchise, license, permit,
judgment, decree, order, statute, rule or
regulation;
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<PAGE> 25
(viii) the statements in the Prospectus under the
headings "THE COMPANY", "BUSINESS",
"MANAGEMENT," "PRINCIPAL STOCKHOLDERS,
"SELLING SECURITY HOLDERS", "CERTAIN
TRANSACTIONS", "DESCRIPTION OF SECURITIES",
and "SHARES ELIGIBLE FOR FUTURE SALE" have
been reviewed by such counsel, and insofar
as they refer to statements of law,
descriptions of statutes, licenses, rules or
regulations or legal conclusions, except for
any of the foregoing opined upon to the
underwriters by counsel to the Company other
than Blau, Kramer, Wactlar & Lieberman,
P.C.; are correct in all material respects;
(ix) the Firm Securities have been accepted for
quotation on the OTC Bulletin Board;
(x) to counsel's knowledge, there are no claims,
payments, issuances, arrangements or
understandings for services in the nature of
a finder's or origination fee with respect
to the sale of the Securities hereunder or
financial consulting arrangement or any
other arrangements, agreements,
understandings, payments or issuances that
may affect the Underwriters' compensation,
as determined by the NASD;
(xi) to counsel's knowledge, the Company is not
party to any ERISA plans or defined benefit
plan, as defined in Section 3(35) of ERISA;
and
(xii) The Securities, when issued in accordance
with the terms of this Agreement, will be
duly and validly issued. The stock
certificates and warrants comprising the
Securities are in due and proper legal form.
To the knowledge of such counsel and except
as disclosed in the Prospectus, no holder of
any of the Company's securities has any
rights, "demand," "piggyback" or otherwise,
to have such securities registered or to
demand the filing of a registration
statement. Except as set forth in the
Prospectus, there are no preemptive or other
rights to subscribe for or purchase, or any
restriction upon the voting or transfer of,
any shares of Common Stock, under the
Certificate of Incorporation or By-Laws of
the Company or under the General Corporation
Law of the State of Delaware, or, to the
knowledge of such counsel, under any
agreement or other outstanding instrument to
which the Company is a party or by which it
is bound.
(xiii) To such counsel's knowledge, no approval or
consent of any court, board or governmental
agency, instrumentality or authority of the
25
<PAGE> 26
United States or of any state having
jurisdiction or authority over the Company
or of any other third party, not duly
obtained (other than any approval or consent
required under any state securities or Blue
Sky laws) is required for the valid
authorization, issuance, sale and delivery
of the Securities and the consummation of
the transactions contemplated by this
Agreement, the Warrant Agreement, the RPO or
the Offering Documents.
(xiv) To such counsel's knowledge, there are no
claims, actions, suits, hearings,
investigations, inquiries or proceedings of
any kind or nature, before or by any court,
governmental authority, tribunal or
instrumentality pending or threatened
against the Company or involving the
properties of the Company which could
materially and adversely affect the Business
of the Company, or which would reasonably be
expected to materially adversely affect the
transactions or other acts contemplated by
this Agreement, the Warrant Agreement, the
RPO or the validity or enforceability of
such agreements.
(xv) To such counsel's knowledge, there are no
material licenses, permits, certificates,
registrations, approvals or consents of any
governmental agency, commission, board,
instrumentality or department that are
required to be obtained by the Company in
order to conduct its current or presently
proposed business as described in the
Offering Documents which have not been so
obtained and the failure to so obtain which
would have a Material Adverse Effect.
(xvi) To such counsel's knowledge and except as
disclosed in the Prospectus, the issuance of
the Securities will not give any holder of
any of the Company's outstanding securities
or rights to purchase shares of the
Company's Common Stock, the right to
purchase any additional shares of Common
Stock and/or the right to purchase shares at
a reduced price.
The opinion shall also state that the Registration Statement,
the Prospectus and each amendment thereto or supplement thereof (except for the
financial statements and schedules and other financial information included
therein, as to which such counsel will express no opinion) comply as to form in
all material respects with the applicable requirements of the Act and the Rules
and Regulations.
Such counsel's opinion shall also include a statement to the
effect that it has participated in conferences with officers and other
representatives of the Company representatives of the independent public
accountants of the Company and representatives of the Representative at
26
<PAGE> 27
which the contents of the Registration Statement and the Prospectus were
discussed and, although such counsel is not passing upon and does not assume
responsibility for the accuracy, completeness or fairness of the statements
contained in the Registration Statement or the Prospectus, on the basis of the
foregoing (relying as to materiality to a large extent upon the opinions of
officers and other representatives of the Company), nothing has come to such
counsel's attention that causes it to believe that the Registration Statement at
the time the Registration Statement became effective contained an untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein not misleading, or
that the Prospectus at the date of the Prospectus and as supplemented or amended
at all times up to and including the date of such opinion, contained an untrue
statement of a material fact or omitted to state a material fact required to be
stated therein, in light of circumstances under which they were made, not
misleading (it being understood that such counsel expresses no opinion or belief
with respect to the financial statements and schedules, statistical information
or other financial information included in the Registration Statement or
Prospectus, or as to information set forth in the Registration Statement under
the captions "Risk Factors -- Government Regulation", "Business -- Intellectual
Properties Patent, Patents Pending and Products", "Business -- Government
Regulation" and "Business -- Legal Proceedings").
(d) On or prior to each Closing Date, the Representative
shall receive from the President and chief financial officer of the Company a
certificate dated the date of each Closing Date stating that:
(i) the representations and warranties of the
Company in this Agreement are true and
correct in all material respects, on and as
of each Closing Date, and the Company has
complied with all agreements and covenants
and satisfied all conditions contained in
this Agreement on its part to be performed
or satisfied at or prior to each Closing
Date;
(ii) no stop order suspending the effectiveness
of the Registration Statement or any part
thereof has been issued, and no proceedings
for that purpose have been instituted or are
pending or, to the best of each of such
person's knowledge, after due inquiry, are
contemplated or threatened under the Act;
(iii) the Registration Statement and Prospectus
contain all statements and information
required to be included therein, and neither
of the Registration Statement or the
Prospectus includes any untrue statement of
a material fact or omits to state any
material fact required to be stated therein
or necessary to make statements therein not
misleading and neither the Preliminary
Prospectus or any supplement thereto
includes any untrue statement of a material
fact or omits to state any material fact
required to be stated therein or necessary
to make the statements therein, in light of
the circumstances under
27
<PAGE> 28
which they were made, not misleading, and
(iv) subsequent to the respective dates as of
which information is given in the
Registration Statement and the Prospectus,
(A) the Company has not incurred up to and
including each Closing Date, other than in
the ordinary course of its business, any
material liabilities or obligations, direct
or contingent; (B) the Company has not paid
or declared any dividends or other
distributions on its capital stock;(C)the
Company has not entered into any
transactions not in the ordinary course of
business; (D) there has not been any change
in the capital stock or long-term debt or
any increase in the short-term borrowings of
the Company; (E) the Company has not
sustained any loss or damage to its property
or assets, whether or not insured; (F) there
is no litigation which is pending or
threatened (or circumstances giving rise to
same) against the Company or any affiliated
party or any of the foregoing which is
required to be set forth in an amended or
supplemental Prospectus which has not been
set forth, and (G) there has occurred no
event required to be set forth in an amended
or supplemental Prospectus which has not
been set forth.
(References to the Registration Statement and the Prospectus in this subsection
are to such documents as amended and supplemented at the date of such
certificate.)
(e) By the Effective Date, the Underwriters will have
received clearance from the NASD as to the amount of compensation allowable or
payable to the Underwriters.
(f) At the date this Agreement is executed, the
Underwriters shall have received a letter, dated such date, addressed to the
Underwriters in form and substance satisfactory in all respects (including the
non-material nature of the changes or decreases, if any, referred to in clause
(iii) below) to the Underwriters and Underwriters' counsel, from Grant Thornton
LLP.
