Registration of Securities by a Small-Business Issuer — Form SB-2
Filing Table of Contents
Document/Exhibit Description Pages Size
1: SB-2 Registration of Securities by a Small-Business 89 553K
Issuer
2: EX-1.1 Underwriting Agreement 26 127K
3: EX-3.(I).5 Articles of Incorporation/Organization or By-Laws 3 13K
4: EX-3.(II).2 Articles of Incorporation/Organization or By-Laws 1 9K
5: EX-4.1 Instrument Defining the Rights of Security Holders 9 39K
6: EX-4.2 Instrument Defining the Rights of Security Holders 1 10K
10: EX-10.10 Material Contract 13 48K
11: EX-10.11 Material Contract 13 47K
12: EX-10.12 Material Contract 4 22K
13: EX-10.13 Material Contract 4 22K
14: EX-10.14 Material Contract 4 22K
15: EX-10.15 Material Contract 4 22K
16: EX-10.16 Material Contract 13 53K
17: EX-10.17 Material Contract 10 39K
18: EX-10.18 Material Contract 4 26K
19: EX-10.19 Material Contract 8 29K
20: EX-10.20 Material Contract 55 196K
21: EX-10.23 Material Contract 2 14K
22: EX-10.24 Material Contract 2 15K
23: EX-10.25 Material Contract 19 70K
24: EX-10.26 Material Contract 10 27K
25: EX-10.28 Material Contract 4 19K
26: EX-10.29 Material Contract 9 45K
27: EX-10.30 Material Contract 6 25K
28: EX-10.32 Material Contract 2 16K
7: EX-10.4 Material Contract 3 18K
8: EX-10.6 Material Contract 8 38K
9: EX-10.9 Material Contract 13 48K
29: EX-12.2 Statement re: Computation of Ratios 1 10K
30: EX-27 Financial Data Schedule 1 13K
SB-2 — Registration of Securities by a Small-Business Issuer
Document Table of Contents
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY , 1998
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
LEGACY BRANDS, INC.
(EXACT NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
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CALIFORNIA 2024 68-0323138
(STATE OR JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
2424 PROFESSIONAL DRIVE, SUITE A
ROSEVILLE, CA 95661
(916) 782-2029
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES)
THOMAS E. KEES
CHIEF EXECUTIVE OFFICER
LEGACY BRANDS, INC.
2424 PROFESSIONAL DRIVE, SUITE A
ROSEVILLE, CA 95661
TELEPHONE (916) 782-2029
FACSIMILE (916) 782-4641
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE OF PROCESS)
COPIES TO:
HARVEY H. ROSEN, ESQ.
MARK H. EASTMAN, ESQ.
RESCH POLSTER ALPERT & BERGER LLP
10390 SANTA MONICA BLVD., FOURTH FLOOR
LOS ANGELES, CALIFORNIA 90025
TELEPHONE (310) 277-8300
FACSIMILE (310) 552-3209
DEBRA K. WEINER, ESQ.
GROVER T. WICKERSHAM, P.C.
430 CAMBRIDGE AVENUE, SUITE 100
PALO ALTO, CALIFORNIA 94306
TELEPHONE (650) 323-6400
FACSIMILE (650) 323-1108
APPROXIMATE DATE OF SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are being offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
(Calculation of Registration Fee on next page)
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION
TO BE REGISTERED REGISTERED(1) PER SHARE OFFERING PRICE(1) FEE
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Units (2) each consisting of:..... 1,725,000 $5.00 $8,625,000 $2,544.38
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(i) one share of Common Stock;
and............................. 1,725,000 -- -- --
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(ii) one Warrant to purchase one
share of Common Stock........... 1,725,000 -- -- --
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Units issuable upon exercise of
the Representative's
Warrants(3), each consisting
of:............................. 150,000 $6.00 900,000 265.50
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(i) one share of Common Stock;
and............................. 150,000 -- -- --
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(ii) one Warrant to purchase one
share of Common Stock........... 150,000 -- -- --
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Common Stock issuable upon
exercise of Warrants, including
Warrants underlying
Representative's Warrants(4).... 1,875,000 7.50 14,062,500 4,148.43
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Total......................... $23,587,515 $6,958.32
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(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(a) promulgated under the Securities Act of 1933, as
amended (the "Securities Act").
(2) Includes 225,000 Units that Paulson Investment Company, Inc., the
representative of the several underwriters (the "Representative") has the
option to purchase to cover over-allotments, if any.
(3) In connection with the sale of the Units, the Registrant is granting to the
Representative warrants to purchase 150,000 Units (the "Representative's
Warrants").
(4) Pursuant to Rule 416, there are also being registered such additional shares
of Common Stock as may be issuable pursuant to the anti-dilution provisions
of the Warrants and the Representative's Warrants.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION DATED JULY , 1998
1,500,000 UNITS
LEGACY BRANDS, INC.
[LOGO]
EACH UNIT CONSISTING OF ONE SHARE OF COMMON STOCK
AND ONE COMMON STOCK PURCHASE WARRANT
Legacy Brands, Inc., a California corporation (the "Company"), is hereby
offering 1,500,000 units (the "Units"), each Unit consisting of one share (the
"Shares") of the Company's common stock, no par value (the "Common Stock") and
one warrant to purchase one share of Common Stock (the "Warrants"). The Units
will trade for a period of 30 days or such shorter period as determined by
Paulson Investment Company, Inc. (the "Representative") and thereafter, the
Common Stock and the Warrants comprising the Units will trade as separate
securities. Each Warrant initially entitles the holder thereof to purchase one
share of Common Stock at an exercise price equal to $ (150% of the
initial public offering price of the Units), subject to certain adjustments. If
the Company's audited fiscal 2000 net income (adjusted to exclude any expenses
relating to the vesting of any employee options or warrants) before interest
expense and taxes ("FY 2000 Net Income") is equal to or greater than $1,000,000,
but less than $1,500,000, the Warrant exercise price shall be reduced to
$ (120% of the initial public offering price of the Units); and if such
FY 2000 Net Income is less than $1,000,000, the Warrant exercise price shall be
reduced to $ (85% of the initial offering price of the Units). Any
reduction which might be determined pursuant to the foregoing (the "Price
Reduction") shall be effective as of the date of the public announcement of the
audited results for the fiscal year 2000 (the "Announcement Date"). The final
Warrant exercise price reflecting such Price Reduction, if any, is referred to
herein as the "Final Warrant Exercise Price." The Warrants are exercisable at
any time after separation of the Units, unless previously redeemed, until the
fifth anniversary of the date of this Prospectus, subject to certain conditions.
The Company may redeem the outstanding Warrants, in whole or in part, at any
time upon at least 30 days' prior written notice to the registered holders
thereof, at a price of $0.25 per Warrant, provided that the closing bid price of
the Common Stock has been at least (i) $ (200% of the Final Warrant
Exercise Price, if there has been no Price Reduction; or (ii) $ (150% of
the Final Warrant Exercise Price, if there has been a Price Reduction) for at
least 20 consecutive trading days immediately preceding the date of the notice
of redemption. See "Description of Securities -- Warrants."
Prior to the Offering, there has been no public market for the Units, the
Common Stock or the Warrants and there can be no assurance that an active market
will develop upon the completion of the Offering. It is anticipated that the
initial public offering price of the Units will be between $4.50 and $5.00 per
Unit. The initial public offering price of the Units and the exercise price and
other terms of the Warrants have been determined by negotiation between the
Company and the Representative and are not necessarily related to the Company's
asset value, net worth, financial condition or any other established criteria
for value. See "Underwriting." Application has been made to list the Common
Stock and Warrants on the Nasdaq SmallCap Markets(SM) ("Nasdaq").
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THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 8.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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UNDERWRITING DISCOUNTS PROCEEDS TO THE
PRICE TO PUBLIC AND COMMISSIONS(1) COMPANY
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Per Unit............................. $ $ $
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Total(3)............................. $ $ $
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(1) Excludes a non-accountable expense allowance equal to 3% of the gross
proceeds of this Offering payable to the Representative, and the value of
five year warrants (the "Representative's Warrants") entitling the
Representative to purchase up to an aggregate of 150,000 Units at a price of
$ per Unit (120% of the initial public offering price of the Units).
The Company has agreed to indemnify the Underwriters against certain civil
liabilities, including liabilities under the Securities of 1933, as amended
(the "Securities Act"). See "Underwriting."
(2) Before deducting estimated expenses of $ payable by the Company,
including the non-accountable expense allowance payable to the
Representative.
(3) The Company has granted to the Representative an option exercisable within
45 days after the date of this Prospectus to purchase up to 225,000
additional Units on the same terms and conditions as the Units offered
hereby, to cover over-allotments, if any (the "Over-Allotment Option"). If
such option is exercised in full, the total Price to the Public,
Underwriting Discount and Commissions and Proceeds to the Company will be
$ , $ and $ respectively. See "Underwriting."
The Units are offered by the Underwriters, subject to prior sale, when, as
and if delivered to and accepted by the Underwriters, and subject to their right
to reject orders in whole or in part and to certain other conditions. It is
expected that delivery of the Units will be made in New York, New York on or
about , 1998.
PAULSON INVESTMENT COMPANY, INC.
The date of this Prospectus is , 1998
In the center portion of the page is a collage consisting of photographs of
the boxes of four of the Company's licensed products.
From left to right, the pictures show: 1 -- The box for Gumby Freeze Pops;
2 -- the box for Mrs. Fields 3-pack Cookie Ice Cream Sandwiches; 3 -- the box
for the 3-pack of the Mrs. Fields Ice Cream Cookie Pop and 4 -- the box for Mrs.
Fields 16 oz. Frozen Cookie Dough. Partially superimposed at the top is the
Company's logo.
COLOR PICTURES
The Mrs. Fields trademark is registered by the Mrs. Fields Development
Corporation ("Mrs. Fields") and used by the Company pursuant to a license. The
Gumby and Pokey trademarks are registered by AJM Marketing Enterprises, Inc.,
("AJM"), and used by the Company pursuant to a license. The Extreme Dinosaurs
trademark is registered by Mattel, Inc. ("Mattel") and licensed to BKN Kids
Network, Inc. ("BKN") and used by the Company pursuant to a license from BKN.
On February 25, 1998, the Company filed on Form 15 to deregister as a
reporting company under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). The deregistration as a reporting company became fully
effective as of May 26, 1998. As of the date of the filing of Form 15, the
Company was no longer subject to the reporting requirements of the Exchange Act.
Upon completion of the Offering, the Company intends to register the Common
Stock and Warrants offered hereby under Section 12 of the Exchange Act and
furnish to its security holders annual reports containing audited financial
statements, quarterly unaudited reports and such other reports as it deems
appropriate.
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE UNITS, COMMON
STOCK OR THE WARRANTS OF THE COMPANY INCLUDING ENTERING STABILIZING BIDS OR
IMPOSING PENALTY BIDS. SEE "UNDERWRITING."
2
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and notes thereto appearing elsewhere in
this Prospectus. Except as otherwise indicated, all information in this
Prospectus: (i) reflects a 1-for-10 reverse stock split of the Common Stock in
October 1996 and a 1-for-3.2 reverse stock split effected prior to the
commencement of the Offering; and (ii) assumes no exercise of the Over-allotment
Option, the Warrants or the Representative's Warrants. Each investor is
encouraged to read this Prospectus in its entirety. Prospective investors should
carefully consider the information set forth under the heading "Risk Factors."
THE COMPANY
Legacy Brands, Inc. licenses and markets premium branded consumer food
products sold in supermarkets, club stores, convenience stores, drug stores and
mass merchandisers throughout the United States. The Company currently holds
three licenses for food products using names and trademarks held by Mrs. Fields,
Gumby and Mattel. The Company has developed and is currently marketing products
under the Mrs. Fields and Gumby licenses and intends to develop and market
products utilizing the Extreme Dinosaurs trademark held by Mattel. The Company
intends to build a portfolio of well-known premium brand products by continuing
to seek licensing opportunities for nationally recognized brand names,
increasing product offerings under current and new licenses, and further
developing distribution of the Company's existing products.
The Company holds an exclusive license to sell frozen cookie dough, frozen
baked goods and other frozen dessert products approved by Mrs. Fields and use
the Mrs. Fields trademarks and logo throughout North America, Hawaii, and Puerto
Rico, excluding Canada with respect to ice cream novelties. The license is
renewable by the Company at its sole discretion every five years for up to 30
years through 2024, but subject to certain termination rights by Mrs. Fields in
the period beginning December 2004. The Company began selling Mrs. Fields frozen
cookie dough products in late 1994. Mrs. Fields frozen cookie dough products are
sold through club stores including Costco Wholesale ("Costco"), BJ's Wholesale
Club, a division of Waban, Inc. ("BJ's") and Sam's Club, a division of WalMart
Stores, Co. ("Sam's Club"), as well as several thousand grocery stores
throughout the United States including certain locations of stores such as
Safeway, Inc. ("Safeway"), Lucky, a division of American Stores Co. ("Lucky"),
Publix Super Markets, Inc. ("Publix"), Kroger Co. ("Kroger"), Jewel, a division
of American Stores Co. ("Jewel"), Harris-Teeter, Inc. ("Harris-Teeter"), Ralphs
Grocery Co. ("Ralphs"), and Raley's ("Raley's). The Company recently introduced
Mrs. Fields ice cream novelties and began selling the Mrs. Fields Cookie Ice
Cream Sandwich and Mrs. Fields Ice Cream Cookie Pop in July 1997 and January
1998, respectively. In April 1998, Mrs. Fields approved both ice cream novelties
for distribution in all of the Mrs. Fields franchise and company-owned retail
stores, which will commence upon completion of Mrs. Fields' distribution
arrangements. In May 1998, the Company was approved to distribute its Mrs.
Fields Cookie Ice Cream Sandwich and Ice Cream Cookie Pop in military
commissaries throughout the United States. The Company is currently developing
other frozen food products to sell under the Mrs. Fields name.
The Company also holds a non-exclusive license to use certain names and
characters from the television show "Adventures of Gumby" in the design and
packaging of freeze pops, fruit coolers and certain types of candy. In mid-1997,
the Company began selling Gumby Freeze Pops through Lucky in Northern
California. In 1998, the Company has increased its marketing efforts for the
summer selling season so the product will be available on a national basis.
Lucky Northern California, Lucky Southern California, Jewel, Acme, Ralph's, and
Osco Drugs have approved Gumby Freeze Pops for distribution in certain of their
locations.
In April 1998, the Company acquired an exclusive license to use trademarks,
copyrights, plots, settings and artwork related to Mattel's Extreme Dinosaurs
for food products including freeze pops, gelatin snacks, fruit coolers, fruit
snacks, cookies and crackers. The Company is in the process of finalizing
certain details in the formal license agreement and identifying the best food
products to introduce for this brand and to date cannot make any representations
to the form or timing of such new products.
3
The Company estimates that the national frozen cookie dough category
remains relatively small at approximately $10 million annually in sales when
compared to national sales for categories such as refrigerated cookie dough that
represent approximately $300 million annually in sales. For this reason the
Company has broadened its Mrs. Fields product offerings to include ice cream
novelties, which had annual sales of approximately $1.58 billion in 1997. The
Company expects sales of these products and Gumby Freeze Pops will diversify the
Company's product lines and reduce the historical seasonality of its revenues.
The Company has a management team with experience in direct retail and
marketing of food products to the retail food industry. The Company sells its
products through a combination of outside brokers and distributors throughout
the United States. The Company does not manufacture any of its products, but
contracts with outside suppliers. The Company believes the use of third-party
suppliers increases its flexibility, reduces production lead-times and costs,
and significantly reduces capital expenditures and associated overhead related
to manufacturing, all resulting in overall lower product costs to the Company.
The Company was incorporated in February 1994. The Company's principal
offices are located at 2424 Professional Drive, Suite A, Roseville, California
95661 and its telephone number is (916) 782-2029.
4
THE OFFERING
Securities Offered............ 1,500,000 Units. Each Unit consists of one
share of Common Stock and one Warrant to
purchase one share of Common Stock. The Common
Stock and the Warrants will be separately
transferable 30 days following completion of
this Offering or such shorter period as
determined by the Representative. See
"Description of Securities."
Warrants
Exercise Price.............. $ per share of Common Stock (150% of the
initial public offering price of the Units),
subject to certain adjustments, including if
the Company's audited fiscal 2000 net income
(adjusted to exclude any expenses relating to
the vesting of employee options or warrants)
before interest expense and taxes ("FY2000 Net
Income")is equal to or greater than $1,000,000,
but less than $1,500,000, a one time downward
adjustment of the exercise price to $ per
share (120% of the initial public offering
price of the Units); and if such FY2000 Net
Income is less than $1,000,000, then the
exercise price shall be adjusted to $ per
share (85% of the initial public offering price
of the Units).
Exercise Period............. The period commencing on the date of the
separation of the Units and terminating five
years from the date of this Prospectus.
Redemption.................. The Company may redeem the Warrants at a price
of $0.25 per Warrant upon not less than 30
days' prior written notice, provided that the
closing bid price of the Common Stock has been
at least (i) 200% of the exercise price of the
Warrants if there has not been a Price
Reduction or (ii) 150% of the exercise price of
the Warrants if there has been a Price
Reduction, in either case for 20 consecutive
trading days immediately preceding the date of
the notice of redemption. See "Description of
Securities -- Warrants."
Common Stock Outstanding...... As of June 15, 1998: 1,041,730 shares(1)
Following the Offering: 2,541,730 shares(1)
Use of Proceeds............... The Company intends to use the net proceeds
from the Offering primarily to pay for
anticipated market expansion, product
development and acquisition of additional
licenses; to repay an outstanding related party
line of credit and notes issued by the Company
in connection with certain bridge financings;
and for other general corporate purposes. See
"Use of Proceeds."
Risk Factors.................. The Units offered hereby involve a high degree
of risk and should not be considered by
investors who cannot afford to lose their
entire investment and should be purchased only
after careful consideration of the significant
risk factors which may affect the Company and
its business. See "Risk Factors" for certain
factors to be considered by potential
investors.
(See
footnote on following page)
5
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Proposed Nasdaq SmallCap Symbols.......... Units: LEGCU
Common Stock: LEGC
Warrants: LEGCW
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(1) Based on shares of Common Stock outstanding as of June 15, 1998, including
20,343 shares of Common Stock issued to unrelated parties upon exercise of
certain warrants, pursuant to which the Company accepted the promissory note
of each of the purchasers. Excludes 387,063 shares of Common Stock issuable
upon exercise of outstanding warrants as of June 15, 1998, 120,625 PAG
Shares issuable following the closing of the Offering and 254,173 shares of
Common Stock to be reserved for issuance under the Company's Stock Option
Plan. See "Capitalization," "Management -- Stock Option Plan," "Certain
Transactions," "Description of Securities" and Note 8 of Notes to Financial
Statements.
6
SUMMARY FINANCIAL INFORMATION
The following table summarizes selected financial information concerning
the Company for the periods indicated. The following financial data should be
read in conjunction with the "Management's Discussion and Analysis of Financial
Condition and Results of Operations," the Financial Statements and notes
relating thereto and other financial information set forth elsewhere in this
Prospectus.
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FOR THE YEARS FOR THE THREE MONTHS
ENDED JANUARY 31, ENDED APRIL 30,
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1997 1998 1997 1998
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(IN THOUSANDS, EXCEPT SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Sales............................................. $ 4,825 $ 5,352 $ 1,249 $ 1,640
Cost of goods sold................................ 3,088 3,309 743 1,026
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Gross profit...................................... 1,737 2,043 506 614
Marketing, general and administrative expenses.... 1,847 2,577 478 690
Compensation related to forgiveness of employee
notes.......................................... -- 1,472 -- --
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Operating (loss) income........................... (110) (2,006) 28 (76)
Other income (expense) and taxes.................. (648) (915) (194) (67)
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Net loss.......................................... (758) (2,921) (166) (143)
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Net loss per share, basic and diluted(1).......... $ (1.16) $ (3.81) $ (0.24) $ (0.14)
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Shares used in per share calculation.............. 651,162 767,613 701,022 1,041,730
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APRIL 30, 1998
JANUARY 31, -------------------------
1998 ACTUAL AS ADJUSTED(2)
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(IN THOUSANDS)
BALANCE SHEET DATA:
Working capital (deficit).............................. $(2,462) $(2,807) $3,263
Total assets........................................... 2,733 3,120 8,220
Total liabilities...................................... 3,555 4,078 3,108
Long-term liabilities.................................. 716 708 708
Accumulated deficit.................................... 7,559 7,702 7,702
Shareholders' equity (deficit)......................... (822) (959) 5,111
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(1) See Note 1 of Notes to Financial Statements for an explanation of the basis
used to calculate net loss per share.
(2) Adjusted to give effect to the sale by the Company of 1,500,000 Units at an
assumed offering price $5.00 per Unit, net of estimated underwriting
discounts and estimated expenses of the Offering and application of the
proceeds therefrom. See "Use of Proceeds," "Capitalization" and "Certain
Transactions."
7
RISK FACTORS
An investment in the Securities offered hereby involves a high degree of
risk. In addition to the other information contained in this Prospectus,
prospective investors should carefully consider the following Risk Factors in
evaluating an investment. Purchase of the securities offered hereby should not
be considered by persons unable to afford the loss of their entire investment.
This Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from the
results discussed in the forward-looking statements. Factors that could cause or
contribute to such differences include those discussed below and elsewhere in
the Prospectus.
HISTORY OF OPERATING LOSSES; FINANCIAL CONDITION. The Company has been in
existence since 1994 and has experienced ongoing operating losses, including the
first quarter of fiscal 1999, although it did achieve income from operations in
the first and third quarters of fiscal year 1998. As of January 31, 1998, the
Company had a negative net worth on a book value basis. For the fiscal years
ended January 31, 1997 and 1998, the Company experienced net losses of $757,703
and $2,921,413, respectively. For the three month period ended April 30, 1998,
the Company experienced a net loss of $142,836. At April 30, 1998, the Company
had a working capital deficit of $2,806,778 and a shareholders' deficit of
$958,534. There can be no assurance that the Company will achieve or sustain
profitability in the future. See "Selected Financial Data," "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
"Report of Independent Accountants."
ABILITY TO CONTINUE AS A GOING CONCERN. The Company's independent
accountants, in their report regarding the Company's fiscal 1998 and 1997
financial statements, have noted that the Company's recurring losses, negative
cash flows from operations, a license compliance confirmation by Mrs. Fields
effective through September 15, 1998, a note payable to the Representative due
on the earlier of the closing of the Offering or, if the Offering has not closed
by October 31, 1998, 30 days after demand for payment by the holder and
substantial negative working capital raise substantial doubt about the Company's
ability to continue as a going concern. The ability of the Company to continue
as a going concern is contingent upon its ability to complete the Offering or
otherwise secure additional financing. See "Report of Independent Accountants"
and Note 2 of Notes to Financial Statements.
DEPENDENCE UPON MRS. FIELDS LICENSE; NEED TO SATISFY MINIMUM VOLUME
REQUIREMENTS. The Company has entered into an exclusive licensing agreement with
Mrs. Fields (the "Mrs. Fields License") pursuant to which it has been granted
the right to manufacture, distribute and sell frozen cookie dough products,
frozen baked goods, and other related frozen dessert products using the Mrs.
Fields brand and related trademarks. The Mrs. Fields License has a 30 year
duration, including option periods. The initial term of the Mrs. Fields License
expires December 31, 1999 (the "Initial Term"), with the Company having an
option to extend, at its sole discretion, the Mrs. Fields License for five five
year periods (the "Option Periods") through December 31, 2024. Mrs. Fields may
terminate the Mrs. Fields License at the end of any Option Period subsequent to
the Initial Term by providing written notice to the Company of its intent to do
so not earlier than 12 months nor later than 90 days from the end of such Option
Period. Thus, assuming the Company remains in compliance, the Mrs. Fields
License may not be terminated any earlier than December 2004. In the event Mrs.
Fields exercises its right to terminate the Mrs. Fields License, it must pay to
the Company an amount equal to three times the average gross margin for sales of
Mrs. Fields products reported by the Company for the last three years of the
Option Period in which such notice of termination is given. The amount
determined to be due shall be payable over three years in twelve equal quarterly
payments.
In the event the Company does not meet the Minimum Volume Commitment
required by the Mrs. Fields License, it must pay the royalty which would
otherwise have been payable on the amount of such shortfall in order to keep the
Mrs. Fields License in effect. While the Minimum Volume Commitment amounts
exceed the amounts shipped by the Company during any preceding calendar year,
the Company expects to meet these Minimum Volume Commitment in calendar year
1998 and thereafter and to comply with the other provisions of the Mrs. Fields
License. However, no assurance can be given that it will, in fact, meet such
requirements during calendar year 1998 and continue to do so thereafter. The
cancellation of the
8
Mrs. Fields License would have a material adverse effect on the Company. See
"Licensing Agreements -- Mrs. Fields."
NEED FOR ADDITIONAL FINANCING; UNCERTAINTY OF ACCESS TO CAPITAL. The
Company has never reported significant positive cash flow from operations and
has been dependent on obtaining debt and equity financing for the continuation
and expansion of its operations. The Company has also relied upon the financing
of the production of the Mrs. Fields cookie dough products by the manufacturer,
Pennant Foods ("Pennant Foods"), formerly known as Van den Bergh Foods. These
financing arrangements will not be available for other Mrs. Fields products or
products bearing other brand names, and there can be no assurance that the
existing arrangements will continue indefinitely for Mrs. Fields cookie dough.
Moreover, it is unlikely that other manufacturing financing will be obtained in
the event such arrangement is no longer available for Mrs. Fields cookie dough.
The Company believes the proceeds from the Offering, together with its
anticipated future cash flow from operations, will be sufficient to meet the
Company's capital requirements for at least the next 12 months. There can be no
assurance, however, that the Company will not require additional capital. The
sale of additional equity or convertible debt securities, if required, may
result in additional dilution to the holders of the Common Stock. There can be
no assurance that additional financing will be available on terms and conditions
acceptable to the Company, if at all. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and
"Business -- Manufacturing."
OBLIGATIONS ARISING OUT OF DISCARDED INVENTORY. In 1994, prior to the time
current management assumed control of the operations of the Company, former
management over-ordered cookie dough from Pennant, the Company's primary
supplier of frozen cookie dough. This excess cookie dough was either discarded
by Pennant due to obsolescence or reworked and sold, resulting in a claimed
original loss of approximately $2,500,000 (the "Pennant Obligation"). Although
the business activities of Van den Bergh have been spun off to Pennant by Van
den Bergh's parent company, Unilever, PLC, and the Pennant Obligation remains
due and owing to Unilever, the Company and Pennant have agreed to continue the
arrangement which has been followed since March 1995, whereby Pennant is
deducting from the Pennant Obligation $2.00 per case delivered on behalf of the
Company and such payments are being used to reduce the amount owing under the
Pennant Obligation now held by Unilever. Pennant has informally indicated that
Unilever would accept a cash payment equal to 66.67% of the remaining $973,307
due as of April 30, 1998. The Company is continuing its discussions in this
regard with management of Pennant, who have represented to the Company that they
have the authority to deal with the Pennant Obligation matters. However, none of
these arrangements have yet been reduced to a formal written agreement. No
assurance can be given that Pennant or Unilever will agree to a discounted
payoff or continue the arrangement for periodic reductions in the amount claimed
to be owing through deductions for cases delivered on behalf of the Company. The
Company may use a portion of the net proceeds of this offering to repay all or a
portion of the Pennant Obligation. See "Use of Proceeds" and Note 6 of Notes to
Financial Statements.
COMPETITION. The Company's Mrs. Fields frozen cookie dough products compete
directly with one national brand, Otis Spunkmeyer, which manufactures and
distributes frozen cookie dough to club stores, supermarkets and convenience
stores nationwide. Otis Spunkmeyer's frozen cookie dough has been in
distribution longer than Mrs. Fields frozen cookie dough products. The Company
also competes directly with regional frozen cookie dough products and indirectly
with refrigerated dough and ready to eat cookies. These broader cookie
categories have a number of larger competitors that have greater financial
resources, more established products, lower production cost, and more extensive
marketing campaigns than the Company. Therefore, there can be no assurance that
the Company will be able to effectively compete or generate sufficient revenues
to warrant continued distribution of the Mrs. Fields frozen cookie dough
products.
Mrs. Fields ice cream novelties compete in a large food product category
that has a number of competitors with greater financial resources, more
established products, lower production costs, and more extensive marketing
campaigns than the Company. There can be no assurance that the Company will be
able to successfully compete and develop distribution and sales of the Mrs.
Fields ice cream novelties that would warrant continuing the product line.
9
With respect to the marketing and distribution of the Gumby products, the
Company competes with national manufacturers such as Jel Sert, Inc. ("Jel Sert")
and Kraft Foods in the freeze pop category. No assurance can be given that the
Company will be able to differentiate its Gumby products substantially from such
competitors or obtain sufficient distribution and customer acceptance to
establish a successful Gumby product line.
The food industry, in general, is highly competitive. The Company competes
with numerous food item producers and distributors, many of which are larger,
have greater resources, enjoy greater economies of scale, and offer a wider
selection of food items with a higher degree of consumer acceptance than the
Company. The Company will compete with other food producers and distributors not
only for consumer acceptance, but also for shelf space in retail outlets and for
marketing attention. There can be no assurance that the Company will compete
successfully against the existing competition or that additional competitors
will not enter the market. See "Business -- Competition."
RISKS ASSOCIATED WITH EXPANSION STRATEGY. The expansion strategy of the
Company depends upon identifying and acquiring additional nationally recognized
brands that are underutilized in the food category and may be available for
acquisition or licensing by the Company. Such opportunities may be unavailable
or available only on terms not acceptable to the Company. In addition,
manufacturing sources for products designated under acquired licenses may not be
available or available on acceptable terms to the Company.
The success and rate of the Company's expansion into new products and
geographical markets will be dependent on a number of factors, including general
economic and business conditions affecting the food industry, competition, the
availability of sufficient capital, the identification and successful
negotiation of acceptable licensing arrangements for brand names the Company
believes have commercial value, the identification and contracting for suitable
manufacturing facilities on acceptable terms, and the ability to attract and
retain qualified personnel and operate efficiently in activities in which the
Company may have had no prior experience. As a result, there can be no assurance
that the Company will be able to achieve its planned expansion strategy on a
timely or profitable basis. See "Business."
RELIANCE ON KEY PERSONNEL. The success of the Company depends upon its
ability to attract and retain key management personnel to conduct its current
and future operations. The loss of the services of such key personnel could have
an adverse effect on the Company. The Company depends upon the abilities of
certain employees, particularly Thomas E. Kees, Chairman, President and Chief
Executive Officer, and Michael E. Banks, Senior Vice President of Marketing and
Sales. Messrs. Kees and Banks serve the Company under employment agreements that
expire in September 1999. Both contracts provide for an automatic one year
extension unless otherwise elected by either party. The Company does not
currently maintain key-man insurance with respect to its key personnel but
intends to obtain such insurance in the future. Absent such insurance there
would not be any source of compensation to the Company should the services of
any such key management personnel be lost.
LIMITED MANAGEMENT RESOURCES; MANAGEMENT OF POTENTIAL GROWTH. The Company's
recent expansion into new product areas and financial difficulties have placed a
significant strain on the Company's managerial and operational resources.
Although all of the Company's management have worked together for the past two
years, it is anticipated that, if the Company is able to effect its business
strategy and expand its operations, the Company may need to retain and integrate
new personnel at all levels of its operations. There can be no assurance that
the Company will be able to effectively implement or manage its expansion
strategy or obtain and integrate such additional personnel. See "Management."