(i) confirming that they are independent
certified public accountants with respect to
the Company within the meaning of the Act
and the applicable Rules and Regulations;
(ii) stating that it is their opinion that the
financial statements and supporting
schedules and footnotes thereto of the
Company included in the Registration
Statement comply as to form in all material
respects with the applicable accounting
requirements of the Act and the Rules and
Regulations thereunder and that the
Representatives may rely upon the opinion of
Grant Thornton LLP with respect to the
financial statements and supporting
schedules included in the Registration
Statement;
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<PAGE> 29
(iii) stating that, on the basis of a limited
review which included a reading of the
latest available unaudited interim financial
statements of the Company (with an
indication of the date of the latest
available unaudited interim financial
statements), a reading of the latest
available minutes of meetings of the
shareholders and board of directors and the
various committees of the board of directors
of the Company, consultations with officers
and other employees of the Company
responsible for financial and accounting
matters and other specified procedures and
inquiries, nothing has come to their
attention which would lead them to believe
that (A) the unaudited financial statements
and supporting schedules of the Company
included in the Registration Statement, if
any, do not comply as to form in all
material respects with the applicable
accounting requirements of the Act and the
Rules and Regulations or are not fairly
presented in conformity with generally
accepted accounting principles applied on a
basis substantially consistent with that of
the audited financial statements of the
Company included in the Registration
Statement, or (B) at a specified date not
more than five days prior to the Effective
Date, there has been any change in the
capital stock or long-term debt of the
Company, or any decrease in the
shareholders' equity or net current assets
or net assets of the Company as compared
with amounts shown in the June 30, 1996
balance sheet included in the Registration
Statement, other than as set forth in or
contemplated by the Registration Statement,
or, if there was any change or decrease,
setting forth the amount of such change or
decrease;
(iv) setting forth, at a date not later than five
days prior to the date of the Registration
Statement, the amount of liabilities of the
Company (including a breakdown of commercial
paper and notes payable);
(v) stating that they have compared specific
dollar amounts, numbers of shares,
percentages of revenues and earnings,
statements and other financial information
pertaining to the Company set forth in the
Prospectus in each case to the extent that
such amounts, numbers, percentages,
statements and information may be derived
from the general accounting records,
including work sheets, of the Company and
excluding any questions requiring an
interpretation by legal counsel, with the
results obtained from the application of
specified readings, inquiries and other
appropriate procedures (which procedures do
not constitute an examination in accordance
with generally accepted auditing standards)
set forth in the letter and found them to be
in agreement, and
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<PAGE> 30
(vi) statements as to such other matters incident
to the transaction contemplated hereby as
the Representative may request.
(g) On each Closing Date, there shall have been duly
tendered to the Representative for the several Underwriters' accounts, the
certificates in the names and denominations requested by the Representative for
the Securities.
(h) No order suspending the sale of the Securities in any
jurisdiction designated by the Representative pursuant to subsection (e) of
Section 7 hereof shall have been issued on the Closing Date and no proceedings
for that purpose shall have been instituted or shall be contemplated.
(i) On or before each Closing Date and upon exercise of
the RPO and payment of the exercise price therefor, if applicable, the Company
shall have executed and delivered to the Representative, the Representative's
Securities in the such denominations and to such designees as shall have been
provided to the Company.
(j) On or before Closing Date, the Securities shall have
been duly approved for quotation on the OTC Bulletin Board.
(k) On or before Closing Date, there shall have been
delivered to the Representative all of the Lock-up Agreements, in form and
substance satisfactory to Underwriters' counsel.
(l) On or before Closing Date, the Company shall have
executed the RPO and the Warrant Agreement, substantially in the forms thereof
filed as exhibits to the Registration Statement.
(m) On or before the Effective Date the Company shall
deliver to the Representative satisfactory results of UCC, lien and title
searches effected in all appropriate jurisdictions, showing that the Company's
assets, including all of its intellectual properties, except as set forth in the
offering documents, are unencumbered, and satisfactory evidence, including
trademark and copyright searches, of its unencumbered title to its owned
intellectual properties.
If any condition to the Underwriters' obligations hereunder to
be fulfilled prior to or at the Closing Date is not so fulfilled, the
Representative may terminate this Agreement on notice to the Company or, if the
Representative so elects, it may waive any such conditions which have not been
fulfilled or extend the time for their fulfillment, and proceed with the
transactions contemplated by this Agreement.
7. Indemnification.
(a) The Company agrees to indemnify and hold harmless
each of the Underwriters (for purposes of this Section 7 "Underwriters" shall
include the officers, directors, partners,
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<PAGE> 31
employees, agents and counsel of the Underwriters), including specifically each
person who may be substituted for an Underwriter (a "controlling person") within
the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, from
and against any and all losses, claims, damages, expenses or liabilities, joint
or several (and actions in respect thereof), whatsoever (including but not
limited to any and all expenses whatsoever reasonably incurred in investigating,
preparing or defending against any litigation, commenced or threatened, or any
claim whatsoever), as such are incurred, to which the Underwriters or such
controlling person may become subject under the Act, the Exchange Act or any
other statute or at common law or otherwise or under the laws of foreign
countries, arising out of based upon any untrue statement or alleged untrue
statement of a material fact contained (I) in any Preliminary Prospectus, the
Registration Statement or the Prospectus (as from time to time amended and
supplemented); (ii) in any post-effective amendment or amendments or any new
registration statement and prospectus in which is included securities of the
Company issued or issuable upon exercise of the Securities, or (iii) in any
application or other document or written communication (in this Section 7
collectively called "application") executed by the Company or based upon written
information furnished by the Company in any jurisdiction in order to qualify the
Securities under the securities laws thereof or filed with the Commission, any
state securities commission or agency, OTC Bulletin Board or any other
securities exchange; or the omission or alleged omission therefrom of a material
fact required to be stated therein or necessary to make the statements therein
not misleading (in the case of the Prospectus, in light of the circumstances
under which they were made) unless such statement or omission was made in
reliance upon and in conformity with written information furnished to the
Company expressly for use in any Preliminary Prospectus, the Registration
Statement or Prospectus, or any amendment thereof or supplement thereto, or in
any application, as the case may be.
The indemnity agreement above referred to shall be in addition
to any liability which the Company may have at common law or otherwise.
(b) Each of the Underwriters agrees severally, but not
jointly, to indemnify and hold harmless the Company, each of its officers and
directors who has signed the Registration Statement, and each other person, if
any, who controls the Company, within the meaning of the Act, to the same extent
as the foregoing indemnity from the Company to the Underwriters but only with
respect to statements or omissions, if any, made in any Preliminary Prospectus,
the Registration Statement or Prospectus or any amendment thereof or supplement
thereto or in any application made in reliance upon, and in strict conformity
with, written information furnished to the Company by such Underwriter expressly
for use in such Preliminary Prospectus, the Registration Statement or Prospectus
or any amendment thereof or supplement thereto or any such application. The
Company acknowledges that the statements with respect to the public offering of
the securities set forth under the heading "Underwriting," the risk factor
entitled "Experience of the Underwriter" and the stabilization legend in the
Prospectus have been furnished by the Underwriters expressly for use therein and
constitute the only information furnished in writing by or on behalf of the
Underwriters for inclusion in the Prospectus.
(c) Promptly after receipt of an indemnified party under this
Section 7 of notice
31
<PAGE> 32
of the commencement of any action, suit or proceeding, such indemnified party
shall, if a claim in respect thereof is to be made against one or more
indemnifying parties under this Section 7, notify each party against whom
indemnification is to be sought in writing of the commencement thereof (but the
failure so to notify an indemnifying party shall not relieve it from any
liability which it may have under this Section 7 except to the extent that it
has been prejudiced in any material respect by such failure or from any
liability which it may have otherwise). In case any such action is brought
against any indemnified party, and it notifies an indemnifying party, and it
notifies an indemnifying party or parties of the commencement thereof, the
indemnifying party or parties will be entitled to participate therein, and to
the extent it may elect by written notice delivered to the indemnified party
promptly after receiving the aforesaid notice from such indemnified party, to
assume the defense thereof with counsel reasonably satisfactory to such
indemnified party. Notwithstanding the foregoing, the 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 the
indemnified party or parties unless (I) the employment of such counsel shall
have been authorized in writing by the indemnifying parties in connection with
the defense of such action at the expense of the indemnifying party; (ii) the
indemnifying parties shall not have employed counsel reasonably satisfactory to
such indemnified party to have charge of the defense of such action within a
reasonable time after notice of commencement of the action, or (iii) such
indemnified party or parties shall have reasonably concluded that there may be
defenses available to it or them which are different from or additional to those
available to one or all of the indemnifying parties (in which case the
indemnifying parties shall not have the right to direct the defense of such
action on behalf of the indemnified party or parties), in any of which events
such fees and expenses of one additional counsel shall be borne by the
indemnifying parties. In no event shall the indemnifying parties be liable for
fees and expenses of more than one counsel (in addition to any local counsel)
separate from their own counsel for all indemnified parties in connection with
any one action or separate but similar or related actions in the same
jurisdiction arising out of the same general allegations or circumstances.
Anything is this Section 7 to the contrary notwithstanding, an indemnifying
party shall not be liable for any settlement of any claim or action effected
without its written consent, provided, such consent was not unreasonably
withheld.
(d) In order to provide for just and equitable contribution in
any case in which (I) an indemnified party makes claim for indemnification
pursuant to this Section 7, but it is judicially determined (by entry of a final
judgment or decree by a court of competent jurisdiction and the expiration of
time to appeal or the denial of the last right of appeal) that such
indemnification may not be enforced in such case notwithstanding the fact that
the express provisions of this Section 7 provide for indemnification in such
case, or (ii) contribution under the Act may be required on the part of any
indemnified party, then each indemnifying party shall contribute to the amount
paid as a result of such losses, claims, damages, expenses or liabilities (or
actions in respect thereof) (A) in such proportion as is appropriate to reflect
the relative benefits received by each of the contributing parties, on the one
hand, and the party to be indemnified on the other hand from the offering of the
Securities, or (B) if the allocation provided by clause (A) above is not
permitted by applicable law, in such proportion as is appropriate to reflect not
only the relative benefits referred to in clause (I) above but also the relative
fault of each of the contributing parties, on the one hand, and the party
32
<PAGE> 33
to be indemnified on the other hand in connection with the statements or
omissions that resulted in such losses, claims, damages, expenses or
liabilities, as well as any other relevant equitable considerations. In any case
where the Company is a contributing party and the Underwriters are the
indemnified party, the relative benefits received by the Company on the one
hand, and the Underwriters on the other, shall be deemed to be in the same
proportions as the total net proceeds from the offering of the Securities
(before deducting expenses) bear to the total underwriting discounts received by
the Underwriters hereunder, in each case as set forth in the table on the Cover
Page of the Prospectus. Relative fault shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a material
fact or the omission of alleged omission to state a material fact relates to
information supplied by the Company, or by the Underwriters, and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such untrue statement or omission. The amount paid or payable by an
indemnified party as a result of the losses, claims, damages, expense or
liabilities (or actions in respect thereof) referred to above in this
subdivision (d) shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such action or claims. Notwithstanding the provisions of this
subdivision (d) the Underwriters shall not be required to contribute any amount
in excess of the underwriting discount applicable to the Securities purchased by
the Underwriters hereunder. No person guilty of fraudulent misrepresentation
(within the meaning of Section 12(f) of the Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. For purposes of this Section 7, each person, if any, who
controls the Company within the meaning of the Act, each officer of the Company
who has signed the Registration Statement, and each director of the Company
shall have the same rights to contribution as the Company, subject in each case
to this subparagraph (d). Any party entitled to contribution will, promptly
after receipt of notice of commencement of any action, suit or proceeding
against such party in respect to which a claim for contribution may be made
against another party or parties under this subparagraph (d), notify such party
or parties from whom contribution may be sought, but the omission so to notify
such party or parties shall not relieve the party or parties from whom
contribution may be sought from any obligation it or they have hereunder or
otherwise than under this subparagraph (d), or to the extent that such party or
parties were not adversely affected by such omission. The contribution agreement
set forth above shall be in addition to any liabilities which any indemnifying
party may have at common law or otherwise.
8. Representations and Agreements to Survive Delivery. All
representations, warranties, covenants and agreements contained in this
Agreement or contained in certificates of officers of the Company submitted
pursuant hereto, shall be deemed to be representations warranties and agreements
of the Company at the Closing Date and such representations, warranties and
agreements of the Company including without limitation the respective indemnity
agreements contained in Sections 4 and 7 hereof, shall remain operative and in
full force and effect regardless of any investigation made by or on behalf of
any Underwriter, the Company, any controlling person of either the Underwriter
or the Company and shall survive the execution and/or termination of this
Agreement or the issuance and delivery of the Securities to the Underwriters and
the Representative, as the case may be.
33
<PAGE> 34
9. Effective Date. This Agreement shall become effective at 9:00
a.m., New York City time, on the next full business day following the date
hereof, or at such earlier time after the Registration Statement becomes
effective as the Representative, in its discretion, shall release the Securities
for the sale to the public, provided, the provisions of Sections 7, 8 and 10 of
this Agreement shall at all times be effective. For purposes of this Section 9,
the Securities to be purchased hereunder shall be deemed to have been so
released upon the earlier of dispatch by the Representative of telegrams to
securities dealers releasing such shares for offering or the release by the
Representative for publication of the first newspaper advertisement which is
subsequently published relating to the Securities.
10. Termination.
(a) The Representative shall have the right to terminate this
Agreement by giving written notice to the Company at any time prior to the
Closing Date if (I) market conditions are unsuitable for the offering
contemplated hereby at the price per Share and Warrant set forth in Section 5(a)
hereof and the Company and the Representative cannot agree on another price or
structure; or (ii) the Company shall have failed, refused, or been unable to
perform any of its obligations hereunder, or breached any of its representations
or warranties hereunder or there shall be a failure of a closing condition to
the Representative's obligations hereunder; (iii) information comes to the
Representative's attention subsequent to the date hereof relating to the
Company, its financial operations and status, its management, its prospects or
its position in the industry which would preclude a successful offering on the
terms set forth herein; (iv) a material adverse change has occurred in the
financial condition, business or prospects of the Company; (v) the Company has
failed to comply with all applicable statutes, laws, rules and regulations; (vi)
the Company cannot expeditiously proceed with the offering contemplated hereby;
(vii) an action, suit or proceeding at law or in equity is commenced or brought
against the Company by any Federal, state or other commission, board or agency,
where any unfavorable decision would materially adversely affect the business
property, financial condition, prospects or income of the Company; (viii) any
domestic or international event or act or occurrence shall have disrupted the
financial markets; (ix) minimum or maximum prices shall have been established by
the New York Stock Exchange, by the American Stock Exchange or in the
over-the-counter market by the NASD (but not in the discretion of any
Underwriter), or trading in securities generally shall have been suspended or
materially limited by either stock exchange or in the over-the-counter market by
the NASD; (x) the United States shall have become involved in a war or major
hostilities, or if there shall have been an escalation in an existing war or
major hostilities in which the United States is a participant, or a national
emergency shall have been declared in the United States; (xi) a general banking
moratorium shall have been declared by New York or Federal authorities, or (xii)
there shall have been a material adverse change in the general market, political
or economic conditions in the United States, such that in any such case, in the
Representative's judgment it would make it inadvisable to proceed with the
offering, sale and/or delivery of the Securities.