PRODUCT LIABILITY. The marketing and sale of food products entails an
inherent risk of product liability. Although the Company is not directly engaged
in the testing or manufacturing of the food products it sells, there can be no
assurance that product liability claims will not be asserted against the
Company. While the Company endeavors to take appropriate precautions, there can
be no assurance that it will avoid significant product liability exposure. The
Company maintains product liability insurance and has the benefit of insurance
maintained by Pennant, in an aggregate amount of $4,000,000 which is adequate to
satisfy existing Mrs. Fields licensing requirements. Additionally the Company is
insured on the policies maintained by its other suppliers in amounts ranging
between $2,000,000 and $5,000,000. While management believes these levels of
insurance
10
are adequate for its current level of operations, there can be no assurance that
such insurance coverage will be adequate, or that a product liability claim,
even one without merit, would not materially and adversely affect the business
or financial condition of the Company.
DEPENDENCE ON LIMITED NUMBER OF SOURCES FOR MANUFACTURING. The Company
currently meets its manufacturing needs by contracting with third party sources
because it has made the strategic decision to have no manufacturing capabilities
of its own. As of April 30, 1998, approximately 76% of the products sold by the
Company, as measured by revenues, were manufactured by Pennant. The relationship
with Pennant is advantageous for the Company for several reasons. Because of
Pennant's relationship with Mrs. Fields, the Company believes that it is charged
a lower price for product ingredients than it could obtain elsewhere. Moreover,
the Company generally is not required to pay for product manufacturing prior to
sale with respect to the cookie dough products and packaging. If the
relationship with Pennant should end, the Company could lose these benefits.
With respect to other products already introduced or anticipated to be
introduced in the near future, the Company relies or is expected to rely upon a
single manufacturing source for each such product. In the event that: (i)
Pennant or any of the other manufacturing sources used by the Company terminates
its relationship with the Company without notice, or (ii) the Company is
compelled to do the same, or (iii) other circumstances require Pennant or such
other sources to cease operations temporarily, the Company's operations would be
adversely affected, particularly if such events affected Pennant.
PRODUCT CONCENTRATION RISK. In fiscal 1998, approximately 89% of the
Company's revenues were derived from sales of Mrs. Fields cookie dough products
and as of April 30, 1998, such sales accounted for approximately 76% of the
Company's revenues for the fiscal quarter then ended. The Company anticipates
that these products will continue to account for most of its sales for the
foreseeable future. A decline in the demand for this product line, coupled with
a failure to acquire or develop other product lines, whether as a result of
competition or other factors, would have a material adverse effect on the
Company's results of operations and financial condition. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business -- Industry Background" and "Business -- Competition."
SEASONAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS. The Company's Mrs.
Fields frozen cookie dough sales, which have accounted for most of the Company's
revenues, have been seasonal with reduced sales in the second and third quarters
of each fiscal year. Additionally, while the Company has not yet had material
sales of the Mrs. Fields ice cream-based products or Gumby Freeze Pops, it can
be anticipated that the sales of such products will also be seasonal with
increased sales likely in the warm weather of the second and third fiscal
quarters and reduced sales in the colder months of the first and fourth fiscal
quarters. To the extent that it is not possible to increase sales of Gumby or
ice cream-based products to offset the seasonal patterns of the Mrs. Fields
cookie dough-based products, the Company may experience greater quarterly losses
or lower profits in the second and third fiscal quarters and its results from
operations for any particular fiscal quarter may not necessarily be indicative
of net income or loss that may be expected for any other fiscal quarter or for
the entire fiscal year. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
BROAD DISCRETION OF MANAGEMENT TO ALLOCATE OFFERING PROCEEDS. The Company's
management will have broad discretion to allocate the proceeds of the Offering
and the amounts actually expended for each use may depend on a number of factors
including its ability to settle the Pennant Obligation for less than the full
amount due, the continuation of favorable financing arrangements for the
manufacture of certain cookie dough products by Pennant, future revenue growth,
the progress of the Company's marketing efforts, and the amount of cash
generated or used by the Company's operations. See "Use of Proceeds."
USE OF PROCEEDS TO REPAY DEBT. The Company expects to use approximately
$1,470,000 of the net proceeds of the Offering to repay the remaining principal
amount of $650,000 on the DayStar Credit Facility, to repay a $103,500 loan from
Larry Wells Company Inc., an affiliate of a director of the Company, to repay a
loan made by the Representative in the principal amount of $200,000, a debt
obligation in the principal amount of $40,000, plus additional fees of $10,000,
for a total repayment obligation of $50,000 from a third party lender and any
additional amounts which might be advanced from such lender up to an estimated
gross principal amount of $385,000 and repayment of accrued interest for these
credit facilities in the approximate
11
amount of $120,000, thereby reducing the amount of net proceeds available to the
Company to expand its business. See "Use of Proceeds."
CONTROL BY EXISTING SHAREHOLDERS. There are no voting agreements among
shareholders, however certain existing shareholders, holding approximately 44%
of the issued and outstanding Common Stock of the Company prior to the Offering,
and warrants with respect to an additional approximately 24%, if acting
together, could be in a position to significantly influence the affairs of the
Company and certain matters requiring a shareholder vote including the election
of directors, the amendment of the Company's charter documents, the merger or
dissolution of the Company, and the sale of all or substantially all of the
Company's assets. The Company has no information which would indicate that any
of such shareholders are acting, or intend to act, together for such purposes.
See "Business -- Legal Proceedings" "Principal Shareholders," and "Description
of Securities -- Common Stock."
ABSENCE OF PUBLIC MARKET/TRADING HISTORY; STOCK PRICE VOLATILITY. Prior to
the Offering, there has been no public market for the Company's Units, Common
Stock or Warrants. Consequently, the initial public offering price of the Units,
and the exercise price and other terms of the Warrants were determined by
negotiations between the Company and the Representative. There can be no
assurance that an active public market for the Company's Units, Common Stock or
Warrants will develop or be sustained after the Offering. The trading price of
the Company's securities could be subject to wide fluctuations in response to
quarterly variations in operating results, announcements of new products by the
Company or its competitors, changes in earnings estimates by analysts, or other
events or factors. In addition, the stock market has experienced wide price and
volume fluctuations which have been at times unrelated to the operating
performance of the companies whose securities are traded. These broad market
fluctuations may adversely affect the market price of the Units, Common Stock or
Warrants.
DILUTION. Purchasers of shares of Common Stock included in the Units
offered hereby will incur immediate and substantial net tangible value dilution
of $3.97 per share or approximately 79% ($3.70) per share, assuming a $5.00
offering price and no exercise of issuable options, or outstanding warrants,
including those included in the Units. To the extent that issuable options or
outstanding warrants to purchase the Company's Common Stock are exercised at
prices below the Unit offering price, there will be further dilution to
purchasers of the Units offered hereby. See "Dilution."
SPECULATIVE NATURE OF WARRANTS; POSSIBLE REDEMPTION OF WARRANTS. The
Warrants do not confer any rights of Common Stock ownership on their holders,
such as voting rights or the right to receive dividends, but merely represent
the right to acquire shares of Common Stock, as the case may be, at a specified
price for a limited period of time. Following the completion of the Offering,
the market value for the Warrants will be uncertain and there can be no
assurance that the market value of the Warrants will meet or exceed their
initial public offering price. There can be no assurance that the market price
of the Common Stock will ever equal or exceed the exercise price of the Warrants
and consequently, whether it will ever be profitable for holders of the Warrants
to exercise their Warrants.
The Warrants will be subject to redemption by the Company at $0.25 per
Warrant on 30 days' prior notice to the warrant holders, provided that the
closing bid price of the Common Stock for 20 consecutive trading days
immediately preceding the notice of redemption equals or exceeds 200% of the
Final Warrant Exercise Price if there has been no Price Reduction or 150% of the
Final Warrant Exercise Price if there has been a Price Reduction. In the event
that warrant holders decide not to exercise their Warrants upon notice of
redemption, the unexercised Warrants will be redeemed prior to exercise, and the
holders thereof will lose the benefit of the appreciated market price of the
Warrants, if any, and/or the difference between the market price of the
underlying Common Stock as of such date and the exercise price of such Warrants,
as well as any possible future price appreciation in the Common Stock. See
"Description of Securities -- Warrants."
GOVERNMENT REGULATION. The production and marketing of the Company's
products are subject to rules and regulations of various federal, state and
local health and environmental agencies. While the Company believes that its
products and operations are in substantial compliance with the rules and
regulations of all federal, state and local health and environmental agencies,
any substantial violation of the rules and
12
regulations pertaining to the Company's operations or products could result in
civil fines and penalties and even the temporary suspension of the Company's
operations or product shipment.
CURRENT PROSPECTUS AND STATE BLUE SKY REGISTRATION REQUIRED TO EXERCISE
WARRANTS. The Warrants are not exercisable unless, at the time of exercise, the
Company has a current prospectus available covering the Common Stock issuable
upon the exercise of the Warrants and such shares have been registered,
qualified or deemed to be exempt under the securities or "blue sky" laws of the
state of residence of the exercising holder of the Warrants. Although the
Company has undertaken to use its reasonable efforts to have all of the Common
Stock issuable upon the exercise of the Warrants registered or qualified on or
before the exercise date and to maintain a current prospectus relating thereto
until the expiration of the Warrants, there is no assurance that it will be able
to do so. The value of the Warrants may be greatly reduced if a current
prospectus covering the Common Stock issuable upon the exercise of the Warrants
is not kept effective or if such Common Stock is not qualified or exempt from
qualification in the states in which the holders of the Warrants reside. The
Common Stock and Warrants contained in the Units will become separately
transferable 30 days following completion of this Offering or such shorter
period as determined by the Representative. Although the Units will not be
knowingly sold to purchasers in jurisdictions in which the Units are not
registered or otherwise qualified for sale, investors residing in such
jurisdictions may purchase the Warrants in the secondary market or investors may
move to a jurisdiction in which the Common Stock underlying the Warrants are not
registered or qualified during the period that the Warrants are exercisable. In
such event, the Company will be unable to issue shares to those persons desiring
to exercise their Warrants unless and until the Common Stock is qualified for
sale in jurisdictions in which the purchasers reside or an exemption from such
qualification exists in such jurisdictions, and holders of the Warrants would
have no choice but to attempt to sell the Warrants in a jurisdiction where such
sale is permissible or allow them to expire unexercised. See "Description of
Securities -- Warrants."
SUBSTANTIAL AMOUNTS OF SHARES ELIGIBLE FOR FUTURE SALE. Sales of
substantial amounts of Common Stock in the public market could adversely affect
the market price of the Units, Common Stock, and Warrants after the Offering.
Such sales might also make it more difficult for the Company to sell equity
securities or equity related securities in the future at a time and price that
the Company deems appropriate. In addition to the Units offered hereby,
following this Offering, there will be 1,041,730 shares of Common Stock
outstanding, all of which are "restricted stock," as that term is defined in
Rule 144 promulgated under the Securities Act. It is anticipated that holders of
approximately 446,000 shares will be subject to lock-up agreements with the
Representative under which such holders will have agreed to not sell or
otherwise transfer their shares for one year from the date of this Prospectus
without the prior consent of the Representative. Of the restricted stock, as of
the date of this Prospectus, approximately 178,250 shares will have been held
less than one year (of which it is anticipated 60,375 shares will be subject to
the lock-up agreement), approximately 30,000 shares will have been held at least
one year but less than two years (of which no shares will be subject to the
lock-up agreement) and approximately 834,000 shares will have been held at least
two years (of which it is anticipated 438,000 shares will be subject to the
lock-up agreement). Holders of restricted stock not otherwise subject to a
lockup agreement will be able to sell their shares in the public market under
Rule 144, if held for at least one year commencing 90 days after the effective
date of this Prospectus, Shareholders not subject to a lockup agreement who have
held their restricted stock for more than two years will be eligible to sell the
shares under Rule 144(k) following this Offering. Holders of warrants with
respect to 284,000 shares of the Common Stock have been granted "piggy-back"
registration rights. In addition, holders of warrants with respect to 145,312
shares of the Common Stock have been granted "demand registration rights."
Holders of 59,375 shares of the Common Stock have been granted "piggy-back"
registration rights and hold such rights with respect to up to an additional
120,625 shares of Common Stock to be issued after the closing of this Offering.
Sales of substantial amounts of Common Stock in the public market could
adversely affect the market price of the Common Stock and Warrants, and
following conversion, the Common Stock. See "Certain Transactions" and "Shares
Eligible for Future Sale."
ARBITRARY DETERMINATION OF OFFERING PRICE. The offering price of the Units
and the exercise price and other terms of the Warrants will be determined
through negotiations between the Company and the Representative of the
Underwriters. Among the factors to be considered in determining the price are
13
prevailing market conditions, the general economic environment, an estimate of
the prospects of the Company, the background and contributions of management and
current conditions in the frozen food industry. There is, however, no
relationship between the offering price of the Units and the Company's assets,
book value, historical earnings or any other objective criteria of value. See
"Underwriting."
IMPACT OF POSSIBLE DELISTING OF SECURITIES FROM NASDAQ SYSTEM; RISKS OF LOW
PRICED STOCKS. While the Units, Common Stock and the Warrants are expected
initially to be included on Nasdaq SmallCap Market, the Company will be required
to continue to meet Nasdaq's maintenance requirements in the future which have
recently been revised to include more stringent standards for continued listing.
If it is unable to satisfy such requirements, its securities may be delisted. In
such event trading, if any, in the Units, Common Stock, and Warrants would be
affected and consequently, the liquidity of the Company's securities could be
impaired, not only in the number of securities which could be bought and sold,
but also through delays in the timing of the transactions, reduction in
securities analysts' and news media's coverage of the Company, and lower prices
for the Company's securities than might otherwise be the case. As a consequence,
an investor could find it more difficult to sell, or to obtain accurate
quotations as to the price of the Common Stock and Warrants.
PENNY STOCK LIMITATIONS. The Securities Enforcement and Penny Stock Reform
Act of 1990 requires additional disclosure in connection with trades in any
stock defined as a "penny stock." The Securities and Exchange Commission (the
"Commission") has adopted regulations that generally define a penny stock to be
any equity security that has a market price of less than $5.00 per share,
subject to certain exceptions. Such exceptions include any equity security
listed on Nasdaq and any equity security issued by an issuer that has: (i) net
tangible assets of at least $2,000,000 if such issuer has been in continuous
operation for more than three years, (ii) net tangible assets of at least
$5,000,000 if such issuer has been in continuous operation for less than three
years, or (iii) average annual revenue of at least $6,000,000 if such issuer has
been in continuous operation for less than three years. Unless an exception is
available, the regulations require the delivery, prior to any transaction
involving a penny stock, of a disclosure schedule explaining the penny stock
market and the risks associated therewith.
In addition, if the Company's securities are not quoted on Nasdaq or the
Company does not have $2,000,000 in net tangible assets, trading in the
Company's securities would be covered by Rules 15g1 through 15g6 promulgated
under the Exchange Act for non-Nasdaq and non-exchange listed securities. Under
such rules, broker/dealers who recommend such securities to persons other than
established customers and accredited investors must make a special written
suitability determination and obtain the purchaser's written consent prior to
sale. Securities are exempt from these rules if the market price of the security
is at least $5.00 per share.
Although the Company's Common Stock will be outside the scope of the
definition for a penny stock if it is listed as anticipated on Nasdaq, in the
event the Common Stock were subsequently characterized as a penny stock the
market liquidity for the Company's securities could be severely affected. In
such event, the regulations on penny stocks could limit the ability of
broker/dealers to sell the Company's securities and thus the ability of
purchasers of the Company's securities to sell their securities in the secondary
market.
LIMITATION ON USE OF NET OPERATING LOSS CARRYOVER. Section 382 of the
Internal Revenue Code of 1986, as amended (the "Code") imposes certain
limitations on the ability of a "loss corporation" to use its net operation
losses ("NOLs") to offset its future taxable income in taxable years following
an "ownership change" (including an ownership change resulting from the issuance
of stock). In general, an ownership change occurs if the percentage (as measured
by value) of the loss corporation's stock (other than certain Common Stock)
which is owned, directly or indirectly, by one or more 5% shareholders (or
certain groups of shareholders collectively treated as a 5% shareholder) is
increased by more than 50 percentage points over the lowest percentage of stock
owned by such 5% shareholders at any time during the applicable "testing period"
of three years or less. In the event of an ownership change, the amount of
pre-change NOLs that the loss corporation can use to offset its taxable income
in a post-change taxable year will generally be limited to an amount equal to
the product of the "long-term tax-exempt rate" in effect on the date of the
ownership change and the value of the loss corporation's stock immediately prior
to the ownership change (without taking into
14
account for such valuation purposes certain capital contributions received by
the loss corporation during the two-year period preceding the ownership change).
The long-term tax-exempt rate is an interest rate based upon certain U.S.
Treasury debt obligations adjusted for differences between rates on taxable and
tax-exempt obligations and announced on a monthly basis by the Internal Revenue
Service. In addition, if the loss corporation does not continue its historic
business or continue to use a substantial portion of its historic assets in its
business for a two-year period following an ownership change, the effect would
be that no portion of the pre-change NOLs would be available to offset future
taxable income (except in certain very limited circumstances).
DIVIDENDS. The Company has never paid any dividends on its Common Stock and
does not anticipate that cash dividends will be paid in the foreseeable future,
as it intends to follow a policy of retaining earnings, if any, to finance
future growth. Applicable law may also restrict the ability of the Company to
pay cash dividends. See "Dividend Policy."
CORPORATE HISTORY
The Company was incorporated in February 1994 under the name of Greg
Plunkett, Inc. The Company commenced business with an initial strategy of
focusing on products generally based upon local or regional brands and
distribution exclusively through direct store delivery. In August 1994, the
Company entered into a long-term licensing agreement with Mrs. Fields, which
provides for the exclusive development by the Company of Mrs. Fields frozen
cookie dough, frozen baked goods, and other frozen dessert products to be
produced and marketed throughout North America, Hawaii, and Puerto Rico
(excluding Canada with respect to ice cream novelties) by the Company in retail
store locations. Largely as a result of the excess production of inventory and
these prior strategies, the Company incurred losses of approximately $3,900,000
through January 1996. The Company, under new management, then redirected its
efforts toward licensing primarily well-known national brands to be sold by
direct store delivery, brokers, and distributors. Since then, the Company's
sales have increased every year and the Company currently has products sold
nationally.
DIVIDEND POLICY
The Company has never declared or paid dividends on its Common Stock. The
Company currently intends to retain all available funds for use in its business
and therefore does not anticipate paying any cash or other dividends in the
foreseeable future. Future cash dividends, if any, will be determined by the
Board of Directors and will be based upon the Company's earnings, capital
requirements, financial condition and other factors deemed relevant by the Board
of Directors. Additionally, under current circumstances, the Company would not
be able to pay cash dividends pursuant to applicable California law.
15
USE OF PROCEEDS
The estimated net proceeds to be received by the Company from the sale of
the Units in the Offering, after deducting the underwriting commissions and the
Representative's nonaccountable expense allowance and other offering expenses,
will be approximately $6,070,000 ($7,048,750 if the Representative's Over-
allotment Option is exercised in full), based on an assumed public offering
price of $5.00 for each Unit. The Company anticipates that the net proceeds will
be used as follows:
[Enlarge/Download Table]
APPROXIMATE AMOUNT PERCENTAGE OF NET
ANTICIPATED APPLICATION OF NET PROCEEDS PROCEEDS
----------------------- ------------------ -----------------
Market Expansion(1)................................. $1,700,000 28.0%
Product Development(1).............................. $1,500,000 24.7%
Repayment of Bridge Notes and Other Debt(2)......... $1,470,000 24.2%
Acquisition of Licenses(1).......................... $ 800,000 13.2%
General Corporate Purposes, including working
capital, selling, marketing and administrative
expenses(1)....................................... $ 600,000 9.9%
----------
TOTAL..................................... $6,070,000
==========
---------------
(1) Marketing expansion includes costs associated with expanding product
distribution such as slotting fees, advertising, and other promotions.
Product development includes research and development of new items under
current licenses and new items under future licenses. Acquisition of
licenses will support costs of purchasing rights to produce products under
additional brand names. Other general corporate purposes will be used to
assist with capital requirements to finance inventory and other costs.
Management intends to use as large a portion of the net proceeds from the
Offering as possible to implement its expansion strategy, including product
development, and acquisition of licenses in other food categories.
(2) The repayment of bridge notes and other debt include the principal amounts
of $650,000 to DayStar maturing at the earlier of September 1, 1998 or five
days following the closing of the Offering with interest for the period
subsequent to January 31, 1998 until maturity capped at $39,100. The initial
advance under such DayStar facility was used for working capital purposes,
with an initial interest rate of 12% per annum on the principal amount
advanced of $440,000, increased to 15% effective February 1, 1998. The
additional $440,000 was utilized to repay a portion of $595,000 in notes
which matured on June 30, 1997, and was intended to be a very short-term
loan to be repaid from the private placement in mid-1997 and therefore bore
interest at the rate of 1% per week until repaid from the proceeds of the
private placement. As the proceeds were insufficient for this purpose,
interest was thereafter capped at $39,100 for the period subsequent to
January 31, 1998. Also to be repaid are (i) $200,000 to the Representative
bearing 10% simple interest due and payable on the earlier of the closing of
this Offering or, if the Offering has not closed by October 31, 1998, 30
days following the Representative's demand for payment, (ii) $40,000 to a
third party lender, and any additional amounts which might be advanced by
such lender up to an estimated gross amount of $385,000, bearing interest at
12% per annum plus origination and due diligence costs, due at the earlier
of (a) August 31, 1998 or (b) in four equal quarterly payments if the loan
is not paid from the proceeds of the Offering in which instance the interest
rate will increase to 15% per annum; (iii) $103,500 advanced on July 6,
1998, by Larry Wells Company, Inc., an affiliate of a director of the
Company, plus $11,500 in fees if paid prior to October 31, 1998, plus
$30,000 if paid after October 31, 1998 and $1,500 each additional month
thereafter until paid; and (iv) approximately $120,000 of accrued interest
on these loans.
The foregoing represents the Company's best estimate of the allocation of
the net proceeds of the Offering based upon the current status of its business
operations, its current plans and current economic conditions. Future events,
including problems, delays, expenses and complications as well as changes in
competitive conditions affecting the Company's business and the success or lack
thereof of the Company's marketing efforts, may make shifts in the allocation of
funds necessary or desirable. A change in the use of such proceeds or timing of
such use will be at the Company's discretion. It may use a portion of the
proceeds to retire all or a portion of the Pennant Obligation, but is not
obligated to do so. Any net proceeds not immediately required for the purposes
described will be invested by the Company in investment grade, short term,
interest bearing investments.
16
CAPITALIZATION
The following table sets forth the capitalization of the Company at April
30, 1998, and as adjusted to reflect the estimated net proceeds from the sale of
1,500,000 Units offered hereby at an initial assumed public offering price of
$5.00 per Unit and the application of the estimated net proceeds of $6,070,000.
See "Use of Proceeds."
[Enlarge/Download Table]
APRIL 30, 1998
-------------------------
ACTUAL AS ADJUSTED(1)
------- --------------
(IN THOUSANDS)
Notes payable, current:
Related parties and others................................ $ 850 $ 0
------- -------
Total notes payable......................................... 850 0
Shareholders' equity (deficit):
Preferred Stock, no par value; 10,000,000 shares
authorized; none issued and outstanding, actual and as
adjusted(2)............................................ -- 0
Common Stock, no par value: 30,000,000 shares authorized;
1,041,730 shares issued and outstanding; 2,541,730
shares as adjusted(2)(3)............................... 6,253 12,323
Contributed capital....................................... 559 559
Notes receivable from shareholders........................ (69) (69)
Accumulated deficit....................................... (7,701) (7,701)
------- -------
Total shareholders' equity (deficit).............. (958) 5,112
------- -------
Total capitalization.............................. $ (108) $ 5,112
======= =======
---------------
(1) Adjusted to give effect to (i) the sale by the Company of 1,500,000 Units at
an assumed offering price $5.00 per Unit, net of estimated underwriting
discounts and estimated expenses of the Offering and application of the
proceeds therefrom. See "Use of Proceeds" and "Certain Transactions."
(2) Reflects amendments to the Company's Articles of Incorporation effective
prior to the commencement of the Offering (i) authorizing the issuance of up
to 10,000,000 shares of Preferred Stock and (ii) effecting a 1-for-3.2
reverse split of the Company's Common Stock.
(3) Excludes (i) 387,063 shares of Common Stock issuable upon exercise of
warrants outstanding as of April 30, 1998, (ii) the 120,625 PAG Shares
issuable following the closing of the Offering and (iii) 254,173 shares of
Common Stock reserved for issuance under the Company's stock option plan.
See "Management -- Stock Option Plan," "Certain Transactions" and "Shares
Eligible for Future Sale."
17
DILUTION
As of April 30, 1998, the Company had a negative net tangible book value of
$(3,445,848) or $(3.31) per share. "Net tangible book value" per share
represents the amount of total tangible assets less total liabilities divided by
the number of shares of Common Stock issued and outstanding. After giving effect
to the sale of the 1,500,000 Units offered hereby based on an assumed price to
the public of $5.00 per Unit, attributing no value to the Warrant component of
the Unit, and assuming no other changes in the net tangible book value after
April 30, 1998, the Company's net tangible book value (after deduction of
estimated underwriting discounts and commissions and estimated offering
expenses) at April 30, 1998 would have been $2,624,152 or $1.03 per share. These
figures represent an immediate increase in net tangible book value of $4.34 per
share to existing shareholders and an immediate dilution to new investors of
$3.97 per share. Dilution is determined by subtracting net tangible book value
per share after the Offering from the amount of cash paid by a new investor for
a share of Common Stock. Common Stock equal to 20,343 shares has been deemed to
be outstanding for the purposes of this determination which relates to
promissory notes issued as payment for the exercise of certain warrants ("Note
Shares"). However, pursuant to California law, such Note Shares may not be
issued or deemed outstanding for any other purpose until such promissory notes
are paid. The following table illustrates the per share dilution:
[Download Table]
Initial public offering price per Unit...................... $5.00
Net tangible book value per share at April 30, 1998....... $(3.31)
Increase per share attributable to new investors.......... 4.34
------
Net tangible book value per share after the Offering........ 1.03
-----
Dilution per share to new investors......................... $3.97
=====
The following table summarizes, on an as adjusted basis as of April 30,
1998, the difference between the number of Units purchased from the Company, the
total consideration paid and the average price per share paid by existing
shareholders and to be paid by new investors purchasing Units offered hereby.
The calculation in this table assumes an initial public offering price of $5.00
per Unit (before deducting the underwriting discounts and commissions and other
estimated expenses of the Offering, including the Representative's non-
accountable expense allowance, payable by the Company).
[Enlarge/Download Table]
SHARES PURCHASED(1)(2) TOTAL CONSIDERATION
---------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- -------- ----------- ------- -------------
Existing shareholders(3)............ 1,041,730 41% $ 6,812,557 48% $6.54
New investors....................... 1,500,000 59% $ 7,500,000 52% $5.00
--------- ---- ----------- ----
Total..................... 2,541,730 100% $14,312,557 100%
========= ==== =========== ====
---------------
(1) Includes the 20,343 Note Shares.
(2) Excludes 387,063 shares of Common Stock issuable upon exercise of warrants
outstanding as of April 30, 1998 and the 120,625 PAG shares issuable
following the close of the Offering.
(3) Represents cash and services paid for shares of Common Stock as per the
April 30, 1998 Common Stock account in the amount of $6,253,057 and gives
effect to contributed capital as shown on the April 30, 1998 balance sheet
in the amount of $559,500. The existing shares of Common Stock outstanding
includes shares of Common Stock issued for cash and services provided to the
Company.
18
SELECTED FINANCIAL DATA
The selected financial data shown in this section with respect to the
Company's statement of operations data for the years ended January 31, 1997 and
1998, respectively and balance sheet data as of January 31, 1998 are derived
from the audited financial statements of the Company included elsewhere in this
Prospectus. These statements have been audited by PricewaterhouseCoopers LLP,
independent accountants, as indicated in their report, which includes an
explanatory paragraph that expresses substantial doubt about the Company's
ability to continue as a going concern as described in the notes to such
financial statements. The selected financial data shown in this section with
respect to the Company's statement of operations data for three months ended
April 30, 1997 and 1998, respectively, and balance sheet data as of April 30,
1998, were prepared by the Company and are unaudited. In the opinion of
management of the Company, such unaudited financial statements have been
prepared on a basis consistent with the audited financial information and
include all adjustments, consisting of normal recurring entries, necessary for a
fair presentation of the results of such periods. The results of operations for
the three month period ended April 30, 1998 are not necessarily indicative of
the results of operations for the year ending January 31, 1999. The data
displayed below should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Financial
Statements and Notes related thereto included elsewhere in this Prospectus.
[Enlarge/Download Table]
FOR THE YEARS ENDED FOR THE THREE MONTHS ENDED
JANUARY 31, APRIL 30,
-------------------- --------------------------
1997 1998 1997 1998
-------- -------- ---------- ------------
(IN THOUSANDS, EXCEPT SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Sales....................................... $ 4,825 $ 5,352 $ 1,249 $ 1,640
Cost of goods sold.......................... 3,088 3,309 743 1,026
-------- -------- -------- ----------
Gross profit................................ 1,737 2,043 506 614
Marketing, general & administrative
expenses................................. 1,847 2,577 478 690
Compensation related to forgiveness of
employee notes........................... -- 1,472 -- --
-------- -------- -------- ----------
Operating loss.............................. (110) (2,006) 28 (76)
Interest and other expense.................. (647) ( 914) (193) (66)
-------- -------- -------- ----------
Loss before income taxes.................... (757) (2,920) (165) (142)
Income taxes................................ 1 1 1 1
Net loss.................................... $ (758) $ (2,921) $ (166) $ (143)
======== ======== ======== ==========
Net loss per common share, basic and
diluted(1)............................... $ (1.16) $ (3.81) $ (0.24) $ (0.14)
======== ======== ======== ==========
Weighted average number of common shares
outstanding.............................. 651,162 768,613 701,022 1,041,730
======== ======== ======== ==========
[Enlarge/Download Table]
JANUARY 31,
1998 APRIL 30, 1998
----------- ------------------------
ACTUAL ACTUAL AS ADJUSTED(2)
----------- ------- --------------
(IN THOUSANDS)
BALANCE SHEET DATA:
Working capital (deficit)................................. $(2,462) $(2,807) 3,263
Total assets.............................................. 2,733 3,120 8,220
Total liabilities......................................... 3,555 4,078 3,108
Long-term liabilities..................................... 716 708 708
Accumulated deficit....................................... 7,559 7,702 7,702
Shareholders' equity (deficit)............................ (822) (959) 5,111
---------------
(1) See Note 1 of Notes to Financial Statements for an explanation of the basis
used to calculate net loss per share.
(2) Adjusted to give effect to (i) the sale by the Company of 1,500,000 Units at
an assumed offering price $5.00 per Unit, net of estimated underwriting
discounts and estimated expenses of the Offering and the application of the
net proceeds therefrom. See "Use of Proceeds," "Capitalization" and "Certain
Transactions."
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
INTRODUCTION
Management's discussion and analysis of financial condition and results of
operations is designed to provide a better understanding of significant changes
and trends related to the Company's financial condition, results of operations,
liquidity, and capital resources. The discussion should be read in conjunction
with, and is qualified in its entirety by, the financial statements of the
Company and notes thereto included elsewhere herein. The Company's fiscal year
ends on January 31st of each year. The ability of the Company to continue as a
going concern is contingent upon its ability to complete the Offering or to
obtain other sources of financing.
BACKGROUND
The Company licenses and markets premium branded consumer food products
sold in supermarkets, club stores, convenience stores, drug stores and mass
merchandisers throughout the United States. The Company currently holds three
licenses for food products using names and trademarks held by Mrs. Fields, Gumby
and Mattel. The Company has developed and is currently marketing products under
the Mrs. Fields and Gumby licenses and intends to develop and market products
utilizing the Extreme Dinosaurs trademark held by Mattel. The Company intends to
build a portfolio of well-known premium brand products by continuing to seek
licensing opportunities for nationally recognized brand names, increasing
product offerings under current and new licenses, and further developing
distribution of the Company's existing products.