(b) If the Representative exercises its rights to terminate
this Agreement and not proceed with the Offering as a result of the
circumstances enumerated in subclauses (ii) through (xi)
34
<PAGE> 35
of the previous sentence, the Company shall reimburse the Representative in full
for its accountable out-of-pocket expenses (including the Representative's
counsel fees and disbursements), minus any amounts previously paid pursuant to
Section 5 hereof. If the Representative exercises its rights to terminate this
Agreement as a result of the circumstances enumerated in subclause (I) of such
sentence, the Company shall reimburse the Representative in full for its
accountable out-of-pocket expenses (including the Representative's counsel fees
and disbursements) up to a maximum of $75,000 minus the amount previously paid
pursuant to Section 5 hereof.
(c) In the event the Representative elects not to proceed with
the offering contemplated hereby as a result of any condition enumerated in
Section 10(a) above, then the Company agrees that it will not negotiate with or
engage any investment banking firm or underwriter other than the Representative
with respect to any private or public financing for the Company during the
12-month period commencing on the date of such termination.
11. Substitution of the Underwriters. If one or more of the
Underwriters shall fail (otherwise than for a reason sufficient to justify the
termination of this Agreement under the provisions of Section 8 or Section 11
hereof) to purchase the Securities which it or they are obligated to purchase on
such date under this Agreement (the "Defaulted Securities"), the Representative
shall have the right, within 24 hours thereafter, to make arrangement for one or
more of the non-defaulting Underwriters, or any other underwriters, to purchase
all, but not less than all, of the Defaulted Securities in such amounts as may
be agreed upon and upon the terms herein set forth and if any such underwriter
is willing to so purchase the Defaulted Securities, then notwithstanding Section
14(ii) below, the Representative shall be obligated to effect such arrangement;
if, however, the Representative shall not have completed such arrangement within
such 24-hour period, then:
(i) if the number of Defaulted Securities does
not exceed 10% of the total number of Firm
Securities to be purchased on such date, the
non-defaulting Underwriters shall be
obligated to purchase the full amount
thereof in the proportions that their
respective underwriting obligations
hereunder bear to the underwriting
obligations of all non-defaulting
Underwriters, or
(ii) if the number of Defaulted Securities
exceeds 10% of the total number of Firm
Securities, this Agreement shall terminate
without liability on the part of any
non-defaulting Underwriters.
No action taken pursuant to this Section shall relieve any
defaulting Underwriter from liability in respect of any default by such
Underwriter under this Agreement.
In the event of any such default which does not result in a
termination of this Agreement, the Representative shall have the right to
postpone the Closing Date for a period of not exceeding ten days in order to
effect any required changes in the Registration Statement or Prospectus or in
any other documents or arrangements.
35
<PAGE> 36
12. Notices. All notices and communications hereunder, except as herein
otherwise specifically provided, shall be in writing and shall be deemed to have
been duly given three days following the day when mailed by prepaid first class
mail, or upon the day of personal delivery. Notices to the Underwriters shall be
directed to the Representative, IAR Securities Corp., 99 Wall Street, New York,
New York 10005, Att: Isaac Rabinowitz, President, with a copy to Beckman &
Millman, P.C., 116 John Street, New York, NY 10004, Att: Michael Beckman, Esq.
Notices to the Company shall be directed to the Company at 131 Jericho Turnpike,
Jericho, NY 11753, with a copy to Blau, Kramer, Wactlar & Lieberman, P.C., 100
Jericho Quadrangle, Jericho, NY 11753, Att: David H. Lieberman, Esq.
13. Parties. This Agreement shall inure solely to the benefit of and
shall be binding upon, the Underwriters, the Company and the controlling
persons, directors and officers and their respective successors, legal
representatives and assigns, and no person shall have or be construed to have
any legal or equitable right, remedy or claim under or in respect of by virtue
of this Agreement or any provisions herein contained. No purchaser of Securities
from any Underwriter shall be deemed to be a successor by reason merely of such
purchase.
14. Construction. This Agreement shall be governed by and construed and
enforced in accordance with the law of the State of New York without giving
effect to the choice of law or conflict of laws principles.
15. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, and all of which
taken together shall be deemed to be one and the same instrument.
16. Entire Agreement; Amendments. This Agreement and the Warrant
Agreement constitute the entire agreement between the parties hereto, and
supersede all prior written or oral agreement, understandings and negotiations,
with respect to the subject matter hereof, except as herein expressly provided.
This Agreement may not be amended except in writing, signed by the
Representative and the Company.
17. Law. This Agreement shall be deemed to have been made and delivered
in New York City and shall be governed as to validity, interpretation,
construction, effect and in all other respects by the internal laws of the State
of New York. The Company and you (I) agree that any legal suit, action or
proceeding arising out or relating to this letter shall be instituted
exclusively in New York State Supreme Court, County of New York or in the United
States District Court for the Southern District of New York, and the United
States District Court for the Southern District of New York; (ii) waive any
objection to the venue of any such suit, action or proceeding, and (iii)
irrevocably consent to the jurisdiction of the New York State Supreme Court,
County of New York, and the United States District Court for the Southern
District of New York in any such suit, action or proceeding. The Company and you
further agree to accept and acknowledge service of any and all process which may
be served in any such suit, action or proceeding in the New York State Supreme
Court, County of New York, or in the United States District Court for the
Southern District of New
36
<PAGE> 37
York and agree that service of process upon it mailed by certified mail to its
address shall be deemed in every respect effective service of process upon it in
any such suit, action or proceeding.
18. No Assignment. Neither this Agreement nor any rights or obligations
hereunder may be assigned by either party without the prior written consent of
the other party, and any attempted assignment without such consent shall be void
and of no effect.
19. Schedules. Any disclosure made on any schedule hereto shall be
deemed as also having been made on any other schedule hereto as to which such
disclosure is also responsive.
37
<PAGE> 38
If the foregoing correctly sets forth the understanding
between the Underwriters and the Company, please so indicate in the space
provided below for that purpose, whereupon this letter shall constitute a
binding agreement among us.
Very truly yours,
MIKE'S ORIGINAL, INC.
By:__________________________________
Michael Rosen
President
Confirmed and accepted as of
the date first above written
IAR Securities Corp.
For itself and as Representative
of the other Underwriters named
in Schedule A hereto.
By: _______________________________
Isaac Rabinowitz
President
38
<PAGE> 39
SCHEDULE A
<TABLE>
<CAPTION>
Number of Shares to Number of Warrants to
Underwriter be Purchased be Purchased
----------- ------------------- ---------------------
<S> <C> <C>
IAR Securities Corp. ------------ ------------
Millennium Securities Corp. ------------ ------------
- ------------ ------------ ------------
- ------------ ------------ ------------
- ------------ ------------ ------------
- ------------ ------------ ------------
- ------------ ------------ ------------
- ------------ ------------ ------------
- ------------ ------------ ------------
TOTAL $
</TABLE>
39
<PAGE> 1
MIKE'S ORIGINAL, INC.
700,000 Units Each Consisting of One Share of Common Stock and
Two Class A Redeemable Common Stock Purchase Warrants
, 1997
AGREEMENT AMONG UNDERWRITERS
IAR Securities Corp.
99 Wall Street
New York, New York 10005
Gentlemen:
We wish to confirm as follows the agreement among you, the undersigned,
and the other Underwriters named in Schedule A to the Underwriting Agreement (as
defined hereinafter), as it is to be executed (all such parties being herein
called the "Underwriters"), with respect to the purchase by the Underwriters
severally from Mike's Original, Inc., a Delaware corporation (the "Company"), of
700,000 units (the "Units"), each consisting of one share of (the "Shares") of
Common Stock, par value $.001 per share, of the Company (the "Common Stock"),
and Two Redeemable Common Stock Class A Purchase Warrants, each of which, upon
exercise, entitles the owner thereof to purchase one share of Common Stock (the
"Warrants"), and the proposed sale of the Units as hereinafter set forth. The
obligations of the Underwriters to purchase the pursuant to the Underwriting
Agreement are herein called "Underwriting Obligations".
I. Authority and Compensation of Representative. We hereby authorize
you, as our Representative and on our behalf, (a) to enter into an agreement
with the Company substantially in the form attached hereto as Exhibit A (the
"Underwriting Agreement), but with such changes therein, including changes in
those who are to be Underwriters and in the respective numbers Shares and/or
Warrants to be purchased by them, as in your judgment are not materially adverse
to the Underwriters; provided, however, that the number of Shares and/or
Warrants to be purchased by us as set forth in or determined pursuant to the
Underwriting Agreement will not be increased, except as provided herein and in
the Underwriting Agreement, without our consent, (b) to exercise all the
authority and discretion vested in the Underwriters and in you by the provisions
of the Underwriting Agreement, and (c) to take all such action and execute all
such documents and instruments as you in your discretion may deem necessary or
advisable in order to carry out the provisions of the Underwriting Agreement and
this Agreement and the sale and distribution of the Shares and/or Warrants;
provided, however, that the time within which the Registration Statement (as
defined in the Underwriting Agreement) is required to become effective pursuant
to the Underwriting Agreement will not be extended by more than 24 hours without
the approval of a majority in interest of the Underwriters (including you).
<PAGE> 2
As your share of the compensation for your services hereunder, we will
pay you, and we authorize you to charge to our account on the Closing Date and
the Additional Closing Dates referred to in the Underwriting Agreement, a sum
equal to not more than 25% of the underwriting discount per Share or Warrant for
each Share or Warrant which we are then obligated to purchase from the Company
pursuant to the Underwriting Agreement.
We hereby authorize you to furnish such information and to make such
representations to the Securities and Exchange Commission (the "Commission") on
behalf of the undersigned as you in your discretion may deem necessary or
advisable.
II. Public Offering. A public offering of the Shares and Warrants is
to be made, as herein provided, as soon, on or after the effective date of the
Registration Statement, as you deem it advisable so to do. The Shares and
Warrants are to be initially offered to the public at the public offering price
set forth on, or determined pursuant to the disclosure on, the cover page of the
Prospectus (as defined in the Underwriting Agreement). You will advise us by
telegraph or telephone when the Shares and Warrants are released for offering.
We authorize you, as Representative of the Underwriters, after the initial
public offering, from time to time to increase or decrease the public offering
price, in your sole discretion, by reason of changes in general market
conditions or otherwise. The public offering price of the Shares and Warrants at
the time in effect is herein called the "Offering Price".
III. Offering to Dealers and Group Sales. We authorize you to reserve
for offering and sale, and on our behalf to sell, to institutions or other
retail purchasers (such sales being herein called "Group Sales") and to dealers
selected by you (such dealers, among whom any of the Underwriters may be
included, being herein called "Dealers") all or any part of our Shares and/or
Warrants as you may determine. Such sales of Shares and/or Warrants, if any,
shall be made (a) in the case of Group Sales, at the Offering Price, and (b) in
the case of sales to Dealers, at the Offering Price or at the Offering Price
less such concession or concessions as you may from time to time determine.
The aggregate of any Group Sales made for our account shall be as
nearly as practicable in proportion to our underwriting obligations (unless you
agree to a smaller proportion for the account of any Underwriter at the request
of such Underwriter), but it shall not be necessary for each such sale to be
made in such proportion. Any sales to Dealers made for our account shall be as
nearly as practicable in the ratio that the Shares and/or Warrants reserved for
our account for offering to Dealers bears to the aggregate of all Shares and/or
Warrants of all Underwriters so reserved.
You agree to notify us promptly on the date of the public offering as
to the number of Shares and/or Warrants, if any, which we may retain for direct
sale. Prior to the termination of this Agreement, you may reserve for offering
and sale as hereinbefore provided any Shares and/or Warrants remaining unsold
theretofore retained by us and we may, with your consent, retain any Shares
and/or Warrants remaining unsold theretofore reserved by you.
2
<PAGE> 3
We authorize you to determine the form and manner of any communications
or agreements with Dealers, which may be in the form of the Selling Agreement,
or otherwise, as you may determine. If there shall be any such agreements with
Dealers, you are authorized to act as manager thereunder and we agree, in such
event, to be governed by the terms and conditions of such agreements. You may
arrange for any Underwriter, including yourself, to become one of such Dealers.
Each Underwriter agrees that it will not offer any of the Shares and/or Warrants
for sale at a price below the Offering Price or allow any concession therefrom
except as herein otherwise provided.
It is understood that any Dealer to which an offer may be made as
hereinbefore provided shall be actually engaged in the investment banking or
securities business, shall execute the written agreement prescribed by Section
24(c) of Article III of the Rules of Fair Practice of the National Association
of Securities Dealers, Inc. (the "NASD"), and shall either be a member in good
standing of the NASD or be a foreign dealer or institution not eligible for
membership in the NASD which agrees to make no offers or sales of the Shares
and/or Warrants in the United States, its 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 Sections 8, 24, and 36 of the Article III of the NASD's Rules of
Fair Practice as if it were an NASD member and Section 25 of such Article III as
it applies to a non-member broker or dealer in a foreign country. The
Underwriters may allow, and the Dealers, if any may reallow, such concession or
concessions as you may from time to time determine on sales of Shares and/or
Warrants, to any eligible broker or dealer, all subject to the Rules of Fair
Practice of the NASD.
You, as Representative, and any of the Underwriters with your prior
consent, may make purchases or sales of Shares and/or Warrants (c) from or to
any of the other Underwriters, at the Offering Price less all or any part of the
underwriting discount as set forth on, or determined pursuant to the disclosure
on, the cover page of the Prospectus and (d) from or to any of the dealers, at
the Offering Price or at the Offering Price less all or any part of the
concession to Dealers.
We authorize you to determine the form and manner of any public
advertisement of the Shares and/or Warrants.
Nothing contained in this Agreement shall be deemed to restrict our
right, subject to the provisions of this Section 3, to offer our Shares and/or
Warrants prior to the effective date of the Registration Statement, provided
that any such offer shall be made in compliance with any applicable requirements
of the Securities Act of 1933, as amended (the "Act"), and the Securities
Exchange act of 1934, as amended (the "Exchange Act"), and the rules and
regulation of the Commission thereunder and of any applicable state or foreign
laws.
IV. Repurchases in the Open Market. Any Shares and/or Warrants sold by
us (otherwise than through you) which, prior to the termination of this
Agreement or such earlier date as you may determine, shall be contracted for or
purchased in the open market by you on behalf of any Underwriter or
Underwriters, shall be repurchased by us on demand at a price equal to the cost
of
3
<PAGE> 4
such purchase (including commissions and taxes paid in connection with such
purchase) plus commissions and taxes on redelivery. Any Shares and/or Warrants
delivered on such repurchase need not be the identical Shares and/or Warrants
originally sold by us. In lieu of delivery of such Shares and/or Warrants to us,
you may (a) sell such Shares and/or Warrants in any manner for our account and
charge us with the amount of any loss or expense, or credit us with the amount
of any profit less any expense, resulting from such sale or, at your option, (b)
charge our account with an amount not in excess of the concession to Dealers on
such Shares and/or Warrants, plus commissions and taxes paid in connection with
such purchase.
V. Delivery and Payment. We agree to deliver to you at or before 8:30
A.M., New York City Time, on the Closing Date and any Additional Closing Date
referred to in the Underwriting Agreement, at the office of IAR Securities
Corp., 99 Wall Street, New York, New York 10005, a certified or official bank
check in New York Clearing House funds payable to your order for an amount equal
to the initial public offering price, less the selling concession, of either (a)
the Shares and Warrants which we are then obligated to purchase pursuant to the
Underwriting Agreement or (b) such of our Shares or Warrants which have not been
sold or reserved for sale in Group Sales or to Dealers, as you direct. The
proceeds of such check shall be credited to our account and applied by you, in
the manner provided in the Underwriting Agreement, to the payment of the
purchase price of the Shares and/or Warrants, against delivery of certificates
for such Shares or Warrants to you for our account. You are authorized to accept
such delivery and to give receipts therefor. If we fail (whether or not such
failure shall constitute a default hereunder) to deliver to you, or you fail to
receive, our check for the Shares and/or Warrants which we have agreed to
purchase, at the time and in the manner provided in this Section 5, you,
individually and not as representative of the Underwriters, are authorized (but
shall not be obligated) to make payment for such Shares and/or Warrants for our
account, but any such payment shall not relieve us of any of our obligations
under the Underwriting Agreement or under this Agreement, and we agree to repay
on demand the amount so advanced for our account (plus interest at then current
rates).