The Company has a management team with experience in direct retail sales
and marketing of food products to the retail food industry. The Company sells
its products through a combination of outside brokers and distributors
throughout the United States. The Company does not manufacture any of its
products, but contracts use of outside suppliers. The Company believes the use
of third-party suppliers increases its flexibility, reduces production
lead-times and costs, and significantly reduces capital expenditures and
associated overhead related to manufacturing, all resulting in overall lower
product costs to the Company.
SEASONALITY
Sales of Mrs. Fields cookie dough have been seasonal, with higher sales
during the traditional baking months of September to March. Therefore, sales
tend to be higher during the first and fourth quarters of each fiscal year. As a
result, fixed overhead, primarily general and administrative expenses, has
represented a disproportionate percentage of revenues during the second and
third quarters of each fiscal year. The Company has added products, such as the
Mrs. Fields ice cream novelties, which it believes should reduce the impact of
the seasonality of the sales of any its cookie dough products. Sales of ice
cream products totaled $454,656 from their introduction in July 1997 to January
31, 1998. Sales of ice cream products totaled $393,618 for the quarter ended
April 30, 1998.
20
RESULTS OF OPERATIONS
The following table sets forth selected statement of operations data of the
Company expressed as a percentage of sales for the years and periods indicated:
[Enlarge/Download Table]
PERCENTAGE OF SALES
----------------------------------------------------
FOR THE FISCAL FOR THE FISCAL
YEARS ENDED QUARTERS ENDED
JANUARY 31, APRIL 30,
-------------------------- ----------------------
1997 1998 1997 1998
----------- ----------- --------- ---------
STATEMENT OF OPERATIONS DATA:
Sales........................................... 100.0% 100.0% 100.0% 100.0%
Cost of goods sold.............................. 64.0 61.8 59.5 62.6
----- ----- ----- -----
Gross profit.................................... 36.0 38.2 40.5 37.4
Operating expenses:
Marketing expenses........................... 20.6 24.9 20.9 23.5
Compensation related to forgiveness of
employee notes............................. -- 27.5 -- --
General and administrative expenses.......... 17.7 23.3 17.3 18.5
----- ----- ----- -----
Operating (loss), income........................ (2.3) (37.5) 2.3 (4.6)
Interest expense............................. (12.9) (8.8) (14.7) (4.0)
Other (expense) income, net.................. (0.5) (8.3) (0.9) (0.1)
----- ----- ----- -----
Net loss........................................ (15.7) (54.6) (13.3) (8.7)
===== ===== ===== =====
COMPARISON OF QUARTER ENDED APRIL 30, 1998 TO QUARTER ENDED APRIL 30, 1997
Revenues. Total revenues for the quarter ended April 30, 1998 (the "1998
Period") were $1,640,728 compared to $1,249,340 for the quarter ended April 30,
1997 (the "1997 Period"). This increase represents sales growth of 31.2% for the
quarter ended April 30, 1998, compared to the 1997 Period. The increase in 1998
is mainly attributable to the introduction of the Mrs. Fields ice cream
novelties to supermarkets and club stores in the 1998 Period. There were no
sales of these products in the comparable 1997 Period.
Cost of goods sold. Cost of goods sold for the quarter ended April 30, 1998
was $1,026,444 compared to $743,298 for quarter ended April 30, 1997. As a
percentage of sales, cost of goods was 62.6% for the 1998 quarter compared to
59.5% for the comparable 1997 Period. The increase for the quarter ended April
30, 1998 was primarily attributable to the higher cost of goods sold associated
with the Mrs. Fields ice cream novelties relative to the frozen cookie dough
products.
Gross profit. Gross profit for the quarter ended April 30, 1998 was
$614,284 compared to $506,042 for the quarter ended April 30, 1997. As a
percentage of sales, gross profit was 37.4% for the 1998 Period compared to
40.5% for the comparable 1997 Period. The decrease in gross profit for the 1998
Period was primarily a result of the lower margins associated with the Mrs.
Fields ice cream novelties as compared to those for cookie dough.
Marketing expenses. Marketing expenses for the quarter ended April 30, 1998
were $387,020 compared to $261,343 for the quarter ended April 30, 1997. As a
percentage of sales, marketing expenses were 23.5% for the 1998 Period compared
to 20.9% for the comparable 1997 Period. The increase in marketing expenses for
the 1998 Period was primarily attributable to approximately $109,000 of product
introduction costs associated with the Mrs. Fields ice cream novelties. These
expenditures allowed the Company to develop distribution in over 30 retail
accounts throughout the U.S. Marketing costs also increased $52,000 due to
higher royalties and commissions resulting from ice cream novelty sales.
General and administrative expenses. General and administrative expenses
for the quarter ended April 30, 1998 were $303,267 compared to $216,315 for the
quarter ended April 30, 1997. As a percentage of sales, general and
administrative expenses were 18.5% for the 1998 Period compared to 17.3% for the
comparable 1997 Period. The increase was primarily attributable to higher
accounting and legal expenses, amortization of licenses, rent, ice cream bill
processing fees, and directors and officers insurance premiums.
21
Operating loss. The operating loss for the quarter ended April 30, 1998 was
$76,003 compared to an operating profit of $28,384 for the quarter ended April
30, 1997. As a percentage of sales, the operating loss was 4.6% for the 1998
Period compared to a 2.3% profit for the comparable 1997 Period. The decrease in
operating profit is mainly attributable to the product introduction expenses
associated with the Mrs. Fields ice cream novelties items and the increased
general and administrative costs noted above.
Interest expense. Interest expense for the quarter ended April 30, 1998 was
$66,033 compared to $184,014 for the quarter ended April 30, 1997. As a
percentage of sales, interest expense was 4.0% for the 1998 Period compared to
14.7% for the comparable 1997 Period. The decrease in interest expense is
primarily attributable to the conversion of $622,500 in debt to Common Stock in
the quarter ended January 31, 1998 and lower amortization of debt issuance
costs.
Net loss. The net loss for the quarter ended April 30, 1998 was $142,836
compared to $166,430 for the quarter ended April 30, 1997. As a percentage of
sales, net losses were 8.7% for the 1998 Period compared to 13.3% for the
comparable 1997 Period. The decrease in net loss was due to the lower interest
expense offset by the product introduction expenses associated with Mrs. Fields
ice cream novelties items and higher general and administrative expenses.
COMPARISON OF YEAR ENDED JANUARY 31, 1998 TO YEAR ENDED JANUARY 31, 1997
Revenues. Total revenues for the year ended January 31, 1998 were
$5,351,917 compared to $4,824,706 for year ended January 31, 1997. This increase
represents sales growth of 10.9% for year ended January 31, 1998, and is
attributable to the 1997 introductions of the Mrs. Fields ice cream sandwiches
and Gumby Freeze Pops. Cookie dough sales were approximately the same for both
years.
Cost of goods sold. Cost of goods sold for the year ended January 31, 1998
was $3,308,660 compared to $3,087,833 for year ended January 31, 1997. As a
percentage of sales, cost of goods was 61.8% for the year ended January 31,
1998, as compared to 64.0% for the year ended January 31, 1997. The 2.2%
decrease in cost of goods sold in fiscal year 1998 was primarily attributable to
an increase in sales of cookie dough products to club stores, which have higher
margins than other channels of distribution.
Gross profit. Gross profit for the year ended January 31, 1998 was
$2,043,257 compared to $1,736,873 for the year ended January 31, 1997. As a
percentage of sales, gross profit was 38.2% for the year ended January 31, 1998
as compared to 36.0% for the year ended January 31, 1997. The increase in gross
profit for fiscal year 1998 was a result of increased sales of cookie dough to
club stores which provide the Company with relatively higher profit margins.
Marketing expenses. Marketing expenses for the year ended January 31, 1998
were $1,332,934 compared to $992,258 for the year ended January 31, 1997. As a
percentage of sales, marketing expenses were 24.9% for the year ended January
31, 1998 as compared to 20.6% for the year ended January 31, 1997. The 4.3%
increase in marketing expenses was primarily attributable to approximately
$86,000 related to the introduction of the new ice cream novelty and freeze pop
items as well as the accrual of $120,000 to Mrs. Fields to repay a shortfall in
the payment of the minimum royalty under the Mrs. Fields license. In addition,
the Company incurred costs of approximately $128,000 in packaging design for new
ice cream products. Although the Company expects to incur costs for packaging
design for new products to be developed in the future, costs for redesign of
existing products is not likely to occur for a few years.
General and administrative expenses. General and administrative expenses
for the year ended January 31, 1998 were $1,244,551 compared to $854,433 for the
year ended January 31, 1997. As a percentage of sales, general and
administrative expenses were 23.3% for the year ended January 31, 1998 as
compared to 17.7% for the year ended January 31, 1997. The 5.6% increase was due
primarily to an increase in accounting and legal expenses related to costs
associated with a public offering which was not completed by a prior
underwriter, the registration of the Company's securities with the Commission
under the 1934 Act in July 1997 on Form 10-SB and related compliance costs
incurred between June and November 1997. In addition, the personnel expense of
the Company increased because two officers became full-time employees of the
Company during the year ended January 31, 1998.
22
Compensation related to forgiveness of employee notes. Compensation related
to forgiveness of Employee Stock Purchase Notes receivable by the Company
totaled $1,472,009, or 27.5% of revenues, for the year ended January 31, 1998.
The amount forgiven included the aggregate principal amount of $1,450,000 and
accrued interest in the amount of $22,009. The notes had been received by the
Company pursuant to the issuance of stock to key employees in 1995 and 1996
pursuant to the Company's Employee Stock Purchase Plan and were forgiven, in
part, in consideration for the employees forgiving their rights to increases in
compensation and as an inducement to retain key management.
Operating loss. The operating loss for the year ended January 31, 1998 was
$2,006,237 compared to an operating loss of $109,818 for the year ended January
31, 1997. As a percentage of sales, operating loss was 37.5% for the year ended
January 31, 1998 as compared to 2.3% for the year ended January 31, 1997. The
35.2% increase in operating loss is mainly attributable to non-recurring general
and administrative expenses such as forgiveness of the Employee Stock Purchase
Notes and accounting and legal expenses related to a public offering which was
not completed by a prior underwriter.
Interest expense. Interest expense for the year ended January 31, 1998 was
$471,186 compared to $622,793 for the year ended January 31, 1997. As a
percentage of sales, interest expense was 8.8% for the year ended January 31,
1998 as compared to 12.9% for the year ended January 31, 1997. The amortization
of debt issuance costs associated with the value of stock and warrants paid to
various bridge loan providers decreased from $500,880 to $222,766 for the years
ended January 31, 1997 and 1998, respectively. As a percentage of revenues, the
amortization of debt issuance costs was 10.4% and 4.2% for the years ended
January 31, 1997 and 1998, respectively.
Other (expense) income, net. Other expense for the year ended January 31,
1998 was $443,190, or 8.3% of revenues. For fiscal year 1998, these expenses
consisted of costs related to the final settlement of agreements with prior
placement agents or advisors in the amount of $293,190 and a provision for
litigation costs in the amount of $150,000 pertaining to a pending lawsuit with
a founder of the Company. Other expense for the year ended January 31, 1997 was
$24,292, or 0.5% of revenues. The expense is primarily related to costs paid to
an unsuitable merger candidate.
Net loss. The net loss for the year ended January 31, 1998 was $2,921,413
as compared to $757,703 for the year ended January 31, 1997. As a percentage of
sales, net losses were 54.6% for the year ended January 31, 1998 as compared to
15.7% for the year ended January 31, 1997. The increase in the net loss was due
primarily to the forgiveness of the Employee Stock Purchase Notes, the cost
associated with the conclusion of investment banking agreements and amounts
payable to Mrs. Fields to meet the minimum royalty payment obligations under the
Mrs. Fields License. Because the Company does not expect these costs to recur in
the future, the amounts and percentages for the year ended January 31, 1998 are
likely to differ from that which might be expected in future years.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its activities since inception primarily through
private placements of Common Stock and the issuance of debt. The Company has
also financed the production of its Mrs. Fields cookie dough through Pennant.
The cumulative losses from the Company's inception through April 30, 1998
totaled $7,701,616 with a shareholders' deficit of $958,534.
The Company had a working capital deficit at April 30, 1998 of $2,806,778.
From January 31, 1998 to April 30, 1998, current assets increased by $186,864
and current liabilities increased by $531,698. The increase in current assets is
primarily attributable to the increase in accounts receivable and inventory
associated with the introduction of Mrs. Fields Ice Cream Sandwiches and Gumby
Freeze Pops. Changes in current liabilities from January 31, 1998 to April 30,
1998 are mainly attributable to: (i) the increase in accounts payable associated
primarily with the funding of inventory and accounts receivable, and (ii) a loan
from the Representative for working capital purposes in the amount of $200,000,
the principal and interest on which will be paid from the net proceeds of this
Offering.
23
Long-term liabilities decreased from January 31, 1998 to April 30, 1998 by
$7,969 due to the repayment of $90,469 on the Pennant Obligation and the
additional liability of $82,500 incurred in connection with the Extreme
Dinosaurs licensing agreement.
Cash used in operating activities was $166,584 for the quarter ended April
30, 1998 compared to $164,620 for the quarter ended April 30, 1997, and $718,276
for the year ended January 31, 1998 compared to $577,885 for the year ended
January 31, 1997. The increases in cash used in operations are due to increases
in the net losses for the respective periods, net of noncash addbacks and
changes in operating assets and liabilities.
Cash used in investing activities was $28,693 for the quarter ended April
30, 1998 compared to $12,342 for the quarter ended April 30, 1997, and $86,741
for the year ended January 31, 1998 compared to $18,579 for the year ended
January 31, 1997. The increases in cash used in investing activities relate to
purchases of office equipment and payments toward the purchases of the Gumby and
Extreme Dinosaurs licenses.
Cash provided by financing activities was $200,000 for the quarter ended
April 30, 1998 compared to $155,015 for the quarter ended April 30, 1997. During
the quarter ended April 30, 1998, the Company's cash flows from financing
activities consisted entirely of the proceeds from the issuance of a note
payable to the Representative. During the quarter ended April 30, 1997, the
Company's cash flows from financing activities consisted of the proceeds from
draws on the DayStar line of credit, net of payments of debt issuance and
deferred offering costs.
Cash provided by financing activities was $792,810 for the year ended
January 31, 1998 compared to $537,142 for the year ended January 31, 1997.
During the year ended January 31, 1998, the Company's cash flows from financing
activities consisted of the proceeds from a private placement of common stock
and net borrowings on the DayStar line of credit, net of the repayment of the
PAG notes. During the year ended January 31, 1997, the Company's cash flows from
financing activities consisted of the proceeds from the issuance of notes
payable to PAG and the issuance of convertible notes payable to C. Brands, net
of the payment of debt issuance and deferred offering costs.
The Company expects to meet its short term capital requirements through
additional bridge financing. On May 15, 1998, a letter of intent to advance up
to $500,000 to the Company was obtained from an independent lender. The Company
currently does not intend to draw down more than $385,000 from this credit
facility. The Company has incurred a repayment obligation of $50,000 as of June
18, 1998, which amount will be repaid from the proceeds of the Offering. On July
6, 1998 the Company received a loan of $103,500 from Larry Wells Company, Inc.,
an affiliate of a director of the Company.
The Company expects its cash requirements to increase significantly in
future periods. The Company will require substantial funds to expand its present
distribution, develop new products, and acquire new licenses. The Company's cash
requirements may vary materially from those now planned depending upon the
success of its current products, changes in product lines, and other factors.
The Company believes that the net proceeds of this Offering, together with
anticipated cash flows from operations will be sufficient to satisfy the
Company's cash requirements for at least the 12 months following this Offering.
Impact of Inflation. The Company does not believe that inflation has had a
material adverse effect on sales or costs of production nor does management
believe that moderate increases in interest rates of commercial lenders or
moderate rates of inflation will have a significant impact upon future
operations.
Year 2000 Disclosure. The Year 2000 issue is the result of computer
programs using two digits rather than four to define the applicable year.
Programs that have time-sensitive software may recognize a date using "00" as
the calendar year 1900 rather than the calendar year 2000. Systems that do not
properly recognize such information could generate erroneous data or cause a
system to fail. The Company's internal computer systems are all newly installed
with Year 2000 compliant programs and operating systems. The Company presently
believes that it has no systems that may be adversely affected by a Year 2000
issue. The Company does not believe that any Year 2000 issue exists which will
adversely impact upon the services provided for the Company by its primary
manufacturers, including Pennant. The Company is considering bringing in-house,
after the Offering, all of the billing and invoicing activities currently being
provided for it by such manufacturers, which it believes will further minimize
the possibility of there being any Year 2000 issue.
24
BUSINESS
OVERVIEW
The Company licenses and markets premium branded consumer food products
sold in supermarkets, club stores, convenience stores, drug stores and mass
merchandisers throughout the United States. The Company currently holds three
licenses for food products using names and trademarks of Mrs. Fields, Gumby and
Mattel's Extreme Dinosaurs. The Company has developed and is currently marketing
products under the Mrs. Fields and Gumby licenses. The Company intends to build
a portfolio of well-known premium brand products by continuing to seek licensing
opportunities for nationally recognized brand names, increasing product
offerings under current and new licenses, and further developing distribution of
the Company's existing products.
The Company holds an exclusive license to sell frozen cookie dough, frozen
baked goods and other frozen dessert products approved by Mrs. Fields and use
the Mrs. Fields trademarks and logo throughout North America, Hawaii, and Puerto
Rico, excluding Canada with respect to ice cream novelties. The license is
renewable by the Company at its sole discretion every five years for up to 30
years (through December 31, 2024) but subject to certain termination rights by
Mrs. Fields in the period beginning December 2004. The Company began selling
Mrs. Fields frozen cookie dough products in late 1994. Mrs. Fields frozen cookie
dough products are sold through club stores including Costco, BJ's and Sam's
Club, as well as several thousand grocery stores throughout the United States
including in certain locations of stores such as Safeway, Lucky, Publix, Kroger,
Jewel, Harris-Teeter, Ralphs and Raley's. The Company recently introduced Mrs.
Fields ice cream novelties and began selling the Mrs. Fields Cookie Ice Cream
Sandwich and Mrs. Fields Ice Cream Cookie Pop in July 1997 and January 1998,
respectively. In April 1998, Mrs. Fields approved both ice cream novelties for
sale in all of the Mrs. Fields franchise and company-owned retail stores. Such
sales will commence upon completion of certain Mrs. Fields' distribution
arrangements. The Company is currently developing other frozen food products to
sell under the Mrs. Fields name. In May 1998, the Company was approved to
distribute its Mrs. Fields Cookie Ice Cream Sandwich and Ice Cream Cookie Pop in
military commissaries throughout the United States.
The Company holds a non-exclusive license to use certain names and
characters from the television show "Adventures of Gumby" in the design and
packaging of freeze pops, fruit coolers and certain types of candy. In mid-1997,
the Company began selling Gumby Freeze Pops through Lucky in Northern
California. In 1998, the Company increased marketing for the summer selling
season so the Gumby Freeze Pops will be available on a national basis. Lucky
Northern California, Lucky Southern California, Jewel, Acme, Ralphs, and Osco
Drugs have approved the item for distribution.
In April 1998, the Company acquired an exclusive license to use trademarks,
copyrights, plots, settings and artwork related to Mattel's Extreme Dinosaurs
for food products including freeze pops, gelatin snacks, fruit coolers, fruit
snacks, cookies and crackers. The Company is in the process of finalizing
certain details in the formal license agreement and identifying the best food
products to introduce for this brand. As of the date of this Prospectus, the
Company cannot make any representations as to the form or timing of such new
products.
The Company has a management team with experience in direct retail sales
and marketing of food products to the retail food industry. The Company sells
its products through a combination of outside brokers and distributors
throughout the United States. The Company does not manufacture any of its
products, but contracts with outside suppliers. The Company believes the use of
third-party suppliers increases its flexibility, reduces production lead-times
and costs, and significantly reduces capital expenditures and associated
overhead related to manufacturing, all resulting in overall lower product costs
to the Company.
25
INDUSTRY BACKGROUND
Cookie Dough
Sales of frozen baked goods in the U.S. were over $1.6 billion in 1996
according to Progressive Grocer magazine in its July 1997 annual Supermarket
Sales Report. The specific subcategory that includes cookie dough grew by 2.4%
in 1996, the second highest growth rate among all subcategories of frozen baked
goods. However, the Company estimates that the frozen cookie dough category will
remain relatively small with approximately $10 million annually in sales, when
compared to categories such as refrigerated cookie dough which represents
approximately $300 million annually in sales. Otis Spunkmeyer and the Company's
Mrs. Fields products together represented the majority of sales in the frozen
cookie dough category in 1997.
Ice Cream Novelties
Ice cream novelties represent a significantly larger market than frozen
cookie dough with $1.58 billion in U.S. sales for calendar year 1997, according
to Information Resources, Inc. ("IRI"), an independent market research firm that
provides information on the supermarket industry. A research study by A.C.
Nielsen, an independent market research firm, reported in the March 2, 1998,
issue of Supermarket News that 93% of all U.S. households buy ice cream and ice
cream novelties. The Supermarket News article also pointed out that shoppers who
buy ice cream products tend to spend more money on other items and that ice
cream sales are less seasonal than they were three years ago. Due to the large
size of the ice cream novelty category, this segment has numerous competitors
and product choices vying for consumer attention.
Shelf-stable freeze pops
The Company has been unable to find reliable market information on the
shelf stable freeze pops category. There are two large competitors, Kraft Foods
and Jel-Sert, and competition has traditionally been based on price.
BUSINESS STRATEGY
The Company's strategy for developing a portfolio of well-known, premium
branded food products includes the following:
- IDENTIFYING THE RIGHT PREMIUM BRANDS
The Company intends to seek out quality brand names such as Mrs. Fields
that have high national brand recognition with consumers. Mrs. Fields Cookies
has a 94% recognition rate among all U.S. consumers according to a 1994 survey
taken by an independent market research firm. The Gumby brand name has more than
40 years of exposure and is well recognized by children and adults. The Company
believes that brand name products often allow premium product pricing and are
less expensive to develop. By focusing on nationally recognized brands, the
Company believes product introductions will require less advertising and up-
front slotting fees. Slotting is an up-front fee paid to retailers to purchase
retail shelf space for the Company's products. The Company regularly evaluates
potential brand licensing opportunities to identify additional premium brands
that have the characteristics for successful product line introductions.
- EXPANDING DISTRIBUTION AND CREATING NEW PRODUCT OFFERINGS
The Company plans to continue to expand distribution of its products and
has offered new items to grow sales. Sales growth is a result of introducing
additional items under a brand, taking brands to new markets, and penetrating
additional channels of distribution. For example, the Company initially sold
Mrs. Fields Frozen Cookie Dough in four varieties of one pound packages in
supermarkets in just a few cities. Sales have grown by adding a fifth variety,
introducing a three pound size for club stores, developing the Holiday Cookie
Kit and expanding distribution to 31 of the 64 IRI Infoscan markets, which
represent the majority of the largest U.S. markets. The addition of the Mrs.
Fields Cookie Ice Cream Sandwich and the Mrs. Fields Ice Cream Cookie Pop
further extends the Mrs. Fields brand in several markets and opens new markets
and channels of
26
distribution such as convenience stores. When possible, the Company plans to
position brand name products in underdeveloped categories that lack a strong
brand representation.
- DIVERSIFYING BRAND LICENSES
The Company intends to create a portfolio of several brand licenses to
reduce the impact if one brand underperforms or fails. The Company intends to
continue diversifying its brand portfolio through both new licensing
opportunities or product acquisitions. The Company will also seek poorly managed
brands with strong market potential that can be acquired and improved.
- USING THIRD-PARTY SUPPLIERS AND CO-PACKERS
The Company currently does not manufacture any of its products internally
and plans to continue to out-source the manufacturing of all of its products
through third-party suppliers and co-packers. This increases the Company's
flexibility, reduces overhead, and allows the Company to benefit from competing
suppliers.
CURRENT PRODUCTS
The Company currently has three highly recognizable brand name product
licenses. The Company has an exclusive license to produce products under the
Mrs. Fields brand name including frozen cookie dough, frozen baked goods and
other related frozen food products. The Company also has a non-exclusive license
to use the names and likenesses of Gumby, Pokey and other characters and names
derived from the television series, "Adventures of Gumby" in conjunction with
products including freeze pops, beverage coolers and fruit forms. The Company
has an exclusive license to market, develop, and sell certain food products
using Mattel's Extreme Dinosaurs characters and theme, but is still in the
process of identifying what items to produce. These initial licenses are the
foundation upon which the Company plans to create new brand name products and
acquire new licenses to build a portfolio of well-known, premium brand products.
Cookie Dough
Mrs. Fields frozen cookie dough is a "super premium" quality product in
which the cookie dough is individually pre-formed and ready to bake. The recipe
used in making the frozen cookie dough is identical to the recipe used to bake
the cookies sold in Mrs. Fields Cookies retail stores. The frozen cookie dough
is sold nationally in 31 out of 64 IRI Infoscan markets through certain
locations of retailers such as Safeway, Lucky, Publix, Kroger, Jewel,
Harris-Teeter, Ralphs and Raleys, and club stores such as Costco, BJ's and Sam's
Club. Currently, there are five different varieties marketed by the Company in
various package sizes: Semi-Sweet Chocolate Chip, Semi-Sweet Chocolate Chip with
Walnuts, Triple Chocolate, White Chunk Macadamia Nut, and Oatmeal Raisin.
Supermarkets that offer Mrs. Fields products will typically carry two to four of
the one pound package size due to limited space in their frozen food sections.
Mrs. Fields frozen cookie dough is typically priced 30% higher than its nearest
premium competitive item due to its super premium designation. The Company began
selling this product in late 1994 and it serves consumers who seek the highest
quality cookie dough available and are willing to pay a premium for the product.
In addition, the Company offers a Mrs. Fields Holiday Cookie Baking Kit
which is marketed during the Christmas season. The kit includes frozen sugar
cookie dough, cookie cutters, frosting, and confectionary sprinkles.
Ice Cream Novelties
The Company currently sells a Mrs. Fields Cookie Ice Cream Sandwich and Ice
Cream Cookie Pop. The cookie ice cream sandwich consists of two Mrs. Fields
chocolate chip cookies with all-natural vanilla bean ice cream between the
cookies. The ice cream cookie pop consists of a single Mrs. Fields chocolate
chip cookie and vanilla bean ice cream hand-dipped in dark chocolate, served on
a stick. The packaging for the single serve ice cream cookie pop forms a unique
detachable drip tray. The Company began selling its Mrs. Fields Cookie Ice Cream
Sandwich in late summer 1997 and was sold exclusively through 7-Eleven stores
nationwide. In 1998, the Company is marketing both products nationwide to
convenience stores, club stores, and supermarkets. In April 1998, the Company
was approved by Mrs. Fields to begin selling its ice cream
27
novelties nationwide in the Mrs. Fields retail stores which will commence upon
implementation by Mrs. Fields of appropriate means to transport ice cream
products to its retail outlets.
Gumby Freeze Pops
The Company began selling Gumby Freeze Pops in Lucky stores in Northern
California during the summer of 1997 and is currently marketing the product
nationally. The freeze pops are sold in a box of 18, 1.25 oz. plastic tubes,
which are eaten by tearing the top from the tube and squeezing the frozen liquid
gradually upward. Gumby Freeze Pops are shelf-stable and can be purchased at
room temperature and frozen before consumption, or can be sold frozen at the
store. In addition, shelf-stable pops do not require freezer space or frozen
storage transportation and can be sold anywhere in a store, which provides
retailers with more flexible display options.
NEW PRODUCTS
The Company both develops its own products and uses existing recipes from
its licensors for new items. The Mrs. Fields cookie dough is the same recipe
used in the Mrs. Fields franchise stores. When the Company develops new products
internally, the products will be either innovative items or brand items similar
to others in their food category. The Company believes innovative items get more
attention when introduced by brokers and distributors to food industry buyers
and often appeal to consumers seeking something new. The Mrs. Fields Ice Cream
Cookie Pop is an example of an innovative product both in its single serve
detachable tray packaging and its high profile combination of ingredients and
design. Gumby Freeze Pops are an example of the Company's alternative strategy
to launch a similar branded product into a "non-branded" category. This strategy
allows the Company to charge a higher price for its product in that category
than its competition because a portion of consumers will be willing to pay more
for the brand name product.
The Company plans to use a portion of the proceeds from the Offering to
develop new products and acquire new brand licenses. Several new Mrs. Fields
super premium products are being considered for introduction between late 1998
and 1999 including but not limited to cheesecakes, double fudge brownies,
muffins, waffles, and cinnamon rolls. The Company also plans to introduce
additional ice cream novelty varieties and a second product using the Gumby name
during 1999. Most products introduced by the Company are developed internally
and require pre-approval by the licensor before release. Some of the Mrs. Fields
products will use recipes from Mrs. Fields, thus saving the Company the time and
expense needed to develop new recipes. It is anticipated that cheesecakes,
double fudge brownies, cinnamon rolls, and muffins also will use existing
recipes from Mrs. Fields Development Corporation. The Company is in the process
of identifying the best food products to introduce under the Mattel's Extreme
Dinosaurs brand and as of the date of this Prospectus cannot make any
representations as to the form or timing of such new products. Although the
Company currently plans to introduce these various products on the approximate
schedule described, there is no assurance that the Company's plans will not
change, either with respect to the specific products or the timing of the
introduction into the market.
COMPETITION
The food industry, in general, is highly competitive. The Company competes
with numerous food item producers and distributors, many of which are larger,
have greater resources, enjoy greater economies of scale, and offer a wider
selection of food items with a higher degree of consumer acceptance than the
Company. The Company will compete with other food producers and distributors not
only for consumer acceptance, but also for shelf space in retail outlets and for
marketing attention. The Company believes that its strategy to market nationally
known name brands will allow the Company more opportunities to distinguish its
products from competitors without significant advertising to create product
awareness and acceptance.
Cookie Dough
Mrs. Fields and Otis Spunkmeyer are the leading brands of frozen cookie
dough in the U.S. The Company competes directly with Otis Spunkmeyer and a few
small regional frozen cookie dough manufactur-
28
ers throughout the U.S. Otis Spunkmeyer markets frozen cookie dough with an
average 30% lower price point than the Company's cookie dough products. Other
indirect competition comes from refrigerated dough manufacturers including
Pillsbury and Nestle and a large variety of manufacturers who produce
ready-to-eat cookies. The price difference between Mrs. Fields frozen cookie
dough and Otis Spunkmeyer is comparable to the price difference between
ready-to-eat cookies such as Pepperidge Farms and Nabisco Chips Ahoy.
Ice Cream Novelties
There are several direct competitors to Mrs. Fields ice cream novelties in
the super premium category, including, but not limited to, Haagen Dazs, Ben &
Jerry's, and Dove Bar. Indirect competition comes from premium and non-premium
products, including, but not limited to Big Ed's, Chipwich, Good Humor,
Klondike, Biggie Iggy, It's It, and other regional products. Mrs. Fields is
priced comparably with other super premium items and offers equal quality.
Within the super premium category, Mrs. Fields is the only brand that offers a
cookie ice cream sandwich, and the Company believes Mrs. Fields Ice Cream Cookie
Pop does not have any directly similar competitors.
Gumby Freeze Pops
Gumby Freeze Pops competes with Kraft Foods, producer of Mr. Freeze,
Jel-Sert, Inc., producer of Fla-Vor-Ice and Otter Pops, and small regional
manufacturers. Gumby is positioned as a premium product and sells from
$0.10 - $0.50 more than its competitors when sold in comparable packages. The
Company believes price has traditionally been the key factor for purchasing
decisions among retail buyers. The Company believes a quality branded product
such as Gumby may be able to serve a niche of consumers willing to pay more for
the brand name product.