Notwithstanding the other provisions of this Section 5, if transactions
in the Shares and/or Warrants can be settled through the facilities of The
Depository Trust Company, payment for and delivery of our Shares and/or Warrants
will be made through the facilities of The Depository Trust Company if we are a
member, unless we have otherwise notified you prior to a date to be specified by
you, or, if we are not a member, settlement may be made through a correspondent
which is a member pursuant to instructions we may send to you prior to such
specified date.
We also agree on demand to take up and pay for or to deliver to you
funds sufficient to pay for at cost any securities purchased by you for our
account pursuant to the provisions of Section 9 hereof, and to deliver to you on
demand any securities sold or over-allotted by you for our account pursuant to
any provision of this Agreement. We also authorize you to deliver our Shares
and/or Warrants and any other securities purchased by you for our account
pursuant to the provisions of Section 9 hereof, against sales made by you for
our account pursuant to any provision of this Agreement.
4
<PAGE> 5
Upon receipt by you of payment for the Shares and/or Warrants sold by
or though you for our account, you will (c) with respect to such Shares and/or
Warrants paid for by us, remit to us promptly an amount equal to the purchase
price paid by us for such Shares and/or Warrants and credit or debit our account
on your books with the difference between the selling price and the purchase
price of such Shares and/or Warrants as set forth in or determined pursuant to
Section 5 of the Underwriting Agreement and (d) with respect to such Shares
and/or Warrants not paid for by us, credit or debit our account on your books
with the difference between the selling price and the purchase price of such
Shares and/or Warrants as set forth in or determined pursuant to Section 5 of
the Underwriting Agreement. You agree to cause to be delivered to us, as soon as
practicable after the Closing Date or any Additional Closing Date, as the case
may be, referred to in the Underwriting Agreement, such part of our Shares
and/or Warrants as shall not have been sold or reserved for sale by you for our
account.
In case any Shares and/or Warrants reserved for sale in Group Sales or
to Dealers shall not be purchased and paid for in due course as contemplated
hereby, we agree (e) to accept delivery when tendered by you of any Shares
and/or Warrants so reserved for our account and not so purchased and paid for
and (f) in case we shall have received payment from you in respect of any such
Shares and/or Warrants, to reimburse you on demand for the full amount which you
shall have paid us in respect of such Shares and/or Warrants.
VI. Authority to Borrow. We authorize you (to the extent permitted by
law) to advance your funds for our account (charging then current interest
rates) and to arrange loans and to purchase funds for our account for the
purpose of carrying out this Agreement and in connection therewith to execute
and deliver any notes or other instruments and to hold or pledge as security
therefor all or any part of the Shares and/or Warrants purchased by us pursuant
to the Underwriting Agreement or any other securities purchased by you for our
account pursuant to the provisions of Section 9 hereof as you shall determine in
your discretion. Any lending bank is hereby authorized to accept your
instructions as Representative in all matters relating to such loans and
purchase of funds. We will repay on demand any such advances, loans, or
purchases, including interest thereon at then current rates.
VII. Allocation of Expense and Liability. We authorize you to charge
our account with and we agree to pay (a) all transfer taxes on sales made by you
for our account, except as herein otherwise provided, and (b) our proportionate
share (based on our underwriting obligations) of all expenses incurred by you in
connection with the purchase, carrying, and distribution, or proposed purchase
and distribution, of the Shares and/or Warrants and all other expenses arising
under the terms of the Underwriting Agreement or this Agreement. Your
determination of all such expenses and your allocation thereof shall be final
and conclusive. Funds for our account at any time in your hands as our
Representative may be held in your general funds without accountability for
interest. As soon as practicable after the termination of this Agreement, the
net credit or debit balance in our account, after proper charge and credit for
all interim payments and receipts, shall be paid to or paid by us; provided,
however, that you in your discretion may establish such reserves as you deem
advisable to cover possible additional expenses chargeable to the Underwriters.
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<PAGE> 6
VIII. Liability for Future Claims. Neither any statement by you, as
Representative of the Underwriters, of any credit or debit balance in our
account nor any reservation from distribution to cover possible additional
expenses relating to the Shares and/or Warrants shall constitute any
representation by you as to the existence or non-existence of possible
unforeseen expenses or liabilities of or charges against the Underwriters.
Notwithstanding the distribution of any net credit balance to us or the
termination of this Agreement or both, we shall be and remain liable for, and
will pay on demand, (a) our proportionate share (based on our underwriting
obligations) of all expenses and liabilities which may be incurred by or for the
accounts of the Underwriters or any of them, including any liability which may
be incurred by or for the accounts of the Underwriters or any of them based on
the claim that the Underwriters constitute an association, unincorporated
business, partnership, or separate entity, and (b) any transfer taxes paid after
such settlement on account of any sale or transfer for our account.
IX. Stabilization. We authorize you, until the termination of this
Agreement, (a) to make purchases and sales of Shares and/or Warrants or of any
other securities of the Company, in the open market or otherwise, for long or
short account, and on such terms and at such prices as you in your discretion
may deem desirable, (b) in arranging for sales of Shares and/or Warrants to
Dealers, to over-allot, and (c) either before or after the termination of this
Agreement, to cover any short position incurred pursuant to this Section 9;
subject, however, to the applicable rules and regulations of the Commission
under the Exchange Act. All such purchases, sales, and over-allotments shall be
made for the accounts of the several Underwriters as nearly as practicable in
proportion to their respective underwriting obligations.
If you engage in any stabilizing transactions as Representative of the
Underwriters, you shall notify us of that fact. If we effect any transaction
which may be deemed to be a stabilizing purchase, we will notify you in writing
within three business days following such purchase of the information required
by Rule 17a-2(d) under the Exchange Act.
We agree to advise you, from time to time upon request until the
settlement of accounts hereunder, of the number of Shares and/or Warrants at the
time retained by us unsold, and we will upon request sell to you for the
accounts of one or more of the several Underwriters such number of our unsold
Shares and/or Warrants as you may designate, at the Offering Price less such
amount, not in excess of the concession to Dealers, as you may determine.
X. Open Market Transactions. We agree that except with your consent and
except as herein provided we will not, prior to the termination of this
agreement or until you notify us that we are released from this restriction, bid
for, purchase, or sell, directly or indirectly, for our own account, in the open
market or otherwise, or attempt to induce others to bid for, purchase, or sell,
either before or after the sale of the Shares and/or Warrants and either for
long or short account, any securities of the Company or any right to purchase
any such security, and, prior to the completion (as defined in Rule 10b-6 under
the Exchange Act) of our participation in the distribution, we will otherwise
comply with Rule 10b-6. We represent that we have complied with Rule 10b-6 in
connection with the offering. Nothing in this Section 10 shall prohibit us from
acting as broker or
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<PAGE> 7
agent in the execution of unsolicited orders of customers for the purchase or
sale of any securities of the Company.
XI. "Blue Sky." Prior to the initial offering by the Underwriters, you
will inform us as to the advice you have received from counsel concerning the
jurisdictions under the respective "blue sky" or securities laws of which it is
believed that the Shares and/or Warrants have been qualified or registered or
are exempt for offer and sale, but you have not assumed and will no assume any
responsibility or obligation as to the accuracy of such information or as to the
right of any Underwriter or Dealer to offer or sell the Shares and/or Warrants
in any jurisdiction. You agree, however, to cause to be filed a Further State
Notice with respect to the Shares and/or Warrants if, in the opinion of counsel
for the Underwriters, such filing is required by Article 23-A of the General
Business Law of the State of New York.
We authorize you, if you deem it inadvisable in arranging sales of
Shares and/or Warrants for our account hereunder to sell any of our Shares
and/or Warrants to any particular Dealer or other buyer because of the "blue
sky" or securities laws of any jurisdiction, to sell our Shares and/or Warrants
to one or more other Underwriters at the Offering Price less, in the case of a
sale for resale to a Dealer, such amount, not in excess of the concession to
Dealers, as you may determine. The transfer tax on any such sales among
Underwriters shall be treated as an expense and charged to the respective
accounts of the Underwriters in proportion to their respective underwriting
obligations.
XII. Default by Underwriters. Default by one or more Underwriters in
respect of their obligations under the Underwriting Agreement shall not release
us from any of our obligations or in any way affect the liability of any
defaulting Underwriter to the other Underwriters for damages resulting from such
default.
In the event of default by one or more Underwriters in respect of their
obligations under this Agreement to take up and pay for any securities purchased
by you for their respective accounts pursuant to Section 9 hereof, or to deliver
any such securities sold or over-allotted by you for their respective accounts
pursuant to any provision of this Agreement, or to bear their respective shares
of expenses or liabilities pursuant to any provision of this Agreement, and to
the extent that arrangements shall not have been made by you or the Company for
other persons to assume the obligations of such defaulting Underwriter or
Underwriters, each non-defaulting Underwriter shall assume its proportionate
share (without regard to the obligation of such defaulting Underwriter or
Underwriters) of the aforesaid obligations of each such defaulting Underwriter
without relieving any such Underwriter of its liability therefor.
XIII. Termination of Agreement. Unless earlier terminated by you, the
provisions of Sections 2, 3, 4, 6, 9 and 10 hereof shall, except as otherwise
provided therein, terminate at the close of business on the forty-fifth day
after the public offering price of the Stock is determined, but may be extended
by you for an additional period or periods not exceeding forty five days in the
aggregate. You may, however, terminate this Agreement or any provisions hereof
at any time by written or telegraphic notice to us.
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XIV. General Position of the Representative. In taking action under
this Agreement, you shall act only as agent of the Underwriters, except as
otherwise specifically provided herein where you may act individually. Your
authority as Representative of the Underwriters shall include the taking of such
actions as you may deem advisable in respect of all matters pertaining to any
and all offers and sales of the Shares and/or Warrants, including the right to
make any modifications which you consider necessary or desirable in the
arrangements with Dealers or others. You shall be under no liability for or in
respect of the value of the Shares and/or Warrants or the validity or the form
thereof, any preliminary prospectus, the Registration Statement, the Prospectus,
the Underwriting Agreement, or other instruments executed by the Company, or
others; or for or in respect of the delivery of the Shares and/or Warrants; or
for the performance by the Company, or others of any agreement on its or their
part; nor shall you as such Representative or otherwise be liable to the
Underwriters under any of the provisions hereof or for any matters connected
herewith, except for want of good faith; and no obligation not expressly assumed
by you as such Representative herein shall be implied from this Agreement. In
representing the Underwriters hereunder, you shall act as the Representative of
each of them respectively. Nothing herein contained shall constitute the
Underwriters partners with you or with each other, or render any Underwriter
liable for the commitments of any other Underwriter, except as otherwise
provided in Section 12 hereof. The commitments and liabilities of each of the
Underwriters are several in accordance with their respective underwriting
obligations and are not joint. If for federal income tax purposes the
Underwriters should be deemed to constitute a partnership, then each Underwriter
elects to be excluded from the application of Subchapter K, Chapter 1, Subtitle
A of the Internal Revenue Code of 1986, as amended, and agrees not to take any
position inconsistent with such election. You, as Representative of the
Underwriters, are authorized, in your discretion, to execute and file on behalf
of the Underwriters such evidence of such election as may be required by the
Internal Revenue Service.
XV. Acknowledgment of Registration Statement. We hereby confirm that
we have received and examined the Registration Statement (including all
amendments thereto but excluding exhibits) and the related prospectus in respect
of the Stock as heretofore filed with the Commission, that we are familiar with
any amendment to the Registration Statement which may have been filed and the
final form of amendment and prospectus proposed to be filed, that we are willing
to accept the responsibilities of an Underwriter thereunder, and that we are
willing to proceed as therein contemplated. We further confirm that the
statements made under the heading " Underwriting" in such proposed final form of
prospectus, insofar as they relate to us, do not contain any untrue statement of
a material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein not misleading. We understand that
the aforementioned documents are subject to further change and that we will be
supplied with copies of any amendment or supplement to the Registration
Statement or the Prospectus promptly, if and when received by you, but the
making of such changes, amendments, or supplements shall not release us or
affect our obligations hereunder or under the Underwriting Agreement.
XVI. Indemnity and Contribution. A. We agree to indemnify and hold
harmless each other Underwriter (including you), its officers, directors,
partners, employees, agents, and counsel and each
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person, if any, who controls any such Underwriter within the meaning of Section
15 of the Act or Section 20(a) of the Exchange Act, to the extent and upon the
terms which we agree to indemnify and hold harmless the Company as set forth in
the Underwriting Agreement.
B. Each Underwriter (including you) will pay, upon your request, as
contribution, its proportionate share, based upon its underwriting obligation,
of any losses, liabilities, claims, or damages, joint or several, paid or
incurred by any Underwriter (including you) to any person other than an
Underwriter, arising out of, based upon, or in connection with any untrue
statement or alleged untrue statement of any material fact contained in any
preliminary prospectus, the Registration Statement, the Prospectus (as from time
to time amended or supplemented), any amendment or supplement thereto, any other
selling or advertising material approved by you for use by the Underwriters in
connection with the sale of the Shares and/or Warrants, or in any application or
other document or communication 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 qualify the Shares and/or Warrants under the "blue sky"
or securities laws thereof or filed with the Commission or any securities
exchange, or any omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading; and will pay such proportionate share, based upon its underwriting
obligation, of all attorney's fees and any and all expenses whatsoever
reasonably incurred by you or with your consent in investigating, preparing, or
defending against any such loss, liability, claim, or damage, or any action in
respect thereof and any amounts paid in settlement of any claim or litigation.
In determining the amount of our obligation under this Section 16(b),
appropriate adjustment will be made by you to reflect any amounts received by
any Underwriter in respect of such untrue statement, alleged untrue statement,
omission, or alleged omission from the Company pursuant to the Underwriting
Agreement or otherwise. There shall be credited against any amount paid or
payable by us pursuant to this Section 16(b) any loss, liability, claim, damage,
or expense which is reasonably incurred by us as a result of any such claim
asserted against us (other than fees and disbursements of our separate counsel
if such counsel is not approved by you as provided in the next sentence), and if
such loss, liability, claim, damage, or expense is incurred by us subsequent to
any payment by us pursuant to this Section 16(b), appropriate provision shall be
made to effect such credit by refund or otherwise. If any such claim is asserted
or any action is commenced in respect thereto, you may take such action in
connection therewith as you deem necessary or desirable, including retaining
counsel for the Underwriters, and in your discretion separate counsel for any
particular Underwriter or group or Underwriters, and the fees and disbursements
of any counsel so retained by you shall be included in the amounts payable
pursuant to this Section 16(b).
C. Our indemnity and contribution agreements contained in this Section
16 shall remain operative and in full force and effect regardless of any
investigation made by or on behalf of such other Underwriter or its officers,
directors, partners, employees, agents, counsel, or controlling persons (if any)
and shall survive the delivery of the Shares and/or Warrants to the several
Underwriters and the termination of this Agreement and the similar agreements
entered into with the other Underwriters. In determining amounts payable
pursuant to Section 16(b) hereof, any loss, liability, claim, damage, or expense
incurred by any person who controls any Underwriter within the
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<PAGE> 10
meaning of Section 15 of the Act or Section 20(a) of the Exchange Act or by any
officer, director, partner, employee, agent, or counsel of any Underwriter which
has been incurred by reason of such control or other relationship shall be
deemed to have been incurred by such Underwriter. Any Underwriter shall have the
right to employ its own counsel, but the fees and expenses of such counsel shall
be at the expense of such Underwriter. No Underwriter may settle any such claim
or action, except you may so settle on advice of counsel retained by you and
with approval of a majority in interest of the Underwriters (including you).