SALES AND MARKETING
The Company currently employs a network of food brokers and distributors to
expand sales in supermarkets, conveniences stores, club stores and other
channels. Since there are regional differences in the strength of distribution
channels across the U.S., using this network allows the Company to hire the best
source in each particular market. The Company regularly sponsors promotions
which are necessary to keep consumer, broker and distributor interest, increase
brand awareness, and gain entry into supermarkets and other channels. The
Company tries to limit up-front slotting payments in lieu of other discounts and
promotions that are based on sales volume. In the past the Company has sometimes
been able to reduce or eliminate slotting fees based on a product's brand
recognition or from relationships the Company's management has in the industry.
There is no assurance that future products will receive similar favorable
treatment.
The Company has found some promotions such as in-store demonstrations and
sampling are useful for creating product awareness and increasing sales. Mrs.
Fields Frozen Cookie Dough and Mrs. Fields Cookie Ice Cream Sandwich are
promoted through demonstrations and sampling in club stores and supermarkets.
The Company uses other forms of advertising that include radio advertising,
in-store coupons, in-store signs, stickers, floor ads, and event marketing such
as PTA meetings, "fun runs" and golf tournaments. The Company is planning to
begin promoting its products in the latter part of 1998 through the Internet by
use of links and a web site. Additionally, the Company participates in selected
trade shows, such as the Food Marketing Institute, to expand product awareness
among attending retailers.
MANUFACTURING
The Company does not manufacture any of its products directly, nor does the
Company intend to begin manufacturing any of its products in the future. The
Company believes that there are numerous third party manufacturers capable of
producing its food products. All of the Company's current suppliers have
sufficient capacity to support growth and none of the Company's current products
require the use of a sole source manufacturer.
29
Mrs. Fields Cookie Dough
Manufacturing for Mrs. Fields cookie dough products is provided by Pennant
which the Company has been advised, also manufactures all of the cookie dough
products for Mrs. Fields franchise stores. Pennant manufactures these products
according to Mrs. Fields specifications. The Company has an informal arrangement
with Pennant that allows the Company to have its cookie dough products produced
pursuant to purchase orders placed for retailers by the food brokers or
distributors acting on behalf of the Company, without any advance payments to
Pennant for manufacturing or packing being required. Pennant distributes the
Company's cookie dough products directly from the co-packer to the Company's
customers' warehouses on a contract trucking basis.
Mrs. Fields Ice Cream Novelties
Mister Cookie Face ("MCF") manufactures the Company's Mrs. Fields Cookie
Ice Cream Sandwich and Mrs. Fields Ice Cream Cookie Pops. The Company purchases
the packaging and already baked cookies for these products in advance of sales
and holds such inventory at MCF. The cookies are prepared and baked by another
manufacturer, Cookie Kingdom. Normal lead time for production and delivery is 10
days. Most of the product is made to order to ensure freshness and reduce
inventory carrying costs. Since the products are handmade, there is minimum time
to change over from one product to another. The Company believes that capacity
can be quickly expanded to meet increased demand.
Gumby Products
Kisko Products ("Kisko") manufactures Gumby Freeze Pops in accordance with
the Company's specifications. Kisko sources and procures all of the components
of the product and the Company pays for product only after it has been shipped.
Upon shipment of the order, Kisko bills the Company for the finished product and
the Company is responsible for collection from the customer. Production lead
time is approximately 10 days and Kisko generally maintains between 5,000 and
10,000 cases of product in inventory during the active selling season, which
represents an estimated 15-day supply. After the end of the season, usually at
the end of September, the Company must pay Kisko for all unsold inventory.
Inventory has a 2 year shelf life. Kisko is a large food manufacturer and
maintains capacity far in excess of the Company's foreseeable requirements.
LICENSING AGREEMENTS
Mrs. Fields. In August 1994, the Company and Mrs. Fields entered into an
exclusive licensing agreement (the "Mrs. Fields License") whereby the Company
acquired, for a purchase price of $2,500,000, the exclusive right and license to
use the Mrs. Fields Cookies, Mrs. Fields Cookies and Brownies and Mrs. Fields
names and trademarks in any format (the License Names and Marks as defined by
the Mrs. Fields License) to market cookies, muffins, brownies, pound cakes,
baked goods, and frozen dessert items, including ice cream, containing Mrs.
Fields Cookie Dough (the "Royalty Bearing Products") throughout North America,
Hawaii, and Puerto Rico (the "Territory") relying on grocery stores,
supermarkets, convenience stores and club stores as distribution channels. The
license does not include the ice cream novelty markets for Canada. The Mrs.
Fields License has a 30 year duration, including option periods. The initial
term of the Mrs. Fields License expires December 31, 1999 (the "Initial Term"),
with the Company having an option to extend, at its sole discretion, the Mrs.
Fields License for five five year periods (the "Option Periods") through
December 31, 2024. Mrs. Fields may terminate the Mrs. Fields License at the end
of any Option Period subsequent to the Initial Term by providing written notice
to the Company of its intent to do so not earlier than 12 months nor later than
90 days from the end of such Option Period. Thus, assuming the Company remains
in compliance, the Mrs. Fields License may not be terminated any earlier than
December 2004. In a letter signed by Mrs. Fields on May 5, 1998, it was
confirmed that the Company was in compliance with the terms of the Mrs. Fields
License. In the event Mrs. Fields exercises its right to terminate the Mrs.
Fields License, it must pay to the Company an amount equal to three times the
average gross margin for sales of Mrs. Fields products reported by the Company
for the last three years of the Option Period in which
30
such notice of termination is given. The amount determined to be due shall be
payable over three years in twelve equal quarterly payments.
The Company also has the right of first refusal to acquire the license to
sell in the Territory, except the Canadian market, all other frozen food
products, including ice cream, at an amount equal to 75% of the price and on the
terms set forth by any prospective licensee. The Company has the right to expand
the definition of Territory to include additional areas, at no additional cost,
upon receipt of the written or deemed consent (resulting from the passage of
time without objection) of Mrs. Fields.
The Company is obligated to pay a $1.00 royalty per twelve pound equivalent
of product sold and to sell a minimum number of cases of Royalty Bearing
Products during the Initial Term (the "Minimum Volume Commitments"), and, if the
license is extended, in each Option Period. Pursuant to the amendment to the
Mrs. Fields License entered into in March 1996, the Minimum Volume Commitment
beginning January 1, 1997 for the 1997 calendar year was 285,000 twelve pound
equivalent cases, for calendar year 1998 it is 350,000 twelve pound equivalent
cases, increasing over the life of the Mrs. Fields License to 583,434 twelve
pound equivalent cases in 2015 and continuing at that level for the remainder of
the Mrs. Fields License.
To the extent that the Company does not meet the Minimum Volume Commitment
to maintain the Mrs. Fields License it shall be required to pay the royalty
which would otherwise have been earned by Mrs. Fields on the amount of the
shortfall from the Minimum Volume Commitment for the relevant period. The
Company sold approximately 177,000 and 179,000 twelve pound equivalent cases
during the calendar years ended December 31, 1996 and 1997, respectively. As of
January 8, 1998, the Company and Mrs. Fields entered into a Second Amendment to
the Trademark Licensing Agreement, pursuant to which it was agreed that the
additional royalty payable of $100,000, plus a penalty of $20,000, with respect
to the shortfall of approximately 100,000 cases for 1997 would be paid by a
surcharge imposed upon royalties payable during 1998 until such time as the
$120,000 has been paid. While these Minimum Volume Commitment amounts exceed the
amounts shipped by the Company during all the preceding calendar years, the
Company expects to meet these Minimum Volume Commitment in 1998 and thereafter
and to comply with the other provisions of the Mrs. Fields License. However, no
assurance can be given that the Company will, in fact, meet such requirements
during 1998 and continue to do so thereafter. The loss of the Mrs. Fields
License would have a material adverse effect on the Company and the results of
operations.
In addition to complying with any and all applicable laws, the Company must
seek Mrs. Fields' approval before selling any Royalty Bearing Product, provide
Mrs. Fields with a written summary of customer complaints regarding the quality
of products and purchase ingredients from sources approved by Mrs. Fields. Mrs.
Fields also has the right to request samples of any Royalty Bearing Product
being sold by the Company free of charge. The Company has the duty to obtain and
keep in force product liability insurance in favor of Mrs. Fields and is
currently in compliance with this requirement.
Gumby. In September 1996, the Company entered into a licensing agreement
(the "Gumby License") with AJM Marketing Enterprises ("AJM") whereby the Company
was awarded the non-exclusive right and license to use certain Names and
Characters (Gumby, Pokey, and other characters derived from the television show
"Adventures of Gumby") to market freezer pops, beverage coolers and fruit forms
(the "Licensed Products") throughout the United States and its territories and
possessions (the "Gumby Territory").
Following the Company's initial payment of $12,500, the Company is
obligated to pay an additional minimum royalty of $112,500 which may be offset
against royalties equal to 5% of sales, by August 31, 1998, which is also the
date the license terminates unless renewed by the mutual consent of the parties
for an additional two year period.
The Company must seek written approval from AJM before selling any licensed
product. AJM has the right to request samples of the Licensed Products from the
Company free of charge. The Company has satisfied the requirement to maintain a
product and personal liability insurance policy in the amount of $1,000,000 in
favor of the Company and AJM.
Extreme Dinosaurs. In May 1997, the Company entered into a letter of intent
with BKN Kids Network, Inc. ("BKN"), under a sub-license from Mattel, Inc.,
pursuant to which the Company acquired the exclusive
31
right and license to use the trademarks, copyrights, plots, environmental
settings and artwork as well as the characters, names and likenesses, all as
used in or emanating from the one half-hour television program currently
entitled "Extreme Dinosaurs." This license will permit the Company to develop,
market, and sell freeze pops, gelatin snacks, molded and generic coolers, baked
and shaped cookies and crackers, fruit snacks and candies to be distributed
throughout the United States (the "BKN License").
In April 1998 the parties reached substantive agreement pursuant to which
the term of the BKN License commenced on May 1, 1998 and continues through July
31, 2000 (the "Initial Term"). The Company has guaranteed a minimum payment of
$110,000, payable in increments to be agreed upon and allowed to be offset
against a 4% royalty payable on all net sales. The Company paid the required
first payment of $27,500. The Company holds an option to renew the license for a
period of two years if: (i) it is not in default, (ii) it has generated at least
$220,000 in royalties and (iii) it pays an additional $60,000 toward a renewal
guarantee payment of $125,000 in increments over the two year term of the option
period (the "Renewal Term"). The parties are still negotiating terms relating to
the timing with respect to: (i) when items shall be required to be brought to
market and (ii) royalty payments.
FACILITIES
The Company's headquarters are located at 2424 Professional Drive, Suite A,
Roseville, California 95661. This space is leased from an entity in which Mr.
Kees and an affiliated party are the principals, pursuant to a month-to-month
arrangement. The Company believes the lease for these premises is on terms and
conditions which are no less favorable than those prevailing for similar
premises in the area. The Company has provided notice that it intends to
relocate to new nearby premises to be leased from an unrelated party. It is
anticipated that such relocation will occur in September 1998. The Company
considers that its 3,000 square feet portion of the current premises and the
estimated 3,000 square feet in the new premises will be adequate for its
purposes, as all manufacturing activities with respect to the products are
currently and are anticipated in the future to be performed off-site by third
party contractors. See "Certain Transactions."
EMPLOYEES
The Company has six full time employees. The Company's employees are not
represented by any collective bargaining organization, and the Company has never
experienced a work stoppage. The Company believes that its relations with its
employees are satisfactory.
LEGAL PROCEEDINGS
On November 19, 1997, an action was filed in the San Francisco Superior
Court by Gregory B. Plunkett, the founder of the Company ("Plunkett") and
currently a holder of in excess of 5% of the outstanding shares of Common Stock,
against the Company seeking: (i) the repayment of $112,500 plus interest thereon
at the rate of 8% from September 1, 1994, allegedly due with respect to a
promissory note claimed to have been issued by the Company in favor of Plunkett,
(ii) the payment of $99,084 in wages claimed to be due by the Company to
Plunkett and (iii) declaratory relief with respect to the agreement entered into
on August 8, 1995, between the Company, Plunkett, and various other parties with
respect to the reorganization of the Company at that time (the "August 1995
Agreement") seeking to determine that he not be required to relinquish 103,125
shares of the Common Stock to the various parties as set forth in the August
1995 Agreement (the "Plunkett Litigation"). The Company has filed a
cross-complaint against Plunkett. Although the matter is still in early stages
of the proceedings, the Company is of the view that the claims by Plunkett are
without merit and that it has substantial defenses and offsets to any amounts
which might ultimately be determined to be due, if any. However, as of January
31, 1998 and April 30, 1998, the Company has accrued $150,000 with respect to
its potential exposure in the Plunkett Litigation. The Company has agreed to
indemnify a related party, one of the recipients of stock from Plunkett, to the
extent that such related party might be required to relinquish to Plunkett any
shares of Common Stock to which it was entitled. See "Principal Shareholders"
and "Certain Transactions."
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding directors and
executive officers of the Company as of June 30, 1998.
[Enlarge/Download Table]
NAME AGE POSITION
---- --- --------
Thomas E. Kees....................... 47 President, Chief Executive Officer, and Chairman of
the Board
Michael E. Banks..................... 50 Senior Vice-President of Marketing and Sales
Craig C. Connerty.................... 41 Chief Financial Officer, Treasurer and Secretary
Steven Riccardelli................... 33 Vice-President of Operations
Arthur L. Patch...................... 57 Director
Larry J. Wells....................... 55 Director
THOMAS E. KEES, President, Chief Executive Officer, and Chairman of the Board of
Directors
Thomas E. Kees has served as the President, Chief Executive Officer and
Chairman since September 1, 1995. From April 1994 to August 1995 he was the
Senior Vice President of Retail Development at A.C. Nielsen where he founded and
chaired the Nielsen Retail Advisory Board. Mr. Kees served as Executive
Vice-President of Raleys Supermarkets and Drug Centers, a regional retailer with
85 stores in Northern California and Nevada, from June 1992 to March 1994. From
March 1990 to May 1992, he was Senior Vice-President of Apple Tree Markets. From
December 1966 to March 1990, Mr. Kees was employed by Lucky where his last
position held was Vice-President, Grocery Marketing. Mr. Kees serves on the
board of Monterey Pasta Company. Mr. Kees holds a Bachelor of Science in
Education from Oregon State University, a Master of Arts Degree from the
University of California at Berkeley, and a Masters in Business Administration
from St. Mary's College.
MICHAEL E. BANKS, Senior Vice-President of Marketing and Sales
Mr. Banks has served as Senior Vice-President of Marketing and Sales since
February 1996. From June 1994 to January 1996, he served as the President of
AdPix, a digital imaging and archiving firm. From May 1993 to May 1994, he was
the Vice President of Advertising for Raleys Supermarkets. From June 1987 to
April 1993, he was responsible for marketing the Checkout Coupon product for
Catalina Marketing. Mr. Banks has a Bachelor's degree in Marketing and
Advertising from the University of Kansas.
CRAIG C. CONNERTY, Chief Financial Officer, Treasurer and Secretary
Mr. Connerty became the Chief Financial Officer in February 1996. He is a
certified public accountant and was a partner of Douglas, Connerty & Company,
Certified Public Accountants, from January 1987 to October 1996. Mr. Connerty
holds a Bachelors of Arts degree in Psychology from the University of California
at Los Angeles.
STEVEN RICCARDELLI, Vice-President of Operations
Mr. Riccardelli has been with the Company since April 1994, serving as
Marketing Manager until October 1995, when he was promoted to Vice-President of
Operations. From November 1991 to March 1994, he was an Account Executive with
Goldberg Moser O'Neill Advertising in San Francisco. From April 1989 to June
1991, Mr. Riccardelli was an Account Executive and Media Planner with Jordan
McGrath Case & Taylor Advertising in New York. He holds a Bachelor of Arts
degree in Economics from Tulane University.
ARTHUR L. PATCH, Director
Mr. Patch was elected to the Board of Directors in October 1996. Mr. Patch
serves on the Compensation and Audit Committees. Since June 1992, Mr. Patch has
served as Vice President of Operations for Save Mart Supermarkets. From October
1989 to February 1992, Mr. Patch was President and Chief Executive Officer of
Apple Tree Markets in Houston. He has a Bachelor of Arts degree in Advertising
from California State University, San Jose.
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LARRY J. WELLS, Director
Mr. Wells was elected to the Board of Directors in January 1998. Mr. Wells
serves on the Compensation Committee. Since June 1996, Mr. Wells has been the
President and sole owner of Larry Wells Company, Inc. which serves as the
General Partner of DayStar Partners LP and Manager of DayStar Fund II, L.L.C.
Since June 1995, the DayStar entities have specialized in making bridge loans to
companies planning their initial public offering. From July 1989 to December
1997, he was a General Manager of Anderson & Wells Company and the General
Manager of Sundance Venture Partners, SBIC. Mr. Wells serves on the board of
Cellegy Pharmaceuticals, Telegen Corporation, Identix, Inc. and Isonics Corp.
Mr. Wells holds a Bachelor's degree in Economics and a Masters of Business
Administration from Stanford University. See "Certain Transactions."
BOARD OF DIRECTORS
BOARD COMMITTEES
Audit Committee. The Audit Committee of the Board of Directors was
established in January 1998, and its responsibilities include: (i) review the
results and scope of the annual audit and other services provided by the
Company's independent auditors, (ii) review and evaluate the Company's internal
audit and control functions and (iii) monitor the transactions between the
Company and its employees, officers and directors. Arthur L. Patch is the sole
member of the Audit Committee.
Compensation Committee. The Compensation Committee of the Board of
Directors was established in January 1998 and is responsible for the
administration of the Company's stock option plan and to oversee the
establishment of compensation levels for the Company's officers and directors.
Arthur L. Patch and Larry J. Wells are the members of the Compensation
Committee.
DIRECTOR COMPENSATION
The Company may pay its non-employee directors a fee of $500 for each Board
meeting and meeting of committees attended and reimburses its directors for
travel and out-of-pocket expenses in connection with their attendance at such
meetings.
EXECUTIVE COMPENSATION
The following table sets forth the annual and other compensation for
service in all capacities for the Company for the two fiscal years ended January
31, 1998 of the Company's Chief Executive Officer and each of the other
executive officers whose total salary and bonus exceeded $100,000 for the
Company's fiscal year ended January 31, 1998.
SUMMARY COMPENSATION TABLE
[Enlarge/Download Table]
ANNUAL COMPENSATION
---------------------------------------------------------
FISCAL YEAR ENDED OTHER
NAME AND PRINCIPAL POSITION JANUARY 31,(1) SALARY BONUS COMPENSATION(2)
--------------------------- ----------------- -------- ------ ---------------
Thomas E. Kees............................ 1998 $200,000 $ 0 $1,010,193
Chairman of the Board, Chief Executive 1997 200,003 2,029 --
Officer and President
Michael E. Banks.......................... 1998 120,000 5,000(3) 153,360
Senior Vice-President, Marketing & Sales 1997 95,000 2,185 --
Craig C. Connerty......................... 1998 120,000 5,000(3) 153,360
Chief Financial Officer, Treasurer &
Secretary 1997 60,000(4) 2,166 11,330(4)
Steven Riccardelli........................ 1998 80,003 3,000 155,096
Vice-President, Operations 1997 68,543 2,029 --
(See footnotes on next page)
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---------------
(1) Information with respect to fiscal year 1997 reflects only that portion of
the year that the designated employee was employed by the Company.
(2) The amounts shown in the column headed Other Compensation includes the
forgiveness by the Company of promissory notes issued by each named employee
with respect to the issuance of Stock Purchase Shares under the Employee
Stock Purchase Plan as follows: (i) Mr. Kees, $1,000,000 principal plus
$10,193 in accrued interest relating to 125,000 shares of Common Stock; (ii)
Mr. Banks, $150,000 principal plus $3,360 in accrued interest relating to
18,750 shares of Common Stock; (iii) Mr. Connerty, $150,000 principal plus
$3,360 in accrued interest relating to 18,750 shares of Common Stock; and
(iv) Mr. Riccardelli, $150,000 principal plus $5,096 in accrued interest
relating to 18,750 shares of Common Stock. Each of the named executives
forgave the contractual right to be paid increases in base salaries in the
respective amounts of $75,000, $37,000, $37,000 and $30,000, respectively.
See "-- Employee Stock Purchase Plan" and "-- Executive Employment
Agreements."
(3) Holiday bonus amount accrued but not paid during 1998 fiscal year.
(4) Reflects payment of salary for that portion of the fiscal year ended January
31, 1997 when Mr. Connerty was directly employed by the Company and $11,330
of accounting fees paid to Douglas, Connerty & Co., for accounting services
rendered to the Company. Mr. Connerty was a principal owner of such
accounting firm.
EXECUTIVE EMPLOYMENT AGREEMENTS
The Company has entered into Employment Agreements ("Employment
Agreements") with Mr. Kees, Mr. Banks, Mr. Connerty and Mr. Riccardelli (the
"Executives"). The terms of these agreements, which are similar, are as follows:
The Employment Agreements, as amended as of February 28, 1997, and January
30, 1998, provide for employment by the Company for a term of three years from
September 1, 1996, for all of the Executives. Mr. Kees' annual base salary as of
September 1, 1996, was $200,000, which was to increase to $225,000 for 1997 and
$250,000 for 1998. Messrs. Banks and Connerty's annual base salary for the same
period was $120,000, which was to increase to $132,000 for 1997 and $145,000 for
1998. Mr. Riccardelli's annual base salary as of September 1, 1996, was $80,000
which was to increase to $90,000 for 1997 and $100,000 for 1998. The Employment
Agreements provide that the Board of Directors, with respect to Mr. Kees (and
the CEO with respect to all other employees) may, at their discretion, increase
the base amount of salary at any time during the contract period. An annual
target bonus is calculated based upon a comparison of actual profits with a
target profit amount. The target profit amount is a number approved by the CEO
which is calculated based upon a formula consisting of earnings from operations
before taxes, interest, depreciation and amortization. Each Executive was to be
offered an opportunity to participate in the Employee Stock Purchase Plan. The
Company is obligated to use its best efforts to procure and maintain a group
health insurance policy covering the Executives. Due to the Company's inability
to obtain satisfactory financing to implement its business plan, the Company did
not meet the targets established for the payment of bonuses and each Executive
has agreed to forgive the obligation in their respective contracts for the
payment of increases in base salary for 1997 and 1998 in the respective amounts
of $75,000 by Mr. Kees, $37,000 by Mr. Banks, $37,000 by Mr. Connerty and
$30,000 by Mr. Riccardelli. In recognition thereof and in order to induce the
Executives to continue working for the Company, the Board of Directors agreed to
forgive the principal and accrued interest due to the Company with respect to
promissory notes given by each Executive in connection with the acquisition of
Stock Purchase Shares under the Employee Stock Purchase Plan in the amounts of
$1,010,193 for Mr. Kees, $153,360 for each of Messrs. Banks and Connerty and
$155,096 for Mr. Riccardelli. The forgiveness by the Executives of their rights
to increased base salaries and the forgiveness of the promissory notes by the
Company were reflected in agreements entered into between the respective
Executive and the Company as of January 30, 1998. The Employment Agreements also
contain confidentiality covenants in the event of termination.
Mr. Kees' Employment Agreement includes the following additional benefits:
(i) disability insurance (so as to provide Mr. Kees with a monthly income equal
to the twelve months average immediately preceding the
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disability and until Mr. Kees reaches the age of sixty-five), medical and dental
insurance (as determined by the Board of Directors from time to time), and
fringe benefits (which may be authorized and approved by the Board of
Directors); (ii) if Mr. Kees is terminated for cause he is entitled to receive
50% percent of the amount of annual base salary to which he would have been
entitled had he completed the full term of the Employment Agreement; and (iii)
Mr. Kees cannot be placed on administrative leave.
INCENTIVE COMPENSATION
The Company has instituted an incentive bonus plan for all of its
employees, including officers, based upon performance. A bonus shall be payable
based upon a comparison of the actual profit achieved by the Company to the
budgeted profit for such fiscal year. The bonus payable to each participant is
calculated based upon a pre-determined formula. The Company believes that this
practice is prevalent within its industry and is a necessary component to
attract and retain qualified persons. No such bonus has been paid.
STOCK OPTION PLAN
The Company's Board of Directors adopted a Stock Option Plan (the "Plan"),
effective October 18, 1996, and approved by the shareholders on October 31,
1996. Under the Plan, the Company has reserved an amount equal to 10% of the
outstanding shares of Common Stock for issuance pursuant to the exercise of
options. Options may be granted to selected employees, officers, directors,
consultants or advisors.
The Plan will be administered by the Board of Directors or by a committee
appointed by the Board of Directors to administer the Plan. Options may be
granted only to such employees, officers, directors, consultants and advisors of
the Company, as the committee shall select from time to time in its sole
discretion, provided, however, that only employees of the Company may be granted
incentive stock options ("ISOs").
Under the Plan, the Company may grant either ISOs or options which are not
qualified as incentive stock options ("NQSO"). The committee shall determine the
number of shares of Common Stock for which the option shall be granted, the
exercise price of the option, the periods during which the option may be
exercised, and all terms and conditions of the option. The exercise price of an
option shall not be less than 85% of the fair market value of the Common Stock
at the time the option is granted. The exercise price of any ISO granted to a
person owning more than 10% of the total combined voting power of all classes of
stock of the Company shall be equal to at least 110% of the fair market value of
the shares of Common Stock at the time of the grant. The term of these options
may not exceed ten years.
In the event that the number of outstanding shares of Common Stock of the
Company is changed by a stock dividend, stock split, reverse stock split,
combination, reclassification or similar change in the capital structure of the
Company without consideration, the number of shares of Common Stock available
under this Plan, the number of shares of Common Stock subject to outstanding
options, and the exercise price per share of such options shall be
proportionately adjusted, subject to any required action by the Board or
shareholders of the Company. Upon a change in control of the Company, the
committee shall be permitted to take any actions it deems appropriate with
regard to stock options outstanding under the Plan. Such actions may include,
without limitation, accelerating exercisability of the options and requiring the
optionee to surrender options held for certain consideration described in the
Plan. In the event of a recapitalization or reorganization after which the
Company is not the surviving corporation, the committee may adjust the number,
price or options to reflect the restructuring event. No options have been
granted under the Plan.
EMPLOYEE STOCK PURCHASE PLAN
The Company's Board of Directors had adopted and ratified an Employee Stock
Purchase Plan (the "Plan") October 18, 1996, as amended in June 1997, pursuant
to which all employees of the Company were eligible to participate. Each
employee designated to participate (a "Participant") by the Board of Directors
was required to enter into a Restricted Stock Purchase Agreement, a recourse
promissory note (the "Purchase Note") and a Stock Pledge Agreement securing the
Purchase Note. The number of shares of Common Stock to be acquired by each
participant (the "Stock Purchase Shares"), the purchase price as well as the
period for repayment all were to be as determined by the Board of Directors. The
Participant's right to sell, transfer,
36
pledge, hypothecate or otherwise dispose ("Disposition Rights") of the Stock
Purchase Shares vests in equal quarterly increments over a period of between
three and ten years ("Vesting") commencing at such time as the Board shall
determine (the "Commencement Date"), so long as the Participant meets all of its
obligations under the Restricted Stock Purchase Agreement, the Stock Pledge
Agreement and the Purchase Note. Interest on the Purchase Note would commence to
accrue consistent with the determination of Vesting at the applicable long term
federal rate.
The Board of Directors had granted to Messrs Kees, Banks, Riccardelli and
Connerty the right to purchase an aggregate of 181,250 Stock Purchase Shares at
a price per share of $8.00 as compared to the determined fair market value of
$6.08 per share at the time of the grant. Each Participant issued a Purchase
Note to the Company for the full purchase price, at the time of grant,
aggregating $1,450,000. Pursuant to action taken by the Board of Directors in
January 1998, all of the outstanding obligations to the Company of each of
Messrs Kees, Banks, Riccardelli and Connerty, in the respective amounts of
$1,010,193, $153,360, $155,096 and $153,360, including all accrued but unpaid
interest were deemed to be paid in full and no longer owing. The interests of
each of them in their respective Stock Purchase Shares were deemed to be fully
vested, in the respective amounts owned by each such Participant, without
restriction. Messrs' Kees, Banks, Riccardelli and Connerty agreed to waive their
rights to deferred compensation in the respective amounts of $75,000, $37,000,
$30,000 and $37,000.
No further stock is available to be granted under the Employee Stock
Purchase Plan.
LIMITATION ON DIRECTORS' AND OFFICERS' LIABILITY AND INDEMNIFICATION
The Articles of Incorporation of the Company limit the liability of
directors for monetary damages to the fullest extent permitted under California
law. The effect of this provision is that the Company and shareholders, through
derivative suits, may not recover monetary damages against a director for any
alleged failure to discharge one's duties as a director, with certain
exceptions. Directors may still be liable for monetary damages for failure to
discharge such duties for: (i) acts or omissions that involve intentional
misconduct or a knowing and culpable violation of the law, (ii) acts and
omissions that a director believes to be contrary to the best interests of the
Company or its shareholders or that involve the absence of good faith on the
part of the director, (iii) any transaction from which a director derived an
improper personal benefit, (iv) acts or omissions that show a reckless disregard
for the director's duty to the Company or its shareholders in the circumstances
in which the director was aware, or should have been aware, in the ordinary
course of performing a director's duties, of a risk of a serious injury to the
Company or its shareholders, (v) acts or omissions that constitute an unexcused
pattern of inattention that amounts to an abdication of the director's duty to
the Company or its shareholders, (vi) any act or omission as an officer,
notwithstanding that the officer is also a director or that his or her actions,
if negligent or improper, have been ratified by the directors, (vii) contracts
or other transactions between corporations and directors having interrelated
directors in violation of Section 310 of the California Corporations Code, and
(vii) distributions, loans or guarantees made in violation of Section 316 of the
California Corporations Code.
The Articles of Incorporation also allow the Company to indemnify any
director, officer, employee, agent or other person serving at the request of the
Company (collectively known as "Agent") for breach of duty to the Company and
its shareholders to the fullest extent allowed by California law. Generally
speaking, the Company shall have the duty to indemnify any Agent who prevails on
the merits in defense of any action brought against him or her relating to
breach of the Agent's duty to the Company or its Shareholders. The Company may
provide indemnification where the Agent has acted in good faith and in a manner
that the Agent reasonably believed was in the best interests of the Company and
in the case of a criminal proceeding where the Agent had no reasonable cause to
believe that its conduct was unlawful. The Company shall not, with certain
exceptions, provide indemnification where it appears (i) that it would be
inconsistent with a provision of the articles, bylaws, a resolution of the
shareholders, or an agreement in effect at the time of the accrual of the
alleged cause of action asserted in the proceeding in which expenses were
incurred or other amounts were paid, which prohibits or otherwise limits
indemnification, or (ii) would be inconsistent with any condition expressly
imposed by a court in approving a settlement.
37
At present there is no pending litigation or proceeding involving a
director or officer of the Company in which indemnification is required or
permitted, and the Company is not aware of any threatened litigation or
proceeding that may result in a claim for such indemnification. The Company
believes that the indemnification provisions in its Articles of Incorporation
are necessary to attract and retain qualified persons as directors and officers.
The Company does not have any separate indemnification agreements with its
directors or officers.
Insofar as indemnification for liabilities under the Securities Act may be
permitted to Company directors, officers and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the Company has been advised
that in the opinion of the Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
CERTAIN TRANSACTIONS
CAPITOL BAY GROUP AND CAPITOL BAY SECURITIES, INC.
C Brands Notes; Conversion of Notes into Common Stock-Indemnification
Agreement
Pursuant to Memorandum of Agreement, dated August 8, 1995, between the
Company, Gregory Plunkett ("Plunkett"), the founder of the Company and a holder
of in excess of 5% of the Common Stock of the Company, Capitol Bay Group and
various other shareholders of the Company (the "August 8, 1995 Agreement"),
Capitol Bay Group committed and undertook, through and on behalf of its
affiliated entity, Capitol Bay Securities, Inc. ("Capitol Bay"), to certain
actions therein, including raising financing for the Company. Capitol Bay
thereupon raised $622,500 through the sale of the Company's convertible
promissory notes to C Brands Management, L.L.C. ("C Brands"), in exchange for
funds provided in the amount of $215,000 in January 1996 (the "Initial Note"),
and a second convertible promissory note in the principal amount of $407,500
issued on October 31, 1996 (the "Supplemental Note" and collectively, the
"Notes"). Effective November 27, 1997, the entire principal and interest of
$736,000 owing to C Brands under the Notes was converted into 46,000 shares of
Common Stock. Stephen C. Kircher is a principal owner of Capitol Bay Group and
Capitol Bay and is the managing member of C Brands. Capitol Bay Group and C
Brands, collectively, are the beneficial owners of in excess of 5% of the
Company's Common Stock prior to the Offering.
The August 8, 1995 Agreement required that Plunkett transfer certain of his
shares of Common Stock to other parties to the August 8, 1995 Agreement in
settlement of various disputes. It further provided that Plunkett was to
transfer certain of his shares of Common Stock to Capitol Bay and to C Brands in
payment of certain obligations arising thereunder. Plunkett has initiated
litigation against the Company only, seeking, among other things, a judicial
determination that the conditions set forth in the August 8, 1995 Agreement have
not been satisfied and, therefore, that the transfer of his shares of Common
Stock as required thereunder be rescinded. Pursuant to a letter agreement as of
January 30, 1998, the Company has agreed to indemnify C Brands to the extent
that a court should order that the 31,250 shares of Common Stock transferred to
C Brands be returned to Plunkett. See "Business -- Legal Proceedings."
1997 Private Placement of Stock
In the period between June and November 1997, the Company sold 108,499
shares of Common Stock at a per share price of $8.00. The shares of Common Stock
were offered on a best efforts basis through Capitol Bay, which was acting as
the Company's Placement Agent. Pursuant to the provisions of a Placement Agent
Agreement as of June 25, 1997, the Company paid an aggregate of $102,080 in cash
compensation to Capitol Bay for the placement of the shares of Common Stock. By
way of final settlement of all of Capitol Bay's rights whether pursuant to the
Placement Agent Agreement or otherwise arising out of all transactions between
the parties since the August 8, 1995 Agreement, the Placement Agent Agreement
was amended as of January 30, 1998, and all rights thereunder and with respect
to any and all services previously provided by Capitol Bay Group or Capitol Bay
arising out of the reorganization of the Company, infusions of capital and the
retention of new management all pursuant to the August 8, 1995 Agreement with
the founder of the Company, Capitol
38
Bay was granted 14,375 shares of Common Stock and warrants, protected from
adjustment in the event of future reverse stock splits up to the time of the
closing of the Offering, to purchase 148,000 shares of Common Stock at $7.50 per
share, exercisable commencing January 30, 1999 through January 30, 2003.
Additionally, an over payment of commissions thereon in the amount of $72,975,
plus interest of $2,047, (in the aggregate, the "Commission Refund") was repaid
by Capitol Bay to the Company on April 18, 1998, in the form of an agreement to
offset against such Commission Refund due to the Company, an equal amount due by
the Company to certain unaffiliated individuals on whose behalf Capitol Bay was
authorized to act, in the principal amount of $60,000 plus interest thereon in
the amount of $26,737 arising out of loans made by such individuals to the
Company in early 1994. The net difference of $11,715 will be paid by the Company
to Capitol Bay from the proceeds of the Offering. See "Use of Proceeds."
OWNERSHIP OF PREMISES
Stephen C. Kircher and Thomas E. Kees are the members of Three Sons, L.L.C.
which is the owner of the building in which the Company currently maintains its
facilities. Capitol Bay is the master tenant of the building and is an occupant
of a portion of the building. The Company occupies its premises pursuant to a
month to month tenancy from Capitol Bay on terms and conditions which are
consistent with rentals for similar facilities in the area. The Company has
notified Capitol Bay that it intends to move to new premises in the area to be
leased from unaffiliated parties and will terminate the month to month tenancy
at that time. It is anticipated that the Company will relocate from the existing
premises in September 1998.
APRIL 1997 DAYSTAR CREDIT FACILITY AND RELATED WARRANTS
Throughout this document the term to DayStar ("DayStar") refers to three
entities: DayStar Fund II, L.L.C.; DayStar Partners, L.P. and Larry Wells
Company Inc. Both DayStar Partners L.P. and DayStar Fund II, L.L.C. are managed
by Larry Wells Company, Inc. and are interrelated. Mr. Larry Wells, who is an
affiliate of each of the DayStar entities, was elected to serve as a director of
the Company on January 30, 1998.
In April 1997, the Company entered into an agreement with DayStar pursuant
to which DayStar agreed to provide a credit facility to the Company in an amount
not to exceed $440,000 to be used for working capital purposes (the "Initial
Credit Facility"). The Company executed a seven-month revolving promissory note
providing for the payment of interest on amounts outstanding at the initial rate
of 12% per annum, payable at the maturity of the note. In July 1997, a
supplemental credit facility was provided by DayStar in the aggregate additional
amount of $408,000 the "Supplemental Credit Facility" and (collectively the
"DayStar Credit Facility"). In connection with the Supplemental Credit Facility,
the maturity of the entire DayStar Credit Facility was extended to thirteen
months from the date of the last advance (July 1997) and the initial 12%
interest rate on the Initial Credit Facility changed to 15% per annum, effective
January 1998, with interest on the Supplemental Credit Facility being incurred
at the rate of one percent per week. If the DayStar Credit Facility is not
repaid at the maturity of the note, the Company may repay the principal and
interest outstanding in monthly amounts of $20,000 with any unpaid amounts due
and payable at the expiration of 24 months. In consideration for the granting of
the DayStar Credit Facility, the Company initially granted to DayStar warrants
to purchase 62,500 shares of the Common Stock at $7.20 per share and warrants to
purchase 31,250 shares of the Common Stock at $16.00 per share, exercisable for
three-years commencing 90 days after the closing of an offering of securities by
the Company (the "Facility Warrants"). In addition certain "piggy-back"
registration rights were granted which are not triggered by this Offering. On
October 30, 1997, DayStar purchased 9,375 shares of the Common Stock of the
Company in the private placement at a price of $8.00 per share by converting
$75,000 due under the DayStar Credit Facility. As of March 31, 1998, an
aggregate of approximately $725,000 in principal and interest was due under the
DayStar Credit Facility. On April 17, 1998, DayStar agreed to fix the interest
payable under the Supplemental Credit Facility after January 1, 1998 at an
amount not to exceed $39,100, the amount which would accrue thereon from January
1, 1998 through May 31, 1998, plus any amounts accrued and unpaid with respect
to the period preceding January 1, 1998, with no further interest to accrue
thereafter and extended the maturity to September 1, 1998. In consideration
therefor, the Company agreed to revise the exercise price on the 31,250 Facility
Warrants originally exercisable at $16 per share to $7.20 per share, such that
all 93,750 of the Facility Warrants are now
39
exercisable at $7.20 per share. Interest continues to accrue on the Initial
Credit Facility at the note rate of 15% per annum. It is the intent of the
Company to repay the DayStar Credit Facility from the proceeds of the Offering.
See "Use of Proceeds," "Management" and "Principal Shareholders."
PACIFIC ACQUISITION GROUP TRANSACTIONS
During the period commencing in November 1995 and ending in March 1996, the
Company engaged in a private placement pursuant to which it sold $300,000 of its
one year promissory notes (the "Bridge Notes"), bearing interest at a rate of
15% per annum and maturing on the anniversary of the date of issuance. In June
1996, the Company sold an additional $300,000 of the Bridge Notes, bearing
interest at a rate of 15% per annum. All of the Bridge Notes were paid in full
in June 1997 from the proceeds of the DayStar Credit Facility. Pacific
Acquisition Group, Inc. ("PAG") acted as placement agent in connection with
these private placements and was paid cash commissions of $90,000. Pursuant to
various amendments to the Bridge Loan and Consulting Agreement between the
parties, (the "Amended Agreement"), the Company has issued 59,375 shares of
Common Stock and had agreed to issue additional shares of Common Stock, up to a
maximum of 200,000, in the event the value of the Common Stock holdings of PAG
were less than an agreed $1,300,000 as measured 12 months following the
commencement of trading in the Common Stock (the "PAG Contingency"). Pursuant to
the Amended Agreement, the Company has granted certain "piggy-back" registration
rights to PAG (which are not triggered by this Offering) and Capitol Bay
Securities was granted a first right of refusal to purchase any of the Common
Stock subject to the Amended Agreement. Pursuant to a Supplement to the Second
Amended and Restated Bridge Loan and Consulting Agreement as of May 24, 1998
(the "Supplemental Agreement"), the parties agreed to deem the PAG Contingency
satisfied in consideration of the issuance of 120,625 shares of Common Stock to
be issued following the closing of the Offering. The Supplemental Agreement
included a full accord and satisfaction and mutual general releases between the
parties. The registration rights and first right of refusal in favor of Capitol
Bay Securities remain in effect. See "Management," "Principal Shareholders" and
"Shares Eligible for Future Sale."
SHANNON CONSULTING ARRANGEMENT
Douglas Shannon is the holder of 62,500 shares of the Common Stock, or
approximately 6% of the outstanding stock prior to the Offering. Pursuant to an
informal arrangement with the Company, he acts as a consultant and advisor in
connection with the marketing and sales activities of the Company and has acted
in this capacity since 1995. He is paid a monthly fee of $6,000. See "Principal
Shareholders."
LARRY WELLS COMPANY, INC., CREDIT FACILITY
On July 6, 1998, Larry Wells Company, Inc., loaned $103,500 to the Company.
Larry J. Wells, a director of the Company, is the president and sole owner of
Larry Wells Company, Inc. The amount due to be repaid shall be $115,000 if paid
any time prior to October 31, 1998, $145,000 if paid thereafter, the amount due
increasing by $1,500 per month thereafter until paid in full. See "Use of
Proceeds," "Management" and "Principal Shareholders."
40
PRINCIPAL SHAREHOLDERS
The following sets forth certain information regarding beneficial ownership
of Common Stock as of June 30, 1998, as adjusted to reflect the sales of the
Units offered hereby by (i) each person who is known by the Company to
beneficially own more than five percent of the Common Stock, (ii) each of the
Company's directors, (iii) each Named Executive Officer and (iv) all executive
officers and directors as a group. Except as otherwise indicated, the persons
named in the table have sole voting and investment power with respect to all
shares of Common Stock beneficially owned, subject to community property laws
where applicable. All of the calculations below assume the 20,343 Note Shares
are outstanding. Except as otherwise indicated, the address of each of the
persons in this table is as follows: c/o Legacy Brands, Inc., 2424 Professional
Drive, Suite A, Roseville, California 95661.
[Enlarge/Download Table]
PERCENT OWNED
--------------------
NAME AND ADDRESS OF NUMBER OF BEFORE AFTER
BENEFICIAL OWNER(1) SHARES OFFERING OFFERING
------------------- --------- -------- --------
Thomas E. Kees.............................................. 125,000 12.00% 4.92%
Gregory B. Plunkett(3)...................................... 125,000 12.00% 4.92%
c/o Tobin & Tobin
1 Montgomery Street, 15th floor
San Francisco, CA 94104
Capitol Bay Group(4)(6)..................................... 114,621 11.00% 4.51%
2424 Professional Drive
Roseville, CA 95661
BKP Partners(5)............................................. 88,205 8.47% 3.47%
Citicorp Center, Suite 3900
One Sansome Street
San Francisco, CA 94102
C Brands, L.L.C.(4)(6)...................................... 77,250 7.42% 3.04%
2424 Professional Drive
Roseville, CA 95661
Douglas Shannon............................................. 62,500 6.00% 2.46%
P.O. Box 1959
Aptos, CA 95001
CBG Partnership(7).......................................... 61,458 5.90% 2.42%
100 The Embarcadero, Penthouse
San Francisco, CA 94105
Pacific Acquisition Group, Inc.(8).......................... 59,375 5.70% 2.34%
21800 Burbank Blvd., Suite 100
Woodland Hills, CA 91367
Craig C. Connerty........................................... 18,750 1.80% *
Michael E. Banks............................................ 18,750 1.80% *
Steven Riccardelli.......................................... 18,750 1.80% *
Larry J. Wells(9)........................................... 9,375 * *
Arthur L. Patch............................................. 625 * *
All directors and executive officers as a group (6 191,250 18.36% 7.52%
persons)..................................................
---------------
* Less than 1%
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. In computing the number of
shares of Common Stock beneficially owned by a person and the percentage
ownership of that person, shares of Common Stock subject to options or
warrants held by that person that are currently exercisable or exercisable
within 60 days of June 30, 1998 are deemed outstanding.
(2) Based upon the total amount of Common Stock outstanding after the Offering.
(Footnotes continue on following page)
41
(3) Does not include 103,125 shares of Common Stock claimed by Mr. Plunkett as
owed to him by C Brands, BKP Partners and CBG Partnership pursuant to an
action for declaratory relief filed against the Company (the "Plunkett
Lawsuit"). See "Business -- Legal Proceedings."
(4) Mr. Stephen C. Kircher is the manager of C Brands L.L.C., which is the owner
of 77,250 shares of Common Stock, and he is a principal owner of Capitol Bay
Group, which is the beneficial owner of 34,559 shares of Common Stock.
Capitol Bay Group is an affiliate of Capitol Bay Securities, which has acted
as a placement agent with respect to the sale of securities by the Company.
Mr. Kircher exercises voting and investment power over the shares of Common
Stock held by C Brands L.L.C. and Capitol Bay Group, but disclaims
beneficial ownership. Mr. Kircher beneficially owns 2,812 shares of Common
Stock. See "Certain Transactions."
(5) Includes 21,875 shares of Common Stock claimed by Plunkett pursuant to the
Plunkett Lawsuit.
(6) Includes 21,875 shares of Common Stock claimed by Plunkett pursuant to the
Plunkett Lawsuit. The Company has agreed to indemnify C Brands to replace
any shares of Common Stock which the court might award to Plunkett from C
Brands.
(7) Includes 7,292 shares of Common Stock held by Mr. Bruce Bercovich, a general
partner therein who exercises voting and investment power over the shares of
Common Stock held by this entity.
(8) Pacific Acquisition Group, Inc. ("PAG") disclaims beneficial ownership of
44,682 shares of Common Stock. Does not reflect 120,625 shares of Common
Stock issuable after the closing of the Offering of which PAG disclaims
beneficial ownership as to 90,468 shares of Common Stock. The Company has
been informed by PAG that the shares of Common Stock as to which PAG
disclaims beneficial ownership are held by PAG for the benefit of, and will
be distributed to, its investors which includes approximately 600
individuals or entities. See "Certain Transactions."
(9) Mr. Larry J. Wells is the manager of DayStar which owns 9,375 shares of
Common Stock. DayStar has provided a credit facility to the Company in the
original aggregate amount of $848,000 of which $650,000 remains outstanding
as of May 15, 1998. Mr. Wells exercises sole investment and voting power
with respect to the shares of Common Stock held by each of the DayStar
entities but disclaims beneficial ownership of the shares of Common Stock
held by DayStar Partners, L.P., and DayStar Fund II, L.L.C. Mr. Wells is
also the President and sole owner of Larry Wells Company, Inc., which has
provided a loan to the Company, on July 6, 1998, in the principal amount of
$103,500. See "Certain Transactions."
42
DESCRIPTION OF SECURITIES
GENERAL
As of the date of the Prospectus, the Company is authorized to issue
30,000,000 shares of Common Stock, without par value (the "Common Stock") and
10,000,000 shares of Preferred Stock, without par value (the "Preferred Stock").
UNITS
Each Unit consists of one share of Common Stock and one Common Stock
Purchase Warrant. The Common Stock and the Warrants comprising the Units will
separate and trade as separate securities 30 days after the completion of the
Offering or such shorter period as determined by the Representative.
COMMON STOCK
As of June 15, 1998, 1,041,730 shares of Common Stock were issued and
outstanding. See "Capitalization."
Holders of Common Stock are entitled to cast one vote for each share held
of record for all matters submitted to a vote of the shareholders, including
election of directors. Every person entitled to vote at an election for
directors may cumulate votes, subject to providing proper notice. Shareholders
holding a majority of the voting power of the Common Stock issued and
outstanding and entitled to vote, represented in person or by proxy, are
necessary to constitute a quorum at any meeting of the Company's shareholders,
and the vote by the holders of a majority of such outstanding shares of the
Common Stock is required to effect certain fundamental corporate changes such as
liquidation, merger or amendment of the Company's Articles of Incorporation.
The Company has not made any provision for the payment of dividends with
respect to the Common Stock. Holders of Common Stock are not entitled to
preemptive or subscription or conversion rights, and there are no redemption or
sinking fund provisions applicable to the Common Stock. Upon liquidation,
dissolution or winding up of the Company, the assets legally available for
distribution to shareholders are distributable ratably among the holders of the
Common Stock outstanding at the time after payment of claims of creditors and
liquidation preferences of the holders of any outstanding Preferred Stock if
any. All outstanding shares of Common Stock are, and the Common Stock offered
hereby will be when issued, fully paid and non-assessable. The rights,
preferences and privileges of holders of Common Stock are subject to any series
of Preferred Stock which the Company may issue in the future.
WARRANTS
The following is a brief summary of certain provisions of the Warrants. For
a more complete description of the Warrants, reference is made to the actual
text of the Warrant Agreement between the Company and U. S. Stock Transfer, Inc.
(the "Warrant Agent"), a copy of which has been filed as an exhibit to the
Registration Statement of which the Prospectus is a part.
Exercise Price and Terms. Each Warrant initially entitles the holder to
purchase one share of Common Stock at an initial price of $ (150% of the
initial public offering price of the Units). The Warrants will be subject to
certain adjustments, including if the Company's audited fiscal 2000 net income
(adjusted to exclude any expenses relating to the vesting of employee options or
warrants) before interest expense and taxes ("FY2000 Net Income") is equal to or
greater than $1,000,000, but less than $1,500,000, a one time downward reduction
of the exercise price to $ per share (120% of the initial public offering
price of the Units); and if such FY2000 Net Income is less than $1,000,000, then
the exercise price shall be reduced to $ per share (85% of the initial
public offering price of the Units). Such reduction (the "Price Reduction") will
be effective as of the date of the public announcement of the audited results
for the fiscal year 2000. The final Warrant exercise price reflecting such Price
Reduction, if any, is referred to herein as the "Final Warrant Exercise Price."
No fractional shares will be issued upon the exercise of the Warrants herein
43
described. The Warrants will be exercisable immediately upon separation of the
Units and will expire five years from the date of this Prospectus unless earlier
redeemed.
Adjustments. The exercise price and number of shares of the Common Stock
purchasable upon the exercise of the Warrants are subject to other adjustments
upon the occurrence of certain events, including stock dividends, stock splits,
combinations or reclassifications of the Common Stock. Additionally, an
adjustment would be made in the case of a reclassification or exchange of the
Common Stock, consolidation or merger of the Company with or into another
corporation (other than a consolidation or merger in which the Company is the
surviving corporation) or sale of all or substantially all other assets of the
Company, in order to enable the holder to acquire the kind and number of shares
of stock or the securities or property receivable upon such reorganization,
reclassification or other change by holders of the number of shares of Common
Stock into which the Warrants might have been exercised.
Redemption Provisions. The Company may redeem the outstanding Warrants at
any time, in whole or in part, at a price of $0.25 per Warrant upon not less
than 30 days' prior written notice to the registered holders thereof, provided
that the closing bid price of the Common Stock has been at least (i) 200% of the
Final Warrant Exercise Price, if there has been no Price Reduction, or (ii) 150%
of the Final Warrant Exercise Price, if there has been a Price Reduction, in
either case for at least 20 consecutive trading days immediately preceding the
date of the notice of redemption.
Transfer, Exchange and Exercise. The Warrants are in registered form and
may be presented to the Warrant Agent for transfer, exchange or exercise at any
time on or prior to their expiration date five years from the date of this
Prospectus, at which time the Warrants will become wholly void and of no value.
If a market for the Warrants develops, the holder may sell the Warrants instead
of exercising them. There can be no assurance, however, that an active market
for the Warrants will develop or continue.
Warrant Holder not a Shareholder. The Warrants do not confer upon holders
thereof any voting, dividends, or other rights as shareholders of the Company.
Modification of Warrants. The Company and the Warrant Agent may make such
modifications to the Warrants as they deem necessary and desirable that do not
adversely affect the interests of the warrant holders. The Company may, in its
sole discretion, lower the exercise price of the Warrants for a period of not
less than 30 days on not less than 30 days prior written notice to the warrant
holders and the Representative. Modification of the number of securities
purchasable upon the exercise of any Warrant, the exercise price (other than
lowering the exercise price as provided in the preceding sentence) and the
expiration date with respect to any Warrant requires the consent of two-thirds
of the warrant holders. No other modifications may be made to the Warrants,
without the consent of two-thirds of the warrant holders.
The Warrants are not exercisable unless, at the time of the exercise, the
Company has a current prospectus covering the shares of the Common Stock
issuable upon exercise of the Warrants, and such shares have been registered,
qualified or deemed to be exempt under the securities or "blue sky" laws of the
state of residence of the exercising holder of the Warrants. Although the
Company has undertaken to use its reasonable best efforts to have all of the
shares of Common Stock issuable upon exercise of the Warrants registered or
qualified on or before the exercise date and to maintain a current prospectus
relating thereto until the expiration of the Warrants, there can be no assurance
that it will be able to do so.
Although the Warrants will not knowingly be sold to purchasers in
jurisdictions in which the underlying shares are not registered or otherwise
qualified for sale, investors in such jurisdictions may purchase Warrants in the
secondary market or investors may more to jurisdictions in which the shares
underlying the Warrants are not so registered or qualified during the period
that the Warrants are exercisable. In such event, the Company would be unable to
issue shares to those persons desiring to exercise their Warrants, and holders
of Warrants would have no choice but to attempt to sell Warrants in a
jurisdiction where such sale is permissible or allow them to expire unexercised.
The foregoing discussion of certain terms and provisions of the Warrants is
qualified in its entirety by reference to the detailed provisions of the Warrant
Agreement, the form of which has been filed as an exhibit to the Registration
Statement of which this Prospectus is a part.
44
For the life of the Warrants, the holders thereof have the opportunity to
profit from a rise in the market price of the Common Stock without assuming the
risk of ownership of the shares issuable upon exercise of the Warrants. The
Warrant holders may be expected to exercise their Warrants at a time when the
Company would, in all likelihood, be able to obtain any needed capital by an
offering of securities on terms more favorable than those provided for by the
Warrants. Furthermore, the terms on which the Company could obtain additional
capital during the life of the Warrants may be adversely affected.
PREFERRED STOCK
The Company's amended Articles of Incorporation will permit the Company's
Board of Directors, without further action or vote of the shareholders, to issue
up to 10,000,000 shares of Preferred Stock in one or more series and to
determine the designations, preferences, voting powers, qualifications and
special or relative rights or privileges of the shares of each such series,
including the dividend rights, dividend rate, conversion rights, voting rights,
terms of redemption (including sinking fund provisions), redemption price or
prices, liquidation preferences and the number of shares constituting any series
or the designations of such series. These rights and privileges could limit the
voting power of holders of Common Stock and restrict their rights to receive
dividends or liquidation proceeds. In addition, the issuance of Preferred Stock,
while providing the Company with financial flexibility in connection with
possible acquisitions and other corporate purposes, could, under certain
circumstances, make it more difficult for a third party to gain control of the
Company, discourage bids for the Common Stock at a premium, or otherwise
adversely affect the market price of the Common Stock. This amendment will
become effective upon filing of a Certificate of Amendment with the California
Secretary of State.
OTHER WARRANTS AND OPTIONS
Randy Haag and Michael Staskus (collectively referred to as "Haag") were
each granted warrants in March 1995 to purchase 18,750 shares of Common Stock,
each at a current exercise price of $3.20 per share. These warrants are
exercisable commencing 90 days following the completion of the Offering and
expire April 15, 1999. Similar warrants were granted to Thomas O'Stasic, Sr. and
Steve Jizmagian with respect to 1,562 and 6,250 shares of Common Stock,
respectively. These warrants are currently exercisable at $3.20 per share and
also expire on April 15, 1999. Certain registration rights have been provided to
the holders of these warrants as set forth therein. Haag was also granted
warrants in January 1998, to purchase 100,000 shares of Common Stock at $7.50
per share.
In November 1997, Capitol Bay Securities, Inc. acquired warrants to
purchase 148,000 shares of Common Stock, at an exercise price of $7.50,
exercisable from January 1, 1999 through January 30, 2003 and having protection
against further reverse stock splits until the closing of this Offering. Certain
piggy-back registration rights are provided to Capitol Bay as contained therein.
Pursuant to the provisions of the DayStar Credit Facility, DayStar acquired
warrants to purchase 62,500 shares of Common Stock at an exercise price of $7.20
per share and 31,250 shares of Common Stock at an exercise price of $16.00 per
share of Common Stock, exercisable commencing at the expiration of 90 days after
the closing of a public offering of the securities of the Company and continuing
for three years. On April 17, 1998, pursuant to an agreement with the Company
modifying and placing a limitation on the amount of interest which would be
payable by the Company pursuant to the DayStar Credit Facility, the exercise
price with respect to these warrants pertaining to 31,250 shares of the Common
Stock was amended to $7.20 per share. These warrants contain certain piggy-back
registration rights.
None of the registration rights are being exercised with respect to the
Offering.
TRANSFER AGENT
The Company has selected U.S. Stock Transfer, Inc. to act as transfer agent
and registrar for the Common Stock and as Warrant Agent for the Warrants.
45
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offering, there has been no public market for the Units,
Common Stock or Warrants. No prediction can be made of the effect, if any, that
future market sales of shares of Common Stock or the availability of such shares
for sale will have on the prevailing market price of the Common Stock.
Nevertheless, sales of substantial amounts of such shares in the open market
could adversely affect the then prevailing market price of the Common Stock.
Upon completion of the Offering, the Company will have 2,541,730
outstanding shares of Common Stock. See "Description of Securities." The
1,500,000 shares of Common Stock which are included in the Units and sold in the
Offering (plus any shares sold as a result of any exercise of the
Representative's Over-Allotment Option) and the shares of Common Stock issuable
upon exercise of the Warrants will, subject to any applicable state law
restrictions on secondary trading, be freely tradeable without restriction under
the Securities Act, except that any shares purchased by an "affiliate" of the
Company (as that term is defined in Rule 144 of the Securities Act) will be
subject to the resale restrictions of Rule 144.
In general, under Rule 144, a person (or persons whose shares are required
to be aggregated) who has beneficially owned, for at least one year, shares of
Common Stock that have not been registered under the Securities Act or that were
acquired from an "affiliate" of the Company (in a transaction or chain of
transactions not involving a public offering) is entitled to sell within any
three month period a number of shares of such stock which does not exceed the
greater of 1% of the number of then outstanding shares (25,417 shares after the
Offering) or the average weekly reported trading volume during the four calendar
weeks preceding the sale. Sales under Rule 144 are also subject to certain
notice requirements and to the availability of current public information about
the Company and must be made in unsolicited brokers' transactions or to a market
maker. A person (or persons whose shares are aggregated) who is not an
"affiliate" of the Company under the Securities Act during the three months
preceding a sale and who has beneficially owned such shares for at least two
years is entitled to sell such shares under Rule 144(k) without regard to the
requirements discussed above, other than a requirement that such sales be made
in unsolicited brokers' transactions.
It is anticipated that except as described herein, all of the current
shareholders who own or beneficially hold 5% or more of the outstanding shares
of Common Stock of the Company and its officers and directors, aggregating
463,371 shares will have agreed that, for a period of 12 months after the
closing of the Offering, they will not offer, sell, grant any option for the
sale of or otherwise dispose of any equity securities of the Company without the
prior written consent of the Representative (the "Lock-Up"). Shareholders who
each own less than 5% of the outstanding Common Stock, comprising an aggregate
of 453,359 shares, are not subject to the Lock-Up, but are subject to the
provisions of Rule 144. The Company has not obtained such a Lock-Up from the
founder of the Company who is engaged in litigation with the Company regarding,
among other issues, the amount of Common Stock as to which he is the holder, nor
has it obtained a Lock-Up from PAG, as PAG disclaims beneficial ownership of all
but 14,693 shares of the 59,375 shares currently shown as beneficially held by
it. The Company's records reflect Gregory B. Plunkett is the holder of 125,000
shares of Common Stock or 12% of the outstanding Common Stock before the
Offering and 4.92% of the total outstanding Common Stock after the Offering is
completed. See "Business -- Legal Proceedings" and "Principal Shareholders."
Holders of warrants with respect to 248,000 shares of the Common Stock have
been granted "piggy-back" registration rights whereby they may be entitled to
include some or all of their shares in a subsequent registration statement being
filed by the Company with the Commission to sell its securities to the public.
In addition, holders of warrants with respect to 145,312 shares of the Common
Stock have been granted "demand registration rights," whereby under certain
circumstances they may require that the Company file a registration statement
with the Commission to register such shares for sale to the public, but only to
the extent that such shares of Common Stock may not otherwise be sold to the
public without restriction, such as pursuant to Rule 144. Holders of 59,375
shares of the Common Stock have been granted "piggy-back" registration rights
and hold such rights with respect to up to an additional 120,625 shares of
Common Stock to be issued after the closing of this Offering. See "Certain
Transactions."
46
Any employee or consultant to the Company who purchased shares pursuant to
a written compensation plan or contract is entitled to rely on the resale
provisions of Rule 701, which permit non-affiliates to sell their Rule 701
shares without having to comply with the public information, holding period,
volume limitations or notice provisions of Rule 144 and permits affiliates to
sell their Rule 701 shares without having to comply with the Rule 144 holding
period restrictions, in each case commencing 90 days after the date of this
Prospectus. Approximately 181,250 shares of the outstanding Common Stock, of
which 162,500 shares are held by affiliates, will be eligible for sale under
Rule 701. All holders of such shares have agreed to the Lock-Up with respect to
such shares.
47
UNDERWRITING
The underwriters named below (the "Underwriters"), for whom Paulson
Investment Company, Inc. is acting as Representative, have severally agreed,
pursuant to the terms and conditions of the Underwriting Agreement between the
Company and the several Underwriters (the "Underwriting Agreement"), to purchase
from the Company, and the Company has agreed to sell to the Underwriters, the
number of Units set forth in the table below:
[Download Table]
NUMBER
UNDERWRITER OF UNITS
----------- ---------
Paulson Investment Company, Inc.
---------
Total............................................. 1,500,000
=========
The Underwriting Agreement provides that the obligations of the
Underwriters to purchase such Units are subject to certain conditions. The
Underwriters are committed to purchase all of the 1,500,000 Units offered by
this Prospectus, but not the 225,000 Units subject to the Over-allotment Option
(described below), if any are purchased.
The Representative has advised the Company that the Underwriters propose to
offer the Units to the public at the initial public offering price set forth on
the cover page of this Prospectus and to selected dealers at such price less a
concession within the discretion of the Representative, and that the
Underwriters and such dealers may reallow a concession to other dealers,
including the Underwriters, within the discretion of the Representative. After
the initial public offering of the Units, the public offering price, the
concessions to selected dealers and the reallowance to other dealers may be
changed by the Representative. The Representative has informed the Company that
its does not expect the Underwriters to confirm sales of Units offered by this
Prospectus to any account over which they exercise discretionary authority.
The Company has granted the Representative an option, expiring at the close
of business 45 days after the date of this Prospectus, to purchase up to 225,000
additional Units from the Company on the same terms as apply to the sale of the
Units set forth above (the "Over-allotment Option"). The Representative may
exercise the option only to cover over-allotments, if any, incurred in the sale
of the Units.
The Company has agreed that if it elects to redeem the Warrants at any time
commencing one year after the date of this Prospectus, it will retain the
Representative as the Company's solicitation agent (the "Warrant Solicitation
Agent"). The Company has agreed to pay the Warrant Solicitation Agent for its
services a solicitation fee equal to no more than three percent of the total
amount paid by the holders of the Warrants who were solicited by the Warrant
Solicitation Agent to exercise the Warrants. The exercise of the Warrants will
be presumed to be unsolicited unless the customer states in writing that the
transaction was solicited by the Warrant Solicitation Agent and designates in
writing the registered representative at the Warrant Solicitation Agent entitled
to compensation for the exercise. The fee is not payable for the exercise of any
Warrant held by the Warrant Solicitation Agent in a discretionary account at the
time of exercise, unless the Warrant Solicitation Agent receives from the
customer prior specific written approval of such exercise. No member of the
National Association of Securities Dealers, Inc. ("NASD") or person associated
with a member of the NASD will receive a solicitation fee or any other
compensation or expense reimbursement in connection with the exercise of a
Warrant if the market price of the Common Stock received upon exercise of the
Warrant is lower than the exercise price of the Warrant.
The Underwriting Agreement provides for indemnification between the Company
and the Underwriters against certain liabilities, including liabilities under
the Securities Act and for contribution by the Company and the Underwriters to
payments that may be required to be made in respect thereof.
48
The Company has agreed to pay the Representative a nonaccountable expense
allowance equal to three percent of the gross proceeds from the sale of Units
offered hereby. In the event this Offering is not consummated, any
nonaccountable portion of the advanced payment will be promptly returned to the
Company.
The Company has agreed to issue to the Representative the Representative's
Warrants, which entitle the holders to purchase up to an aggregate of 150,000
Units at an exercise price per Unit equal to $ (120% of the initial
public offering price of the Units). The Representative's Warrants are not
transferable for one year from the date of issuance, except to individuals who
are either a partner or an officer of an Underwriter, by will or by the laws of
descent and distribution. The Representative's Warrants are not redeemable by
the Company. The Company has agreed to maintain an effective registration
statement with respect to the issuance of the securities underlying the
Representative's Warrants (and, if necessary, to allow their public resale
without restriction) at all times during the period in which the
Representative's Warrants are exercisable, commencing one year after the date of
this Prospectus. Such securities are being registered on the Registration
Statement of which this Prospectus is a part.
The Company has agreed that, for a period of one year following the closing
of the Offering, it will not, subject to certain exceptions, offer, sell,
contract to sell, grant any option for the sale or otherwise dispose of any
securities of the Company without the consent of the Representative. The
Company's officers, directors and certain holders of 5% or more of the
outstanding Common Stock, aggregating a total of 463,371 shares, have agreed
that for a period of one year following the closing of this Offering, they will
not offer, sell, contract to sell, grant any option for the sale or otherwise
dispose of any Common Stock of the Company (other than intra-family transfers or
transfers to trusts for estate planning purposes) without the consent of the
Representative, and thereafter, will give the Representative prior notice of
sales under Rule 144 for five years from the date of this Prospectus.
Until the distribution of the Units is completed, rules of the Commission
may limit the ability of the Underwriters and certain selling group members to
bid for and purchase the securities. As an exception to these rules, the
Underwriters are permitted to engage in certain transactions that stabilize the
price of the Units, Common Stock and/or Warrants. Such transactions consist of
bids or purchases for the purpose of pegging, fixing or maintaining the price of
the Units, Common Stock and/or Warrants. If the Underwriters create a short
position in the Units in connection with the Offering, i.e., if they sell more
Units than are set forth on the cover page of this Prospectus, the
Representative may reduce that short position by purchasing Units in the open
market. The Representative may also elect to reduce any short position by
exercising all or part of the Over-allotment Option described above.
The Representative may also impose a penalty bid on certain Underwriters
and selling group members. This means that if the Representative purchases Units
in the open market to reduce the Underwriters' short position or to stabilize
the price of the Units, Common Stock and/or Warrants, they may reclaim the
amount of the selling concession from the Underwriters and selling group members
who sold those securities as part of this Offering.
In general, purchase of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of a security to the extent that it were
to discourage resales of the security. Neither the Company nor the Underwriters
makes any representation or predictions as to the direction or magnitude of any
effect that the transactions described above may have on the price of the Units,
Common Stock and/or Warrants. In addition, neither the Company nor the
Underwriters makes any representation that the Underwriters will engage in such
transactions or that such transactions, once commenced, will not be discontinued
without notice.
Prior to this Offering, there has been no public market for the Company's
Units, Common Stock or Warrants. Accordingly, the initial public offering price
has been determined by negotiations between the Company and the Representative.
Among the factors considered in determining the initial public offering price of
the Units, and the exercise price and other terms of the Warrants were the
history and the prospects of the Company and the industry in which it operates,
the status and development prospects for the Company's
49
products, the experience and qualifications of the Company's executive officers
and the general condition of the securities markets at the time of the Offering.
In March 1998, the Representative loaned the Company $200,000, evidenced by
a promissory note bearing 10% simple interest. The principal and accrued
interest is due and payable on the earlier of the closing of this Offering or,
if the Offering has not closed by October 31, 1998, 30 days following the
Representative's demand for payment. It is anticipated that the Company will use
a portion of the net proceeds of this Offering to pay the principal and accrued
interest. See "Use of Proceeds."
LEGAL MATTERS
The validity of the Units, Common Stock and Warrants offered hereby will be
passed upon for the Company by Resch Polster Alpert and Berger, A Limited
Liability Partnership, Los Angeles, California. Harvey H. Rosen, of counsel to
Resch Polster Alpert and Berger, beneficially owns 4,687 shares of the Common
Stock. Certain legal matters relating to the Offering will be passed upon for
the Representative by Grover T. Wickersham, P.C., Palo Alto, California.
EXPERTS
The balance sheet as of January 31, 1998, and the statements of operations,
changes in shareholders' equity (deficit) and cash flows each of the two years
in the period then ended, included in this Prospectus, have been included herein
in reliance on the report, which includes an explanatory paragraph that
expresses substantial doubt about the Company's ability to continue as a going
concern as described in notes to such financial statements, of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
that firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
SB-2 under the Securities Act with respect to the Units, Common Stock and
Warrants offered hereby. This Prospectus omits certain information contained in
the Registration Statement and the exhibits and schedules thereto, as permitted
by the rules and regulations of the Commission. For further information with
respect to the Company and the Units, Common Stock and Warrants being offered
hereby, reference is made to the Registration Statement and the exhibits and
schedules thereto. Statements contained in the Prospectus as to the contents of
any contract or other document are not necessarily complete, and in each
instance, reference is made to the copy of such contract or document filed as an
exhibit to the Registration Statement, and each such statement being qualified
in all respects by such reference. Copies of the Registration Statement,
including exhibits and schedules thereto, may be inspected without charge at the
Commission's principal office at 450 Fifth Street, N.W., Washington, D.C. 20549.
Copies of all or part thereof may be obtained from the Commission's principal
office in Washington, D.C. upon payment of fees prescribed by the Commission. In
addition, the Commission maintains a World Wide Web site on the Internet at
http://www.sec.gov that contains reports, proxy and information statements and
other documents filed electronically with the Commission, including the
Registration Statement.
50
INDEX TO FINANCIAL STATEMENTS
[Download Table]
PAGE
----
Report of Independent Accountants........................... F-2
Balance Sheets at January 31, 1998 and April 30, 1998....... F-3
Statements of Operations for the years ended January 31,
1997 and January 31, 1998 and for the three month periods
ended April 30, 1997 and 1998............................. F-4
Statement of Changes in Shareholders' Equity (Deficit) for
the years ended January 31, 1997 and 1998 and for the
three month period ended April 30, 1998................... F-5
Statements of Cash Flows for the years ended January 31,
1997, and January 31, 1998 and for the three month periods
ended April 30, 1997 and 1998............................. F-6
Notes to Financial Statements............................... F-7
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Legacy Brands, Inc.
In our opinion, the accompanying balance sheet and the related statements
of operations, changes in shareholders' equity (deficit) and cash flows present
fairly, in all material respects, the financial position of Legacy Brands, Inc.
at January 31, 1998, and the results of its operations and its cash flows for
each of the two years in the period then ended, 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
discussed in Note 2 to the financial statements, the Company has suffered
recurring losses and negative cash flows from operations, has a license
compliance confirmation expiring on September 15, 1998, has a note payable to an
underwriter due on the earlier of the closing of the planned initial public
offering (IPO), or, if the IPO has not closed by October 31, 1998, 30 days after
demand for payment by the holder, and must obtain additional financing or
complete its IPO to fund working capital requirements. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regards to these matters are also described in Note 2. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty. 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 of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Sacramento, California
July 8, 1998
F-2
LEGACY BRANDS, INC.
BALANCE SHEETS
ASSETS
[Enlarge/Download Table]
JANUARY 31, APRIL 30,
1998 1998
----------- -----------
(UNAUDITED)
Current assets:
Cash...................................................... $ 10,039 $ 14,762
Trade accounts receivable................................. 179,570 251,672
Receivable from related party............................. 73,775 --
Inventory................................................. 87,100 256,146
Prepaid expenses.......................................... 26,641 41,409
---------- ----------
Total current assets.............................. 377,125 563,989
Office equipment, net....................................... 70,521 68,645
Debt issuance costs, net.................................... 7,250 6,250
Organization costs, net..................................... 1,000 750
Licenses, net............................................... 2,276,909 2,342,638
Deferred offering costs..................................... -- 137,676
---------- ----------
Total assets...................................... $2,732,805 $3,119,948
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Related party line of credit and accrued interest......... $ 699,235 $ 754,085
Accounts payable.......................................... 688,238 1,086,384
Accrued expenses and other liabilities.................... 1,018,287 967,368
Note payable to underwriter and accrued interest.......... -- 203,123
Notes payable to related parties and accrued interest..... 85,217 11,715
Liability to manufacturer, current........................ 348,092 348,092
---------- ----------
Total current liabilities......................... 2,839,069 3,370,767
Accrued expenses, noncurrent................................ -- 82,500
Liability to manufacturer, noncurrent....................... 715,684 625,215
---------- ----------
Total liabilities................................. 3,554,753 4,078,482
---------- ----------
Commitments and Contingencies (Notes 1, 5, 6, 11, 13 and 14)
Shareholders' equity (deficit):
Common stock, no par value; 30,000,000 shares authorized;
1,041,730 shares issued and outstanding................ 6,246,807 6,253,057
Contributed capital....................................... 559,500 559,500
Notes receivable from shareholders........................ (69,475) (69,475)
Accumulated deficit....................................... (7,558,780) (7,701,616)
---------- ----------
Total shareholders' equity (deficit).............. (821,948) (958,534)
---------- ----------
Total liabilities and shareholders' equity
(deficit)....................................... $2,732,805 $3,119,948
========== ==========
The accompanying notes are an integral part of these financial statements.
F-3
LEGACY BRANDS, INC.
STATEMENTS OF OPERATIONS
[Enlarge/Download Table]
YEARS ENDED JANUARY 31, THREE MONTHS ENDED APRIL 30,
------------------------- ----------------------------
1997 1998 1997 1998
---------- ----------- ------------ ------------
(UNAUDITED) (UNAUDITED)
Sales.................................... $4,824,706 $ 5,351,917 $1,249,340 $1,640,728
Cost of goods sold....................... 3,087,833 3,308,660 743,298 1,026,444
---------- ----------- ---------- ----------
Gross profit...................... 1,736,873 2,043,257 506,042 614,284
Operating expense:
Marketing.............................. 992,258 1,332,934 261,343 387,020
General and administrative............. 854,433 1,244,551 216,315 303,267
Compensation related to forgiveness of
employee notes...................... -- 1,472,009 -- --
---------- ----------- ---------- ----------
Operating (loss) income................ (109,818) (2,006,237) 28,384 (76,003)
Other income (expense):
Interest expense....................... (622,793) (471,186) (184,014) (66,033)
Other (expense) income, net............ (24,292) (443,190) (10,000) --
---------- ----------- ---------- ----------
Loss before provision for income
taxes.......................... (756,903) (2,920,613) (165,630) (142,036)
Provision for income taxes............... (800) (800) (800) (800)
---------- ----------- ---------- ----------
Net loss.......................... $ (757,703) $(2,921,413) $ (166,430) $ (142,836)
========== =========== ========== ==========
Loss per share (basic and diluted):
Net loss per share..................... $ (1.16) $ (3.81) $ (0.24) $ (0.14)
========== =========== ========== ==========
Weighted average shares used in computing
net loss per share..................... 651,162 767,613 701,022 1,041,730
========== =========== ========== ==========
The accompanying notes are an integral part of these financial statements
F-4
LEGACY BRANDS, INC.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED JANUARY 31, 1997 AND 1998, AND THE THREE MONTH PERIOD ENDED
APRIL 30, 1998
[Enlarge/Download Table]
COMMON STOCK NOTES TOTAL
---------------------- RECEIVABLE SHAREHOLDERS'
NUMBER OF CONTRIBUTED FROM ACCUMULATED EQUITY
SHARES AMOUNT CAPITAL SHAREHOLDERS DEFICIT (DEFICIT)
--------- ---------- ----------- ------------ ----------- -------------
Balance, January 31, 1996................ 605,451 $3,124,922 $559,500 $ -- $(3,879,664) $ (195,242)
Issuance of common stock for services,
including the Contingent Shares
Guarantee (Note 5)..................... 55,375 441,360 -- -- -- 441,360
Issuance of common stock for cash upon
exercise of warrants................... 1,062 34 -- -- -- 34
Issuance of common stock to employees for
notes.................................. 181,250 1,450,000 -- (1,450,000) -- --
Accrual of interest on employee notes.... -- 12,171 -- (12,171) -- --
Issuance of common stock for notes upon
exercise of warrants................... 20,343 65,100 -- (65,100) -- --
Net loss for the year.................... -- -- -- -- (757,703) (757,703)
--------- ---------- -------- ----------- ----------- -----------
Balance, January 31, 1997................ 863,481 5,093,587 559,500 (1,527,271) (4,637,367) (511,551)
Issuance of common stock for cash........ 108,499 747,249 -- -- -- 747,249
Recognition of deferred offering costs... -- (614,271) -- -- -- (614,271)
Issuance of common stock upon conversion
of debt................................ 46,000 570,089 -- -- -- 570,089
Issuance of common stock upon conversion
of accrued interest on related party
line of credit......................... 9,375 75,000 -- -- -- 75,000
Extension of and issuance of warrants for
services............................... -- 245,940 -- -- -- 245,940
Issuance of common stock for services.... 14,375 115,000 -- -- -- 115,000
Accrual of interest on shareholder and
employee notes receivable.............. -- 14,213 -- (14,213) -- --
Forgiveness of employee notes............ -- -- -- 1,472,009 -- 1,472,009
Net loss for the year.................... -- -- -- -- (2,921,413) (2,921,413)
--------- ---------- -------- ----------- ----------- -----------
Balance, January 31, 1998................ 1,041,730 6,246,807 559,500 (69,475) (7,558,780) (821,948)
Amendment of common stock warrants for
services (unaudited)................... -- 6,250 -- -- -- 6,250
Net loss for the period (unaudited)...... -- -- -- -- (142,836) (142,836)
--------- ---------- -------- ----------- ----------- -----------
Balance, April 30, 1998 (unaudited)...... 1,041,730 $6,253,057 $559,500 $ (69,475) $(7,701,616) $ (958,534)
========= ========== ======== =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
F-5
LEGACY BRANDS, INC.
STATEMENTS OF CASH FLOWS
[Enlarge/Download Table]
THREE MONTHS ENDED
YEARS ENDED JANUARY 31, APRIL 30,
-------------------------- ----------------------------
1997 1998 1997 1998
--------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
Cash flows from operating activities:
Net loss.................................................. $(757,703) $(2,921,413) $(166,430) $(142,836)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 110,307 179,144 28,376 47,590
Amortization of debt issuance costs..................... 468,528 236,155 130,980 7,250
Common stock and common stock warrants issued for
services.............................................. 3,960 283,190 -- --
Forgiveness of employee notes........................... -- 1,472,009 -- --
Changes in assets and liabilities:
Decrease (increase) in receivable from related
parties............................................. 22,158 (73,775) -- --
Increase in trade accounts receivable................. (22,921) (156,649) (84,974) (72,102)
Decrease in other receivables......................... 14,785 -- -- --
Increase in inventory................................. (50,000) (37,100) -- (169,046)
Increase in prepaid expenses and other................ (6,996) (19,645) (23,878) (14,768)
(Decrease) increase in accounts payable............... (32,239) 137,536 67,354 398,146
(Decrease) increase in accrued expenses and other
liabilities......................................... (27,717) 519,301 (40,055) (188,595)
Increase (decrease) in accrued interest payable....... 46,912 (2,943) 16,783 58,246
Payments on liability to manufacturer................. (346,959) (334,086) (92,776) (90,469)
--------- ----------- --------- ---------
Net cash used in operating activities............... (577,885) (718,276) (164,620) (166,584)
--------- ----------- --------- ---------
Cash flows from investing activities:
Purchases of office equipment............................. (6,079) (86,741) (12,342) (1,193)
Payments toward purchase of licenses...................... (12,500) -- -- (27,500)
--------- ----------- --------- ---------
Net cash used in investing activities................. (18,579) (86,741) (12,342) (28,693)
--------- ----------- --------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock.................... 34 747,249 -- --
Proceeds from issuance of loans payable................... 445,000 -- -- --
Payment of loans payable.................................. (5,000) (595,000) -- --
Proceeds from issuance of notes payable to related
parties................................................. 454,000 -- -- --
Payments on notes and advances payable to related
parties................................................. (46,500) -- -- --
Payments of debt issuance costs........................... (163,038) (8,000) (20,497) --
Issuance of advance to related party...................... (135,000) -- -- --
Proceeds from repayment of advance to related party....... 135,000 -- -- --
Payment of deferred offering costs........................ (147,354) (1,439) (49,960) --
Proceeds from draw on related party line of credit........ -- 848,000 225,472 --
Payments on related party line of credit.................. -- (198,000) -- --
Proceeds from issuance of note payable to underwriter..... -- -- -- 200,000
--------- ----------- --------- ---------
Net cash provided by financing activities........... 537,142 792,810 155,015 200,000
--------- ----------- --------- ---------
(Decrease) increase in cash................................. (59,322) (12,207) (21,947) 4,723
Cash, beginning of period................................... 81,568 22,246 22,246 10,039
--------- ----------- --------- ---------
Cash, end of period......................................... $ 22,246 $ 10,039 $ 299 $ 14,762
========= =========== ========= =========
Supplemental disclosure of cash flow information:
Cash payments for interest................................ $ 61,615 $ 73,909 $ 29,645 $ 810
========= =========== ========= =========
Cash payments for income taxes............................ $ 800 $ 800 $ 800 $ 800
========= =========== ========= =========
The accompanying notes are an integral part of these financial statements.
F-6
LEGACY BRANDS, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO THE THREE MONTH PERIODS ENDED APRIL 30, 1997 AND
1998)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Organization and Operations
Legacy Brands, Inc. (Company) is a California corporation that licenses and
markets premium branded consumer food products sold in supermarkets, club
stores, convenience stores, drug stores and mass merchandisers throughout the
United States. The Company currently holds three licenses for food products
using names and trademarks held by Mrs. Fields, Gumby and Mattel. The Company
has developed and is currently marketing products under the Mrs. Fields and
Gumby licenses and intends to develop and market products utilizing the Extreme
Dinosaurs trademark held by Mattel. The Company intends to build a portfolio of
well-known premium brand products by continuing to seek licensing opportunities
for nationally recognized brand names, increasing product offerings under
current and new licenses, and further developing distribution of the Company's
existing products. The Company filed an initial registration on Form 10SB with
the Securities Exchange Commission (SEC) in late July 1997 and became a
registrant under Section 12(g) of the 1934 Act in September 1997. In February
1998, the Company filed Form 15 with the SEC to terminate its registration. The
Company is planning an initial public offering of equity securities (IPO) as
described in Note 12.
Interim Results (Unaudited)
The accompanying balance sheet as of April 30, 1998, and the statements of
operations, changes in shareholders' equity (deficit) and cash flows for the
three month periods ended April 30, 1997 and 1998, are unaudited. In the opinion
of management, these statements have been prepared on the same basis as the
audited financial statements and include all adjustments, consisting of only
normal recurring adjustments, necessary for the fair presentation of the results
of the interim periods. The data discussed in these notes to the financial
statements for those interim periods are also unaudited.
Concentration of Manufacturer and Product
The Company currently maintains an informal relationship with two frozen
cookie dough manufacturers and one ice cream product manufacturer. The Company
believes that several other suppliers are capable of providing substantially
similar services. The Company currently markets frozen cookie dough, which is
available in retail stores in five varieties, through a network of brokers and
distributors. The Company introduced cookie ice cream sandwiches in July 1997,
and has expanded the product line to ice cream cookie pops in fiscal 1998. These
products are marketed under the Mrs. Fields license. The Company also introduced
freeze pops marketed under the Gumby license under the trade name of "Gumby and
Friends" during the year ended January 31, 1998.
The primary frozen cookie dough manufacturer produces the product and bills
the retailer for sales upon approval by the Company. Sales proceeds, net of
manufacturing and certain other costs, are remitted to the Company by the
manufacturer. The Company is liable to the frozen cookie dough manufacturer for
uncollectible receivables and spoiled inventory.
The Company's other products, Mrs. Fields cookie ice cream sandwiches and
ice cream cookie pops and Gumby freeze pops, are billed directly by the Company
when the products are shipped by the manufacturers to the retailers.
Sales to one customer, consisting of three divisions which each make
independent purchasing decisions, approximated 23% and 25% and 36% and 32% of
total sales during the years ended January 31, 1997 and 1998 and the three month
periods ended April 30, 1997 and 1998, respectively. Sales to a second customer
accounted for approximately 15% and 8% of total sales during the years ended
January 31, 1997 and 1998, and 13% and 12% for the three month periods ended
April 30, 1997 and 1998, respectively.
F-7
LEGACY BRANDS, INC.
NOTES TO FINANCIAL STATEMENTS CONTINUED
(UNAUDITED WITH RESPECT TO THE THREE MONTH PERIODS ENDED APRIL 30, 1997 AND
1998)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
For all of the Company's products, revenue is recognized when the product
is shipped by the manufacturers to the retailers.
Cash
The Company includes all cash accounts and all highly liquid instruments
purchased with an original maturity of three months or less as cash. The
Company's bank deposits generally exceed the federally insured limit.
Inventory
Inventory at lower of cost (average cost) or market, consists primarily of
cookie ice cream sandwiches maintained in cold storage and raw materials used in
the manufacture of ice cream products.
Office Equipment
Office equipment is recorded at cost. Depreciation is computed using the
straight-line method over the assets' useful lives ranging from five to seven
years. Expenditures for maintenance, repairs and minor renewal and betterments
are charged to expense. The cost and related accumulated depreciation of
equipment sold or retired are removed from the accounts and the resulting gain
or loss is included in other expense.
Accumulated depreciation on office equipment totaled $11,940 and $15,009 at
January 31, 1998 and April 30, 1998, respectively. Depreciation expense on
office equipment totaled $1,722 and $9,186 for the years ended January 31, 1997
and 1998, respectively, and $687 and $3,069 for the three month periods ended
April 30, 1997 and 1998, respectively.
Debt Issuance Costs
Costs incurred in obtaining debt financing are deferred and amortized over
the term of the associated debt agreements using the interest method and include
the following:
[Download Table]
JANUARY 31, APRIL 30,
1998 1998
----------- ---------
Costs related to issuance of related party line of credit
facility, net of accumulated amortization of $21,750 and
$29,000 at January 31, 1998 and April 30, 1998,
respectively.............................................. $7,250 $ 6,250
====== =========
Organization Costs
Organization costs consist of legal fees of $5,000 incurred to incorporate
and are recorded at cost. Amortization is computed using the straight-line
method over a period of five years. Accumulated amortization was $4,000 and
$4,250 at January 31, 1998 and April 30, 1998. Amortization of the organization
costs totaled $1,000 in each of the years ended January 31, 1997 and 1998, and
$250 in each of the three month periods ended April 30, 1997 and 1998.
Deferred Offering Costs
During the year ended January 31, 1998, all deferred offering costs of
$614,271, consisting primarily of legal, accounting and printing costs were
netted against the proceeds of the 1997 private placement offering of common
stock. During the three month period ended April 30, 1998, the Company incurred
additional
F-8
LEGACY BRANDS, INC.
NOTES TO FINANCIAL STATEMENTS CONTINUED
(UNAUDITED WITH RESPECT TO THE THREE MONTH PERIODS ENDED APRIL 30, 1997 AND
1998)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
deferred offering costs of $137,676, which will be netted against the proceeds
of the IPO described in Note 12. If the IPO does not occur, such costs will be
expensed.
License Agreements
MRS. FIELDS LICENSE
The Company has entered into an exclusive license agreement (Mrs. Fields
License) with Mrs. Fields Development Corporation (Mrs. Fields) whereby the
Company has the exclusive right and license to use the licensed names to market
products through certain designated distribution channels in North America,
Hawaii and Puerto Rico over the 30 year duration of the Mrs. Fields License,
including option periods. The initial term of the Mrs. Fields License expires in
December 1999 (Initial Term). During the 30-year duration, the Company has, at
its sole discretion, the option to extend the Mrs. Fields License for five
consecutive five-year periods (Option Periods) that expire in December 2024.
However, Mrs. Fields may terminate the Mrs. Fields License as of the end of
any Option Period by notifying the Company of its intention to terminate the
Mrs. Fields License. Mrs. Fields must also provide written notice of such
termination not more than twelve and not less than three months prior to the end
of any Option Period, and pay the Company an amount equal to three times the
average gross margin for sales of Mrs. Fields products reported by the Company
over the last three years of the current option term in accordance with the Mrs.
Fields License (Buy Out Amount). The Buy Out Amount would be payable in cash
over three years in twelve equal quarterly installments. The first Option Period
ends in December 2004.
In accordance with the Mrs. Fields License, the Company is obligated to
maintain specified levels of product sales (Minimum Volume Commitment) during
the Initial Term and during each Option Period. If the Company fails to meet the
Minimum Volume Commitment, the Company must pay a royalty in an amount equal to
the royalty that would have been paid had the Company met its Minimum Volume
Commitment. If the Company is determined to be insolvent, or files a petition in
bankruptcy or for reorganization, then the Mrs. Fields License may be terminated
upon notice by Mrs. Fields. Mrs. Fields has confirmed that the Company is in
compliance with the terms of the Mrs. Fields License as of May 5, 1998, and has
waived its rights and remedies related to the insolvency provision of the Mrs.
Fields License until such time as an IPO shall have been completed (Note 12),
but not later than September 15, 1998, unless there shall have been a bankruptcy
filing of the Company.
In March 1996, the Mrs. Fields License was amended to require that the
Company meet revised Minimum Volume Commitments beginning January 1, 1997 on a
calendar year basis. The Minimum Volume Commitments were substantially reduced
from the prior commitments. The Minimum Volume Commitment for calendar year 1997
was 285,000 twelve pound equivalent cases, for calendar 1998 is 350,000 twelve
pound equivalent cases, and increases to certain specified quantities over the
life of the agreement to 583,434 twelve pound equivalent cases in 2015, and
remains at that level until the expiration of the last Option Period.
During calendar 1997, the Company generated twelve pound equivalent case
sales resulting in royalties of $179,139, but under the terms of the Mrs. Fields
License was required to pay a minimum of $285,000. In January 1998, the Company
executed a second amendment to the Mrs. Fields License (Second Amendment) due to
a Minimum Volume Commitment shortage for the 1997 calendar year. Pursuant to the
Second Amendment, $120,000 (including a $20,000 penalty) will be paid to Mrs.
Fields during 1998 and thereafter until satisfied through higher royalties. Such
amount has been accrued as of January 31, 1998.
As part of the Mrs. Fields License, the Company paid a non-refundable fee
described as a prepaid royalty of $2,500,000 to Mrs. Fields. The fee is being
amortized on a straight-line basis over the life of the Mrs. Fields
F-9
LEGACY BRANDS, INC.
NOTES TO FINANCIAL STATEMENTS CONTINUED
(UNAUDITED WITH RESPECT TO THE THREE MONTH PERIODS ENDED APRIL 30, 1997 AND
1998)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
License or a total of 30 years. Accumulated amortization was $277,777 and
$298,610 at January 31, 1998 and April 30, 1998, respectively. Amortization
expense included in general and administrative expense totaled $83,333 for each
of the years ended January 31, 1997 and 1998, and $20,833 for each of the three
month periods ended April 30, 1997 and 1998. In addition, the Company pays a
royalty equal to $1 per twelve pound equivalent case sold, net of damages,
returns and credits, plus additional royalties per case as required by the
Second Amendment. Such royalties included in marketing expense were $177,574 and
$287,587 for the years ended January 31, 1997 and 1998, respectively, and
$30,049 and $49,085 for the three month periods ended April 30, 1997 and 1998,
respectively.
Management believes the carrying value of the Mrs. Fields License to be
recoverable over future periods based upon current sales forecasts. Should
anticipated volumes not be achieved and the Company not be able to make the
required royalty payment to meet its commitment under the license agreement or
should the license be terminated, the carrying value of the Mrs. Fields License
may need to be reduced accordingly in future periods.
GUMBY LICENSE
In September 1996, the Company entered into a trademark license agreement
(Gumby License Agreement) whereby the Company has a nonexclusive right and
license to distribute throughout the United States certain food products
displaying the Gumby cartoon characters. The initial two year term of the Gumby
License Agreement began September 1, 1996 and ends August 31, 1998. The Company
has a renewal option for an additional two year period which is dependent upon
performance during the initial term.
As consideration for the Gumby License Agreement, the Company paid $12,500
in September 1996, and agreed to pay monthly royalties equal to 5% of net sales
of Gumby products, with such royalties guaranteed to aggregate a minimum of
$112,500 by August 31, 1998. The Gumby License Agreement has been recorded at
$125,000. Accumulated amortization on the Gumby License Agreement totaled
$70,314 and $93,752 at January 31, 1998 and April 30, 1998, respectively.
Amortization of the minimum royalty is over the initial term of the license at
the greater of straight line amortization or 5% of net sales. Amortization
expense included in general and administrative expense, for the years ended
January 31, 1997 and 1998, totaled $0 and $70,314, respectively, and $0 and
$23,438 for the three month periods ended April 30, 1997 and 1998, respectively.
Through April 30, 1998, the Company had cumulative sales of Gumby products of
$145,008, resulting in royalties of $7,250. Minimum royalties payable, including
the $7,250 noted above, totaled $112,500 at January 31, 1998 and April 30, 1998,
respectively.
EXTREME DINOSAURS LICENSE
In May 1997, the Company entered into a Letter of Intent with BKN Kids
Network, Inc., under a sublicense from Mattel, Inc., pursuant to which the
Company acquired the exclusive right and license to use the trademarks,
copyrights, plots, environmental settings and artwork as well as the characters,
names and likenesses all as used in or emanating from the one half-hour
television program currently entitled "Extreme Dinosaurs" to be used for freeze
pops, gelatin snacks, molded and generic coolers, banked and shaped cookies and
crackers, fruit snacks and candies to be distributed throughout the United
States (the BKN License).
In April 1998 the parties reached substantive agreement pursuant to which
the term of the BKN License commenced on May 1, 1998, and continues through July
31, 2000. The Company has guaranteed a minimum payment of $110,000, payable in
increments to be agreed upon and allowed to be offset against a 4% royalty
payable on all net sales. The Extreme Dinosaurs license has been recorded at
$110,000 as of April 30, 1998. Amortization is being recorded over the initial
term of the license at the greater of straight line amortization or
F-10
LEGACY BRANDS, INC.
NOTES TO FINANCIAL STATEMENTS CONTINUED
(UNAUDITED WITH RESPECT TO THE THREE MONTH PERIODS ENDED APRIL 30, 1997 AND
1998)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
4% of net sales. The Company paid the required first payment of $27,500 during
the three month period ended April 30, 1998. The $82,500 balance has been
accrued as of April 30, 1998. The Company holds an option to renew the license
for a period of two years if it is not in default and it has generated at least
$220,000 in royalties during the initial term and it pays an additional $60,000
toward a renewal guarantee payment of $125,000 in increments over the two year
term of the option period. The parties are sill negotiating terms relating to
the timing with respect to when items will be required to be brought to market
and royalty payments.
Marketing Costs
The costs of marketing, including advertising, are charged to expense in
the period incurred.
New market distribution costs (slotting allowances) are also charged to
expense in the period incurred.
Other (Expense) Income, Net
Other (expense) income, net for the year ended January 31, 1998, consists
of a $150,000 provision for a legal settlement (Note 13) and $293,190 related to
the final settlement of two placement agent agreements (Notes 8 and 10).
Income Taxes
The Company reports income taxes under the liability method. Accordingly,
deferred tax assets and liabilities arise from the differences between the tax
basis of an asset or liability and its reported amount in the financial
statements. Deferred tax amounts are determined using the tax rates expected to
be in effect when the taxes will actually be paid or refunds received, as
provided under currently enacted tax law. Valuation allowances are established
when necessary to reduce deferred tax assets to the amount expected to be
realized. At January 31, 1998 and April 30, 1998, the Company has recorded a
100% valuation allowance against the net deferred tax assets.
Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consist of the following:
[Download Table]
JANUARY 31, APRIL 30,
1998 1998
----------- ---------
Professional fees.................................... $ 458,589 $456,241
Royalties............................................ 323,072 302,646
Accrued liability for legal settlement (Note 13)..... 150,000 150,000
Other................................................ 86,626 58,481
---------- --------
$1,018,287 $967,368
========== ========
F-11
LEGACY BRANDS, INC.
NOTES TO FINANCIAL STATEMENTS CONTINUED
(UNAUDITED WITH RESPECT TO THE THREE MONTH PERIODS ENDED APRIL 30, 1997 AND
1998)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
Accrued Expenses, Noncurrent
Accrued expenses, noncurrent, consists of $82,500 for the Extreme Dinosaurs
license as of April 30, 1998.
Net Loss Per Share
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards (SFAS) No. 128, Earnings Per Share, which is required to be
adopted for financial statement periods ending after December 15, 1997. SFAS No.
128 requires that "primary" and "fully diluted" earnings per share be replaced
by "basic" and "diluted" earnings per share, respectively. The basic calculation
computes earnings per share based only on the weighted average number of shares
outstanding, as compared to primary earnings per share which included common
stock equivalents. The diluted earnings per share calculation is computed
similarly to fully diluted earnings per share.
The retroactive adoption of SFAS No. 128 had no effect on net loss per
share for the year ended January 31, 1997.
Basic and diluted net loss per share has been computed based on the
weighted average number of shares outstanding during the period presented.
Common share equivalents, consisting of restricted stock issued to employees for
notes, stock issued for notes upon the exercise of warrants, convertible debt
and warrants issued by the Company, are anti-dilutive for each of the periods
presented and, therefore, are not included in the computation of diluted net
loss per share.
Stock-Based Compensation
The Company adopted SFAS No. 123, Accounting for Stock-Based Compensation,
during the year ended January 31, 1997, and elected to measure and record
compensation cost as defined in Accounting Principles Board (APB) Opinion No.
25, Accounting for Stock Issued to Employees. There was no additional
compensation cost under the fair value method as prescribed by SFAS No. 123 for
the years ended January 31, 1997 and 1998 or for the three month periods ended
April 30, 1997 and 1998.
Fair Value of Financial Instruments
The carrying amount of cash approximates fair value due to the short-term
nature of these instruments.
Due to uncertainties regarding the Company's financial status, it is not
practicable to determine the fair value of the Company's related party line of
credit, notes payable to related parties and an underwriter, and the liability
to manufacturer.
2. BASIS OF PRESENTATION:
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. The Company has suffered recurring
losses and negative cash flows from operations, and must obtain additional
financing or complete its planned initial public offering of equity securities
to fund working capital requirements. As explained in Notes 1 and 5, the
Company's license compliance confirmation with respect to the Mrs. Field's
License expires September 15, 1998, and a $203,123 note payable, including
interest accrued to April 30, 1998, to an underwriter is due on the earlier of
the closing of an IPO, or, if the IPO has not closed by October 31, 1998, 30
days after demand for payment by the holder. These factors raise substantial
doubt about the Company's ability to continue as a going concern.
F-12
LEGACY BRANDS, INC.
NOTES TO FINANCIAL STATEMENTS CONTINUED
(UNAUDITED WITH RESPECT TO THE THREE MONTH PERIODS ENDED APRIL 30, 1997 AND
1998)
2. BASIS OF PRESENTATION, CONTINUED:
Management plans to improve profitability through further increases in
sales volume, reduction of overhead expenses and stronger controls over product
development and marketing and is seeking additional financing. The Company
received a $103,500 bridge loan from a related party in July 1998, a letter of
intent in May 1998 for another bridge loan for up to $500,000, and is currently
pursuing an IPO. There can be no assurance that management's plans to achieve
profitability and raise sufficient financing will be successful. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
3. ACCOUNTS PAYABLE:
The Company has certain old accounts payable, primarily dating back to the
summer of 1994, which have been recorded at the billed amounts. Some uncertainty
exists related to substantiation of the extent of goods and services received in
relation to the billed amounts. Such amounts are included in accounts payable
and total $422,202 at January 31, 1998 and April 30, 1998.
4. RELATED PARTY LINE OF CREDIT:
Effective June 10, 1997, the Company entered into a formal agreement with
DayStar L.L.C. (DayStar), a related party, pursuant to which DayStar agreed to
provide a credit facility to the Company in an amount not to exceed $440,000 to
be used for working capital purposes (DayStar Credit Facility). A general
partner of DayStar became a director of the Company in January 1998. As of
January 31, 1998 and April 30, 1998, $420,000 is outstanding under the DayStar
Credit Facility. The interest rate on the DayStar Credit Facility was initially
12%, and increased to 15% effective February 1, 1998. The DayStar Credit
Facility is due at the earlier of: (i) September 1, 1998 or, (ii) within five
business days of the Company raising $1,750,000 in connection with a financing
transaction (Maturity Date). If the note has not been repaid at the Maturity
Date, the Company shall thereupon repay the principal and interest outstanding
in monthly amounts of $20,000 with any unpaid amounts due and payable at the
expiration of 24 months.
On July 1, 1997, the Company entered into a second agreement with DayStar
pursuant to which DayStar agreed to provide to the Company a supplemental
facility (Supplemental DayStar Credit Facility) in the aggregate amount of
$408,000, including a facility fee of 2% of the amount advanced, to be used to
repay certain bridge notes which matured on June 30, 1997. Pursuant to the
Supplemental DayStar Credit Facility, the Company executed a promissory note
providing for the payment of interest on the amounts outstanding at a rate of 1%
per week. With regard to the Supplemental DayStar Credit Facility, the Company
repaid $178,000 through January 31, 1998 and April 30, 1998. Accordingly, the
principal outstanding at January 31, 1998 and April 30, 1998, is $230,000. An
agreement was entered into effective November 1997 with respect to the
Supplemental DayStar Credit Facility to provide the same maturity provisions as
applicable to the DayStar Credit Facility.
The Company has pledged substantially all of its assets as collateral on
the line of credit, subject to other security interests.
DayStar converted $75,000 of accrued interest into 9,375 shares of common
stock of the Company on October 31, 1997, at fair market value. As of January
31, 1998 and April 30, 1998, total accrued interest payable to DayStar was
$49,235 and $104,085, respectively.
In connection with the DayStar line of credit, certain warrants were issued
to DayStar as described in Note 8.
In April 1998, the Company amended its agreements with DayStar such that
the 1% per week interest on the Supplemental DayStar Credit Facility was fixed
at $39,100 for the period from February 1, 1998 until maturity. Additionally,
the maturity dates of the DayStar Credit Facility and the DayStar Supplemental
F-13
LEGACY BRANDS, INC.
NOTES TO FINANCIAL STATEMENTS CONTINUED
(UNAUDITED WITH RESPECT TO THE THREE MONTH PERIODS ENDED APRIL 30, 1997 AND
1998)
4. RELATED PARTY LINE OF CREDIT, CONTINUED:
Credit Facility were extended from July 1998 to September 1, 1998. In exchange
for the reduction in interest and the extension of the maturity date, the
exercise price on the warrants held by DayStar to purchase 31,250 shares of
common stock was decreased from $16.00 to $7.20 per share. The amendment to the
warrants was valued at $6,250 and has been recorded as debt issuance costs at
April 30, 1998.
Note Payable to Underwriter
In March 1998, the Company borrowed $200,000 from the underwriter of the
IPO (Note 12) under a promissory note. The note accrues interest at 10% per
annum, and is due on the earlier of the closing of the IPO or, if the IPO has
not closed by October 31, 1998, 30 days after demand for payment by the holder.
5. NOTES PAYABLE:
Notes Payable to Related Parties
Notes payable to related parties, including accrued interest, consist of
the following:
[Download Table]
JANUARY 31, APRIL 30,
1998 1998
----------- ---------
Uncollateralized notes payable to related parties bearing
interest at 12%, principal and interest payable the
earlier of ten working days after the closing of an IPO or
September 30, 1999........................................ $85,217 $11,715
======= =======
During the three month period ended April 30, 1998, the related party
receivable was offset against the note and accrued interest, as discussed in
Note 10.
Convertible Notes Payable
In the period August 1995 through October 1996, C. Brands Management,
L.L.C. (C. Brands), a company whose principal manager is a shareholder of the
Company, received notes from the Company, for cash consideration of $622,500, of
which $454,000 was received during the year ended January 31, 1997. In
connection with services provided related to the issuance of the notes, the
Company paid Capitol Bay Securities (a related party) 15 percent of the
principal amount of the notes plus other costs ($94,000), 17,187 shares of
common stock, valued at $49,500, and warrants to purchase 18,750 shares of
common stock, valued at $1,200. In addition, C. Brands received 31,250 shares of
common stock from the founder, which was valued at $90,000 and recorded as debt
discount. The debt discount was accreted over the life of the debt agreement
using the interest method. The stated rate of interest was 12% per annum.
Under the note agreement, the notes were convertible into common stock at
$16 per share, at the option of the noteholders. The noteholders committed in
writing in June 1997 to convert upon the close of the 1997 private placement
equity offering. That offering closed on November 27, 1997, and the notes in the
principal amount of $622,500 converted into 38,906 shares of common stock.
Concurrently, the noteholders elected to convert interest accrued to date on the
notes totaling $113,500 into 7,094 shares of common stock at a rate of $16 per
share.
Loans Payable
In the period November 1995 through March 1996, Pacific Acquisition Group
(PAG) made loans (First Bridge Loan), through investors, to the Company totaling
$300,000, of which $145,000 was received by the Company during the year ended
January 31, 1997. As consideration for receiving an additional $300,000
F-14
LEGACY BRANDS, INC.
NOTES TO FINANCIAL STATEMENTS CONTINUED
(UNAUDITED WITH RESPECT TO THE THREE MONTH PERIODS ENDED APRIL 30, 1997 AND
1998)
5. NOTES PAYABLE, CONTINUED:
bridge loan (Second Bridge Loan), the Company paid PAG other issuance costs of
$101,988 (including commissions of $90,000) and issued PAG 4,687 shares. The
4,687 shares issued to PAG in connection with the Second Bridge Loan were also
subject to certain registration rights and limitations on reverse stock splits.
The Company also issued an additional 50,000 shares to PAG in connection with
the debt issuance agreements. These 54,687 shares issued were valued at $315,000
and recorded as additional debt issuance costs. In addition, the Company agreed
that it would issue additional shares of common stock to PAG to reach a
$1,300,000 minimum value (Contingent Shares Guarantee). The Contingent Shares
Guarantee was valued at $122,400 and recorded as an addition to debt issuance
costs and common stock.
In April 1997, in preparation for the Company's then anticipated IPO, the
Company and PAG executed an agreement to eliminate the limitation on reverse
stock splits and the Contingent Shares Guarantee. In consideration therefore the
Company granted to PAG the right to have its shares registered for sale
contemporaneous with the IPO, subject only to an agreement by PAG that holders
of PAG shares in excess of 10,000 would enter into a "lock-up" agreement with
the underwriter not to sell shares for a period of 13 months, and the Company
also agreed to issue 10,937 additional shares to PAG. When the Company
terminated the IPO in May 1997 and proceeded with a private placement of its
equity securities, it was necessary to amend and clarify the April 1997
agreement. In June 1997, the April 1997 agreement was rescinded by the parties,
and replaced by an agreement to (i) grant to PAG limited piggy-back registration
rights subject to an underwriter's discretion, and (ii) reinstate and clarify
the Contingent Shares Guarantee, whereby the Company would be required to issue
additional shares at the expiration of twelve months after the date upon which
the common stock shares shall have commenced trading, such that the determined
value of the PAG holdings would be equal to approximately $1,300,000 based upon
the determined highest trading priced during such twelve months, with the
maximum number of shares which the Company would be required to issue to PAG
under any circumstances set at 200,000. The April and June 1997 agreements did
not change the original accounting for the Contingent Shares Guarantee noted
above.
In May 1998, the Company executed an agreement with PAG to issue an
additional 120,625 shares to PAG in exchange for cancellation of the Contingent
Shares Guarantee. The Company is in the process of valuing the 120,625 shares as
of May 1998 and will record the related expense during the second quarter of
fiscal 1999.
The debt issuance costs related to the PAG bridge loans were fully
amortized as of January 31, 1998.
The original bridge loan maturity dates were extended in February and March
1997 and the interest rate was increased to 16%. The loans remaining after a
$5,000 principal payment during the year ended January 31, 1997, in the
principal amount of $595,000, were repaid on July 3, 1997.
6. LIABILITY TO MANUFACTURER:
During 1994, the Company arranged for the manufacture of approximately
$2,500,000 of frozen cookie dough product. In 1995, all of this product was
either discarded by the manufacturer due to obsolescence or reworked and sold to
reduce the loss. Based upon a troubled debt restructuring negotiated with the
manufacturer, $2 per case of new product sold since March 1995 is deducted from
the monthly amount received by the Company from the manufacturer. (Note 1) The
Company may negotiate with the manufacturer related to a discount for early
payoff of the liability. Such discount, if any, will be recorded when final
settlement is made.
F-15
LEGACY BRANDS, INC.
NOTES TO FINANCIAL STATEMENTS CONTINUED
(UNAUDITED WITH RESPECT TO THE THREE MONTH PERIODS ENDED APRIL 30, 1997 AND
1998)
6. LIABILITY TO MANUFACTURER, CONTINUED:
Estimated aggregate future payments based on historical data are as
follows:
[Download Table]
YEAR ENDING JANUARY 31:
1999...................................................... $ 348,092
2000...................................................... 348,092
2001...................................................... 367,592
----------
Total............................................. 1,063,776
Less current portion...................................... (348,092)
----------
Noncurrent portion........................................ $ 715,684
==========
7. INCOME TAXES:
The net deferred tax asset consists of the following:
[Download Table]
JANUARY 31,
1998
-----------
Deferred tax assets, net:
Net operating loss carryforwards.......................... $ 1,437,286
Package design costs...................................... 48,627
License, net.............................................. (105,835)
Built-in-losses........................................... 91,785
Other..................................................... 8,640
-----------
1,480,503
Less valuation allowance.................................... (1,480,503)
-----------
Net deferred tax asset...................................... $ --
===========
As a result of providing a valuation allowance equal to the net deferred
tax assets, there is no federal tax provision. The valuation allowance increased
from January 31, 1997 to January 31, 1998, by $1,047,601, due primarily to the
increase in net operating loss carryforwards. The valuation allowance increased
by a minor amount from January 31, 1998 to April 30, 1998, again primarily due
to an increase in net operating loss carryforwards. The provision for tax for
the years ended January 31, 1997 and 1998, and for the three month periods ended
April 30, 1997 and 1998, is the state minimum tax.
At January 31, 1998, the Company had approximately $3,700,000 and
$1,800,000 in net operating losses for federal and state tax purposes,
respectively, available to be carried forward to future periods. The
carryforwards expire from 2010 to 2012 for federal purposes and from 2000 to
2002 for state purposes.
During fiscal year ended January 31, 1996, the Company had more than a 50%
change in ownership. Section 382 of the Internal Revenue Code and comparable
state statutes impose certain annual limitations on the utilization of net
operating loss carryforwards to offset income in future periods. The amounts
shown above for the operating loss carryforwards consider the reductions under
the Code due to such ownership change.
The Company has plans for future equity transactions. If these transactions
are completed, it is likely that another 50% ownership change will occur within
the meaning of Section 382 of the Internal Revenue Code. If this occurs, there
may be further reductions in the ability to use the net operating losses of the
Company in future periods.
F-16
LEGACY BRANDS, INC.
NOTES TO FINANCIAL STATEMENTS CONTINUED
(UNAUDITED WITH RESPECT TO THE THREE MONTH PERIODS ENDED APRIL 30, 1997 AND
1998)
8. SHAREHOLDERS' EQUITY:
Reverse Stock Split
In October 1996, the Company amended its articles of incorporation to
effect a one-for-ten reverse stock split. Subsequent to April 30, 1998, the
Board and the shareholders approved a one-for-three and two-tenths(3.2) reverse
stock split.
All common share and per share information in these financial statements
has been adjusted to reflect the reverse stock splits.
Preferred Stock
In January 1998, the Board approved amending the articles of incorporation
of the Company to authorize, subject to shareholder approval, 10,000,000 shares
of preferred stock. Subsequent to April 30, 1998 the shareholders voted to
approve such amendment to the articles of incorporation.
Pending Amendments to Articles of Incorporation
The amendments to the Company's articles of incorporation necessary to
effect the one-for-three and two-tenths reverse stock split and the
authorization for the issuance of preferred stock shall be effective upon filing
of such amendment with the California Secretary of State.
Shareholders' Equity Transactions for the Year Ended January 31, 1997
In May 1996, 688 shares valued at $3,960 were issued to an outside party
for services rendered to the Company.
In June 1996, the Company issued 54,687 shares of common stock to PAG
valued at $315,000 and the Contingent Shares Guarantee valued at $122,400 for
services provided in obtaining debt financing.
These shares issued were valued at $5.76 per share based on an independent
valuation.
In October 1996, the Company, in connection with management compensation
agreements, issued restricted shares aggregating 181,250 to four key employees
in exchange for notes aggregating $1,450,000 and treated as nonrecourse. The
Company recorded $12,171 of interest on such notes during the year ended January
31, 1997.
In January 1997, warrants issued in the original private placement offering
in 1994 were exercised; and the Company issued 20,343 shares in exchange for
notes totaling $65,100 bearing interest at 6.72% per annum. The Company is in
the process of finalizing a written extension of the shareholder notes which
were to mature on June 30, 1998.
Shareholders' Equity Transactions for the Year Ended January 31, 1998
On October 31, 1997, DayStar converted $75,000 of accrued interest into
9,375 shares of the Company's common stock, at fair market value.
During November 1997, the Company completed a private placement offering of
95,999 shares of common stock for $662,249, and recognized related deferred
offering costs of $614,271.
In December 1997, the Company issued 12,500 shares of common stock for
$85,000.
F-17
LEGACY BRANDS, INC.
NOTES TO FINANCIAL STATEMENTS CONTINUED
(UNAUDITED WITH RESPECT TO THE THREE MONTH PERIODS ENDED APRIL 30, 1997 AND
1998)
8. SHAREHOLDERS' EQUITY, CONTINUED:
In November 1997, the C. Brands debt in the carrying amount of $570,089
(principal of $622,500, plus accrued interest, less unaccreted discount and
unamortized debt issuance costs), converted into 46,000 shares of common stock.
In connection with the final settlement of the placement agent agreement
with Capitol Bay Securities, the Company issued 14,375 shares of common stock
valued at $115,000.
Effective January 30, 1998, the Company forgave the employee notes
receivable and accrued interest to date thereon, totaling $1,472,009.
Shareholders' Equity Transactions Subsequent to January 31, 1998
As discussed in Note 5, the Company executed an agreement in May 1998 with
PAG to issue an additional 120,625 shares of common stock in exchange for
cancellation of the Contingent Shares Guarantee.
Common Stock Warrants
As part of the original private placement offerings in 1994 and 1995, the
Company issued warrants to purchase 70,781 shares of common stock at $3.20 per
share to several individuals, of which 5,125 expired January 31, 1997, and
20,343 were exercised as described above and 45,313 have been extended and
remain outstanding at January 31, 1998 and April 30, 1998, as described below.
Under their original terms, the 45,313 warrants were to expire March 6,
1998. Effective December 31, 1997, in connection with the final settlement of an
investment banking agreement, the term of the 45,313 remaining warrants at $3.20
per share was extended to April 15, 1999. The extended 45,313 warrants were
valued at $217,500 during the year ended January 31, 1998. The settlement
agreement also required the Company to issue new warrants to purchase 100,000
shares of common stock at $7.50 per share, which warrants were valued at $3,000.
As additional consideration for the DayStar Credit Facility, the Company
agreed to grant to DayStar, a related party, three year warrants to purchase
62,500 shares of common stock at $7.20 per share and 31,250 shares of common
stock at $16.00 per share. The warrants were valued at $21,000, and are
exercisable for three years commencing 90 days after the closing of an offering
of securities by the Company. As discussed in Note 4, the exercise price on the
warrants to purchase 31,250 shares was decreased from $16.00 to $7.20, effective
April 1998.
Certain piggy back registration rights were given to DayStar in connection
with the first 1933 Act registration statement, subject to the underwriter's
discretion.
In connection with the final settlement of the placement agent agreement
with Capitol Bay Securities, the Company issued warrants to purchase 148,000
shares of common stock at $7.50 per share, valued at $4,440.
9. STOCK OPTION PLAN:
In October 1996, the Company adopted a Stock Option Plan (Plan) which
provides for the issuance of incentive stock options or nonqualified stock
options to certain employees, officers, directors, and non-employees of up to
10% of the outstanding common shares of the Company in accordance with the Plan.
Under this Plan, incentive and nonqualified stock options are granted at prices
determined by the Stock Option Plan Committee (Committee) but shall not be less
than 85% of the fair market value of the underlying stock on the date of grant.
The exercise price of any incentive stock option granted under the Plan to a
more
F-18
LEGACY BRANDS, INC.
NOTES TO FINANCIAL STATEMENTS CONTINUED
(UNAUDITED WITH RESPECT TO THE THREE MONTH PERIODS ENDED APRIL 30, 1997 AND
1998)
9. STOCK OPTION PLAN, CONTINUED:
than 10% shareholder shall be equal to at least 110% of the fair market value of
the underlying stock on the date of the grant. The term of options granted under
the plan may not exceed ten years, with vesting as determined by the Committee.
No options have been granted under the Plan.
10. RELATED-PARTY TRANSACTIONS:
Through October 1997, the Company shared office space and related
administrative expenses for a monthly flat rate of $2,000 with Capitol Bay
Group, a company controlled by a shareholder. For the years ended January 31,
1997 and 1998, these office and administrative expenses amounted to $24,000 and
$24,700, respectively, under a month-to-month agreement, which expired in
October 1997.
Effective November 1, 1997, the Company commenced a month-to-month tenancy
in a building owned by the Company's chief executive officer and another
shareholder of the Company. Accrued rent totaled $14,450 and $20,000 at January
31, 1998 and April 30, 1998, respectively. Rent expense for the year ended
January 31, 1998, and the three month period ended April 30, 1998, totaled
$15,579 and $16,766, respectively. The Company has provided notice that it
intends to relocate to a new nearby premises to be leased from an unrelated
party. It is anticipated that such relocation will occur in September 1998.
Included in interest expense, excluding amortization of debt issuance
costs, are amounts to related parties of $49,808, $190,935 and $55,660 for the
years ended January 31, 1997 and 1998, and three month period ended April 30,
1998, respectively.
In late calendar 1995 and continuing into calendar 1996, the Company
periodically borrowed various amounts not exceeding $50,000 at any time from
Capitol Bay Group, which amounts were repaid by May 1996, without interest.
In November 1996, the Company loaned $135,000 to Capitol Bay Group, which
was repaid within six days. Interest related to the loan approximated $400 and
was received in January 1997.
In connection with the Company's 1997 private placement offering of its
common stock, the Company entered into a placement agent agreement with Capitol
Bay Securities, Inc., a related party. Commissions and expenses to Capitol Bay
Securities, Inc. totaled $102,080 for the year ended January 31, 1998.
The Company amended its placement agent agreement with Capitol Bay
Securities, Inc. effective January 31, 1998. As compensation for the final
settlement of all of Capital Bay Securities, Inc.'s rights contained in the
original placement agent agreement, including its right of first refusal on
future offerings, Capitol Bay Securities, Inc. received 14,375 shares of the
Company's common stock valued at $115,000, and warrants to purchase 148,000
shares of the Company's common stock at $7.50 per share, exercisable commencing
January 30, 1999 through January 30, 2003, and valued at $4,440.
In connection with the final settlement of the placement agent agreement,
the Company also agreed to indemnify C. Brands by agreeing to issue up to 31,250
additional shares in the event of an adverse determination in a pending action
by the founder of the Company (Note 13).
At January 31, 1998, the Company had $73,775 receivable from Capitol Bay
Securities, Inc., a related party. In April 1998, the Company received a written
right to offset the receivable against notes payable and accrued interest to
Capitol Bay Securities, Inc. and related entities totaling $85,217. The offset
has been recorded as of April 30, 1998, resulting in a net payable to related
parties of $11,715.
F-19
LEGACY BRANDS, INC.
NOTES TO FINANCIAL STATEMENTS CONTINUED
(UNAUDITED WITH RESPECT TO THE THREE MONTH PERIODS ENDED APRIL 30, 1997 AND
1998)
11. COMMITMENTS:
Consulting Services Agreement
In February 1996, the Company completed renegotiating an agreement for
consulting services with a shareholder. Under terms of the agreement, the
Company paid the consultant as current compensation $5,000 each month from
February 1996 through January 1997. Additionally, the agreement provided for the
payment of a maximum bonus of $60,000 contingent upon a company sales target for
the fiscal year ended January 31, 1997, which was not achieved. The agreement
also stipulated that all prior agreements with the Company and the shareholder
be canceled. In exchange for the cancellation of all prior agreements, the
Company agreed to pay $5,000 each month for twelve months with the final payment
in January 1997. The Company accrued the $60,000 liability as of January 31,
1996. The Company has extended the monthly consulting portion of the agreement
increasing the compensation to $6,000 per month for each of the years ending
January 31, 1998 and 1999, respectively, without any bonus arrangement.
Management Compensation
Pursuant to the Board of Directors' approval in October 1996, effective
September 1, 1996, and as amended on February 28, 1997 and January 30, 1998, the
Company entered into employment agreements with four key employees for
three-year terms, which will be automatically extended for an additional year
unless canceled by either party. Compensation may be increased by the Board of
Directors with respect to the chief executive officer or by the chief executive
officer with respect to the other employees during the term of the agreements.
The minimum aggregate compensation expense under these agreements is $520,000
and $347,000 in the fiscal years ending January 31, 1999 and January 31, 2000,
respectively.
In addition to the minimum compensation described above, such individuals
are entitled to an annual bonus calculated on targeted earnings for the year, as
defined. The bonus could reach between 45% and 70% of the annual minimum salary
noted above, plus additional amounts based upon earnings levels. Such bonuses
are paid to the individuals during the year based on predetermined percentages
and adjusted after year-end based on audited data. Bonuses were not earned or
paid related to the compensation agreements for the 1997 and 1998 fiscal years,
or for the three month period ended April 30, 1998.
Employee Stock Purchase Plan
As part of the compensation agreements described above, each individual was
granted the right to purchase shares of common stock of the Company pursuant to
a Restricted Stock Purchase Agreement. Vesting was to occur over a three year
period based on the terms of the agreements. Vesting and payment provisions were
amended in June 1997 to provide for vesting and payment for future stock
purchases ratably over a ten-year period. Vesting for one of the key employees,
as well as his $1,000,000 note payment term, was also extended to ten years in
the June 1997 amendment.
In October 1996, shares aggregating 181,250 were purchased under these
agreements at $8.00 per share by the issuance of notes in the aggregate
principal amount of $1,450,000, interest payable at 6.72%, maturing on the third
anniversary of the first issuance of a certificate of vesting by the Company,
subject to forfeiture in the event of early termination, certain repurchase
rights of the Company, and with certain anti-dilution protection. Such shares
were pledged as collateral on the notes. Effective January 31, 1997, the Company
and the key employees amended the note agreements to eliminate all prepayment
provisions. Therefore, from January 31, 1997 forward, the Company was not
required to evaluate compensation expense based on increases in the value of the
Company's common stock. Compensation expense was not recorded currently by the
Company as the value of the Company's stock at October 31, 1996 and January 31,
1997, of $6.08 and
F-20
LEGACY BRANDS, INC.
NOTES TO FINANCIAL STATEMENTS CONTINUED
(UNAUDITED WITH RESPECT TO THE THREE MONTH PERIODS ENDED APRIL 30, 1997 AND
1998)
11. COMMITMENTS, CONTINUED:
$7.20 per share, respectively, based on an independent valuation, was below the
stock purchase price (including interest).
The shares, pursuant to the restricted stock purchase agreements described
above, were issued in accordance with an Employee Stock Purchase Plan adopted by
the Board of Directors in October 1996.
Effective January 30, 1998, the Company's Board of Directors approved the
forgiveness of employee notes totaling $1,450,000, and the accrued interest to
date of $22,009, resulting in expense upon the forgiveness of $1,472,009 during
the year ended January 31, 1998. In connection with the forgiveness, the
employees involved amended their respective employment agreements to eliminate
certain scheduled base salary increases. Upon the forgiveness of the employee
notes, the related shares of common stock fully vested to the employees.
The Board intends to terminate the Employee Stock Purchase Plan during the
year ending January 31, 1999.
12. OFFERINGS OF EQUITY SECURITIES:
The Company commenced an offering to private investors, on a best efforts
basis, of shares of its common stock at a price of $8.00 per share in July 1997.
The offering, which closed on November 27, 1997, resulted in net proceeds of
$747,249. In addition, $75,000 of accrued interest payable to DayStar on the
line of credit was converted into 9,375 shares of common stock of the Company.
Effective February 1998, the Company signed a letter of intent with another
underwriting firm in connection with a proposed initial public offering of
equity securities. The letter of intent is for a firm commitment to sell up to
1,500,000 units, each consisting of one share of common stock and one five year
warrant to purchase one additional share of common stock. The exercise price,
adjustments and redemption provisions of the warrants shall be agreed upon prior
to the closing of the offering.
13. CONTINGENCIES:
On November 19, 1997, a founder and shareholder holding in excess of 5% of
the Company's outstanding Common Stock, filed a lawsuit against the Company with
respect to:
(i) An August 1995 agreement entered into among the shareholder, the
Company and other parties providing for the establishment of a management
committee to restructure the Company. The August 1995 agreement involved the
infusion of new capital and the distribution of certain of the shareholder's
shares to other parties. The August 1995 agreement also contained mutual
releases and a waiver of certain provisions of the California Civil Code, the
intent of which was to waive the right of any party to assert claims including
those of which they might not have been aware at the time the general release
was given;
(ii) An alleged note due from the Company in the amount of $112,500, that
allegedly is still outstanding, plus accrued interest;
(iii) An allegation that the transfer of certain shares of the common stock
of the Company in 1995 pursuant to the August 1995 agreement is not valid; and
(iv) An allegation of back wages owing to him by the Company.
The maximum exposure related to the note and back wages is estimated to be
$370,000. In the opinion of management, the estimated exposure to the Company,
if any, is approximately $150,000. Such amount is accrued as of January 31, 1998
and April 30, 1998, and has been included in other expenses for the year ended
F-21
LEGACY BRANDS, INC.
NOTES TO FINANCIAL STATEMENTS CONTINUED
(UNAUDITED WITH RESPECT TO THE THREE MONTH PERIODS ENDED APRIL 30, 1997 AND
1998)
13. CONTINGENCIES, CONTINUED:
January 31, 1998. Management is also of the opinion that the transfer of certain
shares of common stock pursuant to the August 1995 agreement are valid and in
force. The Company believes it has substantial defenses to and offsets against
the claims.
14. SUBSEQUENT EVENTS:
The Company received a letter of intent dated May 15, 1998 and amended on
June
2, 1998, for a bridge loan from a third party lender in an amount up to
$500,000. Under the letter of intent:
- Interest on the loan accrues at 12%, increasing to 15% if the loan is
unpaid at September 1, 1998.
- An additional fee is also to be paid in an amount equal to 25% of amounts
drawn on the loan, with a maximum fee of $125,000.
- A due diligence fee of a maximum of $50,000 will be paid.
- Three-year warrants exercisable at 120% of the IPO price will be granted
to purchase the number of shares of common stock of the Company equal to
25% of the amount drawn on the loan.
- The loan will have a maturity of September 30, 1998, or five days after
the closing of an IPO.
- If the loan is not paid upon maturity, i) quarterly payments are to be
made over one year, each consisting of 25% of the principal and the
additional fee and all accrued interest, and ii) the exercise price on
the warrants decreases to $1.00 per share.
As of June 30, 1998, $40,000 in principal had been drawn on the loan plus
additional fees of $10,000 had accrued, for a total repayment obligation of
$50,000. The loan documents are in the process of being formalized.
The Company received a loan of $103,500 on July 6, 1998 from Larry Wells
Company, Inc., an affiliate of a director of the Company. If the loan is repaid
prior to October 31, 1998, a total of $115,000 shall be paid. If paid
thereafter, $145,000 shall be due increasing by $1,500 per month. The loan
documents are in the process of being formalized.
F-22
DESCRIPTION OF COLOR ART WORK ON INSIDE BACK COVER
A full page, full-color illustration of all of the stock keeping units
(boxes) currently in distribution by the Company, including seven boxes for Mrs.
Fields Frozen Cookie Dough in various sizes, five boxes of Mrs. Fields Ice Cream
novelties and one box of Gumby Freeze Pops. On the bottom right is an
illustration of the color logo for Mattel's Extreme Dinosaurs, recently licensed
by the Company.
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NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY SECURITY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO
MAKE SUCH AN OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREBY SHALL UNDER ANY CIRCUMSTANCE IMPLY THAT THE
INFORMATION IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
[Download Table]
Prospectus Summary..................... 3
Risk Factors........................... 8
Corporate History...................... 15
Dividend Policy........................ 15
Use of Proceeds........................ 16
Capitalization......................... 17
Dilution............................... 18
Selected Financial Data................ 19
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 20
Business............................... 25
Management............................. 33
Certain Transactions................... 38
Principal Shareholders................. 41
Description of Securities.............. 43
Shares Eligible for Future Sale........ 46
Underwriting........................... 48
Legal Matters.......................... 50
Experts................................ 50
Additional Information................. 50
Index to Financial Statements.......... F-1
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
------------------------------------------------------
------------------------------------------------------
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------------------------------------------------------
1,500,000 UNITS
EACH CONSISTING OF ONE SHARE OF
COMMON STOCK AND
ONE COMMON STOCK PURCHASE WARRANT
[Legacy Brands Logo]
LEGACY BRANDS, INC.
--------------------
PROSPECTUS
--------------------
PAULSON INVESTMENT
COMPANY, INC.
, 1998
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Officers and Directors
The Articles of Incorporation of Legacy Brands, Inc. (the "Company")
limit the liability of directors for monetary damages to the fullest extent
permitted under California law. The effect of this provision is that the Company
and shareholders, through derivative suits, may not recover monetary damages
against a director for any alleged failure to discharge one's duties as a
director, with certain exceptions. Directors may still be liable for monetary
damages for failure to discharge such duties for: (i) acts or omissions that
involve intentional misconduct or a knowing and culpable violation of the law,
(ii) acts and omissions that a director believes to be contrary to the best
interests of the Company or its shareholders or that involve the absence of good
faith on the part of the director, (iii) any transaction from which a director
derived an improper personal benefit, (iv) acts or omissions that show a
reckless disregard for the director's duty to the Company or its shareholders in
the circumstances in which the director was aware, or should have been aware, in
the ordinary course of performing a director's duties, of a risk of a serious
injury to the Company or its shareholders, (v) acts or omissions that constitute
an unexcused pattern of inattention that amounts to an abdication of the
director's duty to the Company or its shareholders, and (vi) any act or omission
as an officer, notwithstanding that the officer is also a director or that his
or her actions, if negligent or improper, have been ratified by the directors.
The Articles of Incorporation also allow the Company to indemnify any
director, officer, employee, agent or other person serving at the request of the
Company (collectively known as "Agent") for breach of duty to the Company and
its shareholders to the fullest extent allowed by California law. Generally
speaking the Company shall have the duty to indemnify any Agent who prevails on
the merits in defense of any action brought against him or her relating to
breach of Agent's duty to the Company or its Shareholders. The Company may
provide indemnification where Agent has acted in good faith and in a manner that
Agent reasonably believed was in the best interests of the Company and, in the
case of a criminal proceeding, where Agent had no reasonable cause to believe
that its conduct was unlawful. The Company shall not, with certain exceptions,
provide indemnification where it appears (i) that it would be inconsistent with
a provision of the Articles, bylaws, a resolution of the shareholders, or an
agreement in effect at the time of the accrual of the alleged cause of action
asserted in the proceeding in which the expenses were incurred or other amounts
were paid, which prohibits or otherwise limits indemnification, or (ii) that it
would be inconsistent with any condition expressly imposed by a court in
approving a settlement.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The Company's expenses in connection with the offering, other than
underwriting discounts and commissions and the non-accountable expense
allowance, are set forth below. All of these amounts are estimates, except for
registration and filing fees.
II-1
[Download Table]
Amount Payable
by Registrant
-------------
SEC Registration Fee............................... $ 6,958.33
NASD Filing Fee.................................... 2,858.76
NASDAQ Listing Fee................................. 20,000.00
Blue Sky Fees and Expenses......................... 40,000.00
Printing Costs..................................... 75,000.00
Registrar and Transfer Agent Fees.................. 20,000.00
Representative's Non-accountable Expense Allocation 225,000.00
Legal Fees and Expenses............................ 170,000.00
Accounting Fees and Expenses....................... 60,000.00
Miscellaneous...................................... 60,182.91
------------
Total $680,000.00
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
All information pertaining to outstanding shares herein are determined as if
the 1:10 reverse stock split effective in March, 1998 and the 1:3.2 stock split
effective prior to the Offering had been effective as of all relevant times
herein.
BRIDGE LOAN WARRANTS
Pursuant to a letter of intent dated May 15, 1998 and amended on June 2,
1998, the Company received a commitment for a bridge loan from a third party
lender in an amount up to $500,000. Under the terms of that commitment, the
Company will issue to the lender three-year warrants to purchase that number of
shares of the Common Stock of the Company equal to 20% of the principal amount
advanced, exercisable at 120% of the Offering price. As of June 30, 1998, the
lender had advanced $40,000.
The warrants will be issued in reliance upon the exemption from
registration provided by Section 4(2) of the Securities Act of 1933, as amended
(the "Act"). The lender is a single, sophisticated investor who also has a
lending relationship with the Company.
DECEMBER 31, 1997 HAAG, ET AL. WARRANTS
Pursuant to an Agreement for Termination, Release and Waiver of Rights
dated as of December 31, 1997, the Company extended five year warrants
previously issued to four individuals to purchase an aggregate of 45,312 shares
of the Common Stock of the Company, at a purchase price of $3.20 per share.
Additional five year warrants to purchase 100,000 shares of the Common Stock of
the Company at $7.50 were also issued to Haag (collectively, the "Haag
Warrants"). None of such warrants are exercisable until at least 90 days
following
II-2
the closing of the Offering. The Haag Warrants were issued in consideration of
the settlement and release of any and all rights and claims that the holders may
have had against the Company based upon an Investment Banking Compensation
Agreement dated March 7, 1995.
The Haag Warrants were issued in reliance upon the exemption from
registration provided by Section 4(2) of the Act. There were a total of four
recipients, each of whom had a pre-existing contractual relationship with the
Company and was a sophisticated investor.
1997 PRIVATE PLACEMENT OF COMMON STOCK
In the period between June and November 1997, the Company sold 108,499
shares of Common Stock at a per share price of $8.00 to a total of 16 investors
(the "1997 Private Placement"). The shares were offered on a best efforts basis
through Capitol Bay Securities ("Capitol Bay"), which was acting as the
Company's Placement Agent. Pursuant to the provisions of a Placement Agent
Agreement dated as of June 25, 1997, the Company paid an aggregate of $102,080
in cash compensation to Capitol Bay for the placement of the shares. By way of
final settlement of all of Capitol Bay's rights whether pursuant to the
Placement Agent Agreement or otherwise arising out of all transactions between
the parties since the August 8, 1995 Agreement, the Placement Agent Agreement
was amended as of November 27, 1997, and all rights thereunder and with respect
to any and all services previously provided by Capitol Bay Group or Capitol Bay
(including, without limitation, advice in connection with the reorganization of
the Company, infusions of capital and retention of new management), Capitol Bay
was granted 14,375 shares of Common Stock and warrants to purchase 138,750
shares of Common Stock at $8.00 per share, exercisable commencing January 30,
1999 through January 30, 2003. Additionally, an over payment of commissions
thereon in the amount of $72,975, plus interest of $2,047 (in the aggregate, the
"Commission Refund"), was repaid by Capitol Bay to the Company on April 15,
1998, in the form of an agreement to offset against such Commission Refund due
to the Company, an equal amount due by the Company to Capitol Bay and other
entities or individuals on whose behalf Capitol Bay was authorized to act, in
the principal amount of $60,000 plus interest thereon in the amount of $26,715.
The net difference of $11,715 will be paid by the Company to Capitol Bay from
the proceeds of the Offering.
The shares issued in the private placement were issued in reliance upon
the exemption from registration provided by Section 4(2) of the Act and Rule 506
of Regulation D promulgated thereunder. There were a total of 16 investors, of
whom 14 were accredited investors. The non accredited investors were provided
with a Private Placement Memorandum containing all of the information required
by Rule 502. Based upon the investor suitability questionnaires completed by the
purchasers who were not accredited investors, the Company reasonably believed
that such purchasers had such knowledge and experience in financial and business
matters that they were capable of evaluating the merits and risks of the
prospective investment.
APRIL 1997 DAYSTAR CREDIT FACILITY AND RELATED WARRANTS
The term DayStar ("DayStar") refers to three entities: DayStar Fund II,
L.L.C.; DayStar Partners, L.P. and Larry Wells Company, Inc. Both DayStar
Partners L.P. and DayStar Fund II, L.L.C. are managed by Larry Wells Company,
Inc. and are interrelated. Mr. Larry Wells, who is an affiliate of each of the
DayStar entities, was elected to serve as a director of the Company on January
30, 1998.
In April 1997, the Company entered into an agreement with DayStar
pursuant to which DayStar agreed to provide a credit facility to the Company in
an amount not to exceed $440,000 to be used for working capital
II-3
purposes (the "Initial Credit Facility"). The Company executed a seven-month
revolving promissory note providing for the payment of interest on amounts
outstanding at the initial rate of 12% per annum, payable at the maturity of the
note. In July 1997, a supplemental credit facility was provided by DayStar in
the aggregate additional amount of $408,000 (the "Supplemental Credit Facility,"
and together with the Initial Credit Facility, collectively, the "DayStar Credit
Facility") which was used to repay $400,000 of the $595,000 of PAG Bridge Notes
which were then maturing and due. In connection with the Supplemental Credit
Facility, the maturity of the entire DayStar Credit Facility was extended to
thirteen months from the date of the last advance (maturity date of August 3,
1998) and the 12% interest rate on the Initial Credit Facility was changed to
15% per annum effective January 1998, with interest on the Supplemental Credit
Facility being incurred at the rate of one percent per week. If the DayStar
Credit Facility is not repaid at maturity, the Company may repay the principal
and interest outstanding in monthly amounts of $20,000 with any unpaid amounts
due and payable at the expiration of 24 months.
In consideration for the granting of the DayStar Credit Facility, the
Company initially granted to DayStar warrants to purchase 31,250 shares of the
Common Stock at $7.20 per share and warrants to purchase 62,500 shares of the
Common Stock at $16.00 per share, exercisable during a three-year period
commencing 90 days after the closing of an offering of securities by the Company
(the "Facility Warrants"). In addition certain "piggyback" registration rights
were granted.
On October 30, 1997, DayStar purchased 9,375 shares of the Common Stock
of the Company in the 1997 Private Placement at a price of $8.00 per share, by
converting $75,000 due under the DayStar Credit Facility. As of March 31, 1998,
an aggregate of approximately $725,000 in principal and interest was due under
the DayStar Credit Facility. On April 17, 1998 DayStar agreed to fix the
interest payable under the Supplemental Credit Facility at an amount not to
exceed $39,100, the amount which would accrue thereon from January 1, 1998
through May 31, 1998, plus any amounts accrued and unpaid with respect to the
period preceding January 1, 1998, with no further interest to accrue thereafter
and to extend the maturity date to September 1, 1998. In consideration, the
Company agreed to revise the exercise price on the 31,250 Facility Warrants
originally exercisable at $16.00 per share to $7.20 per share, such that all
93,750 of the Facility Warrants are now exercisable at $7.20 per share. Interest
continues to accrue on the Initial Credit Facility at the note rate of 15% per
annum. It is the intent of the Company to repay the entire DayStar Credit
Facility from the proceeds of the Offering.
The notes issued by the Company in connection with the DayStar Credit
Facility and the Facility Warrants were issued to DayStar in reliance upon the
exemption from registration provided by Section 4(2) of the Act and Rule 506 of
Regulation D promulgated thereunder. Larry J. Wells, the managing member of
DayStar is a sophisticated investor with a long-standing relationship with the
Company.
C BRANDS NOTES; CONVERSION OF NOTES INTO COMMON STOCK
Pursuant to a Memorandum of Agreement, dated August 8, 1995, between the
Company, Gregory Plunkett ("Plunkett"), the founder of the Company and a holder
of in excess of 5% of the Common Stock of the Company, Capitol Bay and various
other shareholders of the Company (the "August 8, 1995 Agreement"), Capitol Bay
Group committed and undertook, through and on behalf of its affiliated entity,
Capitol Bay Securities, although not a party to the August 8, 1995 Agreement or
a signatory to the August 1, 1995 Letter Agreement referenced in the August 8,
1995 Agreement, to certain actions therein, including raising financing for the
Company. Thereafter, in January 1996, the Company issued a convertible
promissory note (the "Initial
II-4
Note") to C. Brands, the "investor" contemplated in the August 8, 1995
Agreement, in exchange for funds provided in the amount of $215,000. On October
31, 1996, the Company issued a second convertible promissory note in the
principal amount of $407,500 (the "Supplemental Note" and collectively the
"Notes"). Effective November 27, 1997, the entire principal and interest of
$736,000 owing under the Notes was converted into 46,000 shares of the Company's
Common Stock.
The C Brands Notes were issued to C Brands in reliance upon the
exemption from registration provided by Section 4(2) of the Act. The notes were
converted into common stock in reliance upon the exemption from registration
provided by Section 3(a)(9) of the Act. C Brands is a single, sophisticated
investor with a long-standing relationship with the Company. The manager of C
Brands is Mr. Stephen C. Kircher. Mr. Kircher is a shareholder of the Company
and is President of Capitol Bay, which has served as a placement agent with
respect to certain private placements previously made by the Company.
JANUARY 1996 CAPITOL BAY WARRANTS
Warrants to purchase 18,750 shares of Common Stock at $8.00 per share
were issued to Capitol Bay during the fiscal year ended January 31, 1996 for
services performed in connection with certain private placements provided to the
Company. These warrants expired, unexercised, on January 31, 1997.
The warrants were issued in reliance upon the exemption provided by
Section 4(2) of the Act. Capitol Bay is a single, sophisticated investor with a
long-standing business relationship with the Company.
PACIFIC ACQUISITION GROUP TRANSACTIONS
During the period commencing in November 1995 and ending in March 1996,
the Company engaged in a private placement pursuant to which it sold $300,000 of
its one year promissory notes (the "Bridge Notes"), bearing interest at a rate
of 15% per annum and maturing on the anniversary of the date of issuance. In
June 1996, the Company sold an additional $300,000 of the Bridge Notes, bearing
interest at a rate of 15% per annum. Pacific Acquisition Group, Inc. ("PAG")
acted as placement agent in connection with these private placements and was
paid cash commissions of $90,000. All of the Bridge Notes were paid in full in
June 1997.
Pursuant to various amendments to the Bridge Loan and Consulting
Agreement between Legacy and PAG (collectively, the "Amended Agreement"), the
Company has issued an aggregate of 63,333 shares of Common Stock to PAG, and had
agreed to issue additional shares, up to a maximum of 200,000 shares, in the
event that the value of the Common Stock holdings of PAG were less than
$1,300,000 as measured 12 months following the commencement of trading in the
Common Stock (the "PAG Contingency"). Pursuant to the Amended Agreement, the
Company has granted certain "piggy-back" registration rights to PAG, and Capitol
Bay Securities was granted a first right of refusal to purchase any of the
Common Stock subject to the Amended Agreement. Pursuant to a Supplement to
Second Amended Bridge Loan and Consulting Agreement dated as of May 8, 1998 (the
"Supplemental Agreement"), the parties agreed to deem the PAG Contingency
satisfied in consideration of the issuance of 120,625 shares of Common Stock to
be issued following the closing of the Offering. The Supplemental Agreement
includes a full accord and satisfaction and mutual general releases between the
parties. The registration rights and first right of refusal in favor of Capitol
Bay Securities remain in effect.
The Bridge Notes were issued in reliance upon the exemption from
registration provided by Section 4(2) of the Act and Rule 506 of Regulation D
promulgated thereunder. There were a total of 37 investors. Of the 37
II-5
investors, 21 were accredited investors. The non accredited investors were
provided with a Private Placement Memorandum containing all of the information
required by Rule 502. Based upon the information provided by the purchasers who
were not accredited investors, the Company reasonably believed that such
purchasers, either alone or together with their purchaser representatives, had
such knowledge and experience in financial and business matters that they were
capable of evaluating the merits and risks of the prospective investment.
The shares of Common Stock were issued to PAG in reliance upon the
exemption from registration provided by Section 4(2) of the Act. PAG is a
single, sophisticated investor with a long-standing relationship with the
Company.
ITEM 27. EXHIBITS
EXHIBIT LIST
[Download Table]
EXHIBIT
NO. Description
--- -----------
1.1 Form of Underwriting Agreement
1.2 Form of Agreement Among Underwriters***
1.3 Form of Selected Dealer Agreement***
3(i).1 Articles of Incorporation dated February 14, 1994*
3(i).2 Certificate of Amendment of Articles of Incorporation dated March 10,
1994*
3(i).3 Certificate of Amendment of Articles of Incorporation dated January 27,
1995*
3(i).4 Certificate of Amendment of Articles of Incorporation dated March 6,
1996*
3(i).5 Certificate of Amendment of Articles of Incorporation dated March 13,
1998
3(i).6 Certificate of Amendment of Articles of Incorporation dated July ,
1998***
3(ii).1 Bylaws*
3(ii).2 Amendment to Bylaws
4.1 Form of Representative Warrant
4.2 Specimen of Common Stock Certificate
4.3 Warrant Agreement with U. S. Stock Transfer, including form of Warrant
***
5 Opinion of Resch Polster Alpert & Berger LLP re legality***
10.1 Trademark License Agreement between Mrs. Fields Development Corporation
and Plunkett, Inc. dated August 14, 1994* 10.2 First Amendment to
Trademark License Agreement between Mrs. Fields Development Corporation
and Plunkett, Inc. [March 28, 1996]*
10.3 License Agreement by and between AJM Marketing Enterprises, Inc./Prema
Toy Co., Inc. and Legacy Brands, Inc. [Gumby -- September 1, 1996]*
II-6
[Download Table]
EXHIBIT
NO. Description
--- -----------
10.4 Letter Agreement relating to license for the property "Extreme
Dinosaurs," dated July 8, 1997
10.5 Stock Option Plan, Form of Incentive Stock Option Agreement, Form of
Non-Qualified Stock Option Agreement*
10.6 Employee Stock Purchase Plan
10.7 Employment Agreement, dated October 30, 1996, by and between Legacy
Brands, Inc. and Thomas E. Kees*
10.8 Amendment to Employment Agreement, dated February 28, 1997, by and
between Legacy Brands, Inc. and Mr. Kees*
10.9 Employment Agreement, dated October 30, 1996, by and between Legacy
Brands, Inc. and Michael E. Banks
10.10 Employment Agreement, dated October 30, 1996, by and between Legacy
Brands, Inc. and Craig Connerty
10.11 Employment Agreement, dated October 30, 1996, by and between Legacy
Brands, Inc. and Steven Riccardelli
10.12 Agreement and Mutual Release dated as of January 30, 1998, by and
between Legacy Brands Inc. and Thomas E. Kees
10.13 Agreement and Mutual Release dated as of January 30, 1998, by and
between Legacy Brands Inc. and Michael E. Banks
10.14 Agreement and Mutual Release dated as of January 30, 1998, by and
between Legacy Brands Inc. and Craig Connerty
10.15 Agreement and Mutual Release dated as of January 30, 1998, by and
between Legacy Brands Inc. and Steven Riccardelli
10.16 Second Amended and Restated Bridge Loan and Consulting Agreement by and
between Pacific Acquisition Group, Inc. and Legacy Brands, Inc., dated
June, 1997
10.17 Supplement to Second Amended Bridge Loan and Consulting Agreement dated
May 8, 1998
10.18 Investment Banking Compensation Agreement between Greg Plunkett, Inc.
and Steve Jizmagian and Randy Haag dated March 7, 1995
10.19 Agreement for Termination, Release and Waiver of Rights between Legacy
Brands, Inc., Jizmagian and Haag dated December 31, 1997
10.20 Common Stock Purchase Warrants issued in connection with the
Termination, Release and Waiver of Rights between Legacy Brands, Inc.,
Jizmagian and Haag
10.21 Credit Facility Agreement by and between Legacy Brands, Inc., and
DayStar, LLC*
10.22 Supplemental Credit Facility Agreement by and between Legacy Brands,
Inc. and DayStar, LLC*
II-7
[Download Table]
EXHIBIT
NO. Description
10.23 Amended Promissory Note payable by Legacy Brands, Inc. to Paulson
Investment Company, Inc., dated June 23, 1998
10.24 Letters to Legacy Brands, Inc. from C&K Capital Corporation, dated May
15, 1998 and June 2, 1998
10.25 Correspondence between Legacy Brands, Inc., and Pennant Foods (formerly
known as "Van den Bergh Foods Company") dated March 16, 1995, January
15, 1996, January 22, 1996, June 14, 1996, October 9, 1996, November 1,
1996, December 11, 1996, December 27, 1996 and March 4, 1997
10.26 Manufacturing Agreement by and between Legacy Brands, Inc., and Kisko
Products dated May 28, 1997
10.27 Placement Agent Agreement between Legacy Brands, Inc. and Capitol Bay
Securities dated June 25, 1997*
10.28 Amendment No. 2 to Private Placement Agent Agreement between Capitol Bay
Securities and Legacy Brands, Inc., dated as of November 27, 1997
10.29 Warrant and Share Purchase Agreement between Legacy Brands, Inc. and
Capitol Bay Securities, dated November 27, 1997
10.30 Common Stock Purchase Warrant issued to Capitol Bay Securities dated
January 30, 1998
10.31 Memorandum of Agreement, dated August 18, 1995, re restructuring and
recapitalization of Company**
10.32 Letter Agreement between Legacy Brands, Inc., C Brands Management LLC
and Capitol Bay Group relating to conversion and indemnification, dated
January 30, 1998
12.1 Consent of Resch Polster Alpert & Berger LLP***
12.2 Consent of PricewaterhouseCoopers LLP
24 Power of Attorney (see signature page)
27 Financial Data Schedule
-------------------
* Incorporated by reference from Legacy Brands, Inc.'s Registration Statement
on Form 10-SB filed with the Securities and Exchange Commission on July 31,
1997.
** Incorporated by reference from Legacy Brands, Inc.'s Quarterly Report on
Form 10-QSB for the Quarterly Period ended October 31, 1997.
*** To be provided by amendment.
ITEM 28. UNDERTAKINGS
The Company will file, during any period in which it offers or sell
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)
II-8
reflect in the prospectus any facts or events which, individually or together,
represent a fundamental change in the information in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered and any deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume
and price represent no more than 20% change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table in the effective
registration statement, (iii) include additional or changed material information
on the plan of distribution, and (iv) file a post-effective amendment to remove
from registration any of the securities that remain unsold at the end of the
offering. For determining liability under the Securities Act, the Company will
treat each post-effective amendment as a new registration statement of the
securities offered, and the offering of the securities at that time to be the
initial bona fide offering.
The Company will provide to the Underwriter at the closing or closings
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.
Insofar as indemnification for liabilities under the Securities Act of
1933 (the "Act") may be permitted to directors, officers and controlling persons
of the Company 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 Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the Company
of expenses incurred or paid by a director, officer or controlling person of the
Company in the successful defense of any action, suit or proceeding) is asserted
by such director, officer or controlling person in connection with the
securities being registered, the Company will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
For determining liability under the Securities Act, the Company will
treat the information omitted from the prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in the form of
prospectus filed by the Company 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.
For determining liability under the Securities Act, the Company will
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.
II-9
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as
amended, the Registrant has duly caused this Registration Statement to be signed
on its behalf by the undersigned, in the City of Roseville, State of California,
on July 8, 1998.
LEGACY BRANDS, INC.
By: /s/ Thomas E. Kees
------------------------------------
Thomas E. Kees, President
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below appoints Thomas E. Kees his true and lawful attorney-in-fact and agent,
with full power of substitution for him and in his name, place and stead, in any
and all capacities, to sign any or all amendments (including post-effective
amendments) to this Registration Statement, and any related Registration
Statement filed pursuant to Rule 462(b) of the rules adopted by the Securities
and Exchange Commission under the Securities Act of 1933, as amended, and to
file the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto such
attorney-in-fact and agent, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes he might or could do in person,
hereby ratifying and conforming all that such attorney-in-fact and agent, or his
substitute may lawfully do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates stated below.
[Download Table]
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Thomas E. Kees President, Chief Executive Officer, July 6, 1998
-------------------- Chairman and Director (Principal Executive
Thomas E. Kees Officer)
/s/ Arthur L. Patch Director July 3, 1998
--------------------
Arthur L. Patch
/s/ Larry J. Wells Director July 1, 1998
--------------------
Larry J. Wells
/s/ Craig C. Connerty Chief Financial Officer and July 6, 1998
-------------------- Treasurer (Principal Financial and
Craig C. Connerty Accounting Officer)
II-10
EXHIBIT INDEX
[Download Table]
EXHIBIT
NO. Description
--- -----------
1.1 Form of Underwriting Agreement
1.2 Form of Agreement Among Underwriters***
1.3 Form of Selected Dealer Agreement***
3(i).1 Articles of Incorporation dated February 14, 1994*
3(i).2 Certificate of Amendment of Articles of Incorporation dated March 10,
1994*
3(i).3 Certificate of Amendment of Articles of Incorporation dated January 27,
1995*
3(i).4 Certificate of Amendment of Articles of Incorporation dated March 6,
1996*
3(i).5 Certificate of Amendment of Articles of Incorporation dated March 13,
1998
3(i).6 Certificate of Amendment of Articles of Incorporation dated July ,
1998***
3(ii).1 Bylaws*
3(ii).2 Amendment to Bylaws
4.1 Form of Representative Warrant
4.2 Specimen of Common Stock Certificate
4.3 Warrant Agreement with U. S. Stock Transfer, including form of Warrant
***
5 Opinion of Resch Polster Alpert & Berger LLP re legality***
10.1 Trademark License Agreement between Mrs. Fields Development Corporation
and Plunkett, Inc. dated August 14, 1994* 10.2 First Amendment to
Trademark License Agreement between Mrs. Fields Development Corporation
and Plunkett, Inc. [March 28, 1996]*
10.3 License Agreement by and between AJM Marketing Enterprises, Inc./Prema
Toy Co., Inc. and Legacy Brands, Inc. [Gumby -- September 1, 1996]*
[Download Table]
EXHIBIT
NO. Description
--- -----------
10.4 Letter Agreement relating to license for the property "Extreme
Dinosaurs," dated July 8, 1997
10.5 Stock Option Plan, Form of Incentive Stock Option Agreement, Form of
Non-Qualified Stock Option Agreement*
10.6 Employee Stock Purchase Plan
10.7 Employment Agreement, dated October 30, 1996, by and between Legacy
Brands, Inc. and Thomas E. Kees*
10.8 Amendment to Employment Agreement, dated February 28, 1997, by and
between Legacy Brands, Inc. and Mr. Kees*
10.9 Employment Agreement, dated October 30, 1996, by and between Legacy
Brands, Inc. and Michael E. Banks
10.10 Employment Agreement, dated October 30, 1996, by and between Legacy
Brands, Inc. and Craig Connerty
10.11 Employment Agreement, dated October 30, 1996, by and between Legacy
Brands, Inc. and Steven Riccardelli
10.12 Agreement and Mutual Release dated as of January 30, 1998, by and
between Legacy Brands Inc. and Thomas E. Kees
10.13 Agreement and Mutual Release dated as of January 30, 1998, by and
between Legacy Brands Inc. and Michael E. Banks
10.14 Agreement and Mutual Release dated as of January 30, 1998, by and
between Legacy Brands Inc. and Craig Connerty
10.15 Agreement and Mutual Release dated as of January 30, 1998, by and
between Legacy Brands Inc. and Steven Riccardelli
10.16 Second Amended and Restated Bridge Loan and Consulting Agreement by and
between Pacific Acquisition Group, Inc. and Legacy Brands, Inc., dated
June, 1997
10.17 Supplement to Second Amended Bridge Loan and Consulting Agreement dated
May 8, 1998
10.18 Investment Banking Compensation Agreement between Greg Plunkett, Inc.
and Steve Jizmagian and Randy Haag dated March 7, 1995
10.19 Agreement for Termination, Release and Waiver of Rights between Legacy
Brands, Inc., Jizmagian and Haag dated December 31, 1997
10.20 Common Stock Purchase Warrants issued in connection with the
Termination, Release and Waiver of Rights between Legacy Brands, Inc.,
Jizmagian and Haag
10.21 Credit Facility Agreement by and between Legacy Brands, Inc., and
DayStar, LLC*
10.22 Supplemental Credit Facility Agreement by and between Legacy Brands,
Inc. and DayStar, LLC*
[Download Table]
EXHIBIT
NO. Description
--- -----------
10.23 Promissory Note payable by Legacy Brands, Inc. to Paulson Investment
Company, Inc., dated March 4, 1998
10.24 Letters to Legacy Brands, Inc. from C&K Capital Corporation, dated May
15, 1998 and June 2, 1998
10.25 Correspondence between Legacy Brands, Inc., and Pennant Foods (formerly
known as "Van den Bergh Foods Company") dated March 16, 1995, January
15, 1996, January 22, 1996, June 14, 1996, October 9, 1996, November 1,
1996, December 11, 1996, December 27, 1996 and March 4, 1997
10.26 Manufacturing Agreement by and between Legacy Brands, Inc., and Kisko
Products dated May 28, 1997
10.27 Placement Agent Agreement between Legacy Brands, Inc. and Capitol Bay
Securities dated June 25, 1997*
10.28 Amendment No. 2 to Private Placement Agent Agreement between Capitol Bay
Securities and Legacy Brands, Inc., dated as of November 27, 1997
10.29 Warrant and Share Purchase Agreement between