Whenever you receive notice of the assertion of any claim or the commencement of
any action to which the provisions of Section 16(b) hereof would be applicable,
you will give prompt notice thereof to each Underwriter. If any Underwriter or
Underwriters default in its or their obligation to make payments under Section
16(b) hereof, each non-defaulting Underwriter shall be obligated to pay its
proportionate share of all defaulted payments, based upon such Underwriter's
underwriting commitment as related to the underwriting commitments of all
non-defaulting Underwriters. Nothing herein shall relieve a defaulting
Underwriter of liability for its default.
XVII. Capital Requirements. We confirm that we may, in accordance with
and pursuant to Rule 15c3-1 promulgated by the Commission under the Exchange Act
and any applicable rules relating to capital requirements of any securities
exchange to which we are subject, agree to purchase the numbers of Shares and/or
Warrants we may be obligated to purchase under any provision of the Underwriting
Agreement or this Agreement.
XVIII. Undertaking to Mail Prospectuses. As contemplated by Rule 15c2-8
under the Exchange Act, you 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. We confirm that we
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. You have heretofore
delivered to us such preliminary prospectuses as have been requested by us,
receipt of which is hereby acknowledged, and will deliver such copies of the
Prospectus will be requested by us.
XIX. Miscellaneous. Any notice hereunder from you to us or from us
to you shall be deemed to have been duly given if sent by registered mail,
telegram, or teletype, to us at our address as set forth in our Underwriters'
Questionnaire previously delivered to you, or to you at IAR Securities Corp., 99
Wall Street, New York, New York 10005 Attention: Isaac Rabinowitz, President.
We understand that you are a member in good standing of the NASD. 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, including, without limitation, the
NASD's interpretation with respect to Free-Riding and Withholding and Section 24
of Article III of the NASD's Rules of Fair Practice, or, if we are not such a
member, we are a foreign dealer or institution not eligible for membership in
the NASD (a)
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which agrees to make no offers or sales within the United States, its
territories, or its possessions (except that we may participate in Group Sales
under Section 3 hereof) 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 Sections 8, 24, and 36 of Article III
of the NASD's Rules of Fair Practice as if we were an NASD member and Section 25
of such Article III as it applies to a non-member broker or dealer in a foreign
country and (b) which in connection with sales and offers of Shares and/or
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 Prospectus
will be made 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 Shares and/or Warrants, Common
Stock, 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 Common Stock, 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.
This Agreement may be signed by the Underwriters in various
counterparts which together shall constitute one and the same agreement among
all the Underwriters and shall become effective at such time as all the
Underwriters shall have signed such counterparts and you shall have confirmed
all such counterparts.
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.
Please confirm that the foregoing correctly sets forth the
understanding between us by signing and returning to us a counterpart hereof.
Very truly yours,
-----------------------------------
As Attorney-in-Fact for each of the
Underwriters named in Schedule A to the
Underwriting Agreement
Confirmed as of the date first above written.
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New York, New York
IAR SECURITIES CORP.
By: __________________________________
Name:
Title:
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<PAGE> 1
MIKE'S ORIGINAL, INC.
700,000 Units, Each Consisting of One (1) Share of Common Stock and
Two (2) Class A 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 700,000 units (the "Units")
consisting of a total of 700,000 shares of Common Stock, par value $.001 per
share, of the Company (the "Common Stock") and 1,400,000 Class A 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). The 700,000 Shares of Common Stock and 1,400,000 Warrants
are hereinafter referred to as the "Firm Securities." The Firm 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.
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
<PAGE> 2
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 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
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<PAGE> 3
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.
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
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the Representative shall not be under any obligation to you except for
obligations expressly assumed by us in this Agreement.
We are authorized 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 repurchase such Securities at a price equal to the total cost of
such purchase, including any commissions and transfer taxes on redelivery.
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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, 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
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<PAGE> 6
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 units (the "Units"), each
consisting of one share of Common Stock, par value $.001 per share, of Mike's
Original, Inc. (the "Company") (the "Common Stock") and two 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, its
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
7
<PAGE> 8
that such preliminary prospectus or the 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 5
[LETTERHEAD]
[BLAU, KRAMER, WACTLAR & LIEBERMAN, P.C.]
July 23, 1997
Securities and Exchange Commission
450 Fifth Avenue, N.W.
Washington, D.C. 20549
Re: Mike's Original, Inc.
Registration Statement on Form SB-2
-----------------------------------
Gentlemen:
Reference is made to the filing by Mike's Original, Inc. (the
"Company") of a Registration Statement on Form SB-2 (the "Registration
Statement"), as amended, with the Securities and Exchange Commission pursuant
to the provisions of the Securities Act of 1933, as amended, covering the
registration of (a)700,000 Units, in connection with the sale thereof by the
Company, each Unit consisting of one share of the Company's common stock, par
value $.001 per share (the "Common Stock") and two redeemable common stock
purchase warrants (the "Class A Warrant"); (b) 70,000 Unit Purchase Options
owned by the Underwriter ("Underwriter's Purchase Option") and (c) an aggregate
of 861,167 shares of Common Stock which are owned by other selling shareholders
(the "Selling Securityholders").
As counsel for the Company, we have examined its corporate records,
including its Certificate of Incorporation, By-Laws, its corporate minutes,
the form of its Common Stock certificate and Class A Warrant certificate and
such other documents as we have deemed necessary or relevant under
the circumstances.
Based upon our examination, we are of the opinion that:
1. The Company is duly organized and validly existing under the laws
of the State of Delaware.
<PAGE> 2
2. The shares of Common Stock and the Class A Warrants covered by the
Registration Statement have been duly authorized and, when issued in accordance
with their terms, as more fully described in the Registration Statement, will
be validly issued, fully paid and non-assessable.
3. The shares of Common Stock reserved for issuance upon the exercise
of the Class A Warrants and the Underwriter's Purchase Option, when issued in
accordance with the terms and conditions of such Warrants and Option, will be
validly issued, fully paid and non-assessable.
We hereby consent to be named in the Registration Statement and in
the Prospectus which constitutes a part thereof as counsel to the Company,
and we hereby consent to the filing of this opinion as Exhibit 5.1 to the
Registration Statement.
Very truly yours,
Blau, Kramer, Wactlar & Lieberman, P.C.
---------------------------------------
BLAU, KRAMER, WACTLAR & LIEBERMAN, P.C.
<PAGE> 1
Exhibit 11
Mike's Original, Inc.
Computation of Net Loss Per Share
<TABLE>
<CAPTION>
Net Loss Per Share
------------------------------------------------------------------
Three Months Ended Year Nine Months
-------------------------------- Ended Ended
March 31, March 31, December 31, December 31,
1997 1996 1996 1995
-------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
Loss $(1,485,217) $(516,974) $(4,050,547) $(1,614,858)
Shares
Weighted average shares outstanding (1) 1,904,974 1,362,160 1,592,106 1,311,398
Dilutive stock options 567,916 567,916 567,916 567,916
Dilutive shares - convertible notes 301,222 301,222 301,222 301,222
-------------- ------------ ---------- ----------
Weighted average common and equivalent
shares outstanding 2,774,112 2,231,298 2,461,244 2,180,536
-------------- ------------ ---------- ----------
Net loss per share $(0.54) $(0.23) $(1.65) $(.74)
-------------- ------------ ---------- ----------
</TABLE>
(1) Excluded from the weighted average shares outstanding are 132,769 shares
that were held in escrow for the period September 1995 to February 1996.
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated April 17, 1997, (except for Note H, as to which
the date is June 20, 1997, and Note C-10, as to which the date is July 21,
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 Amendment No. 6 to 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
July 21, 1997
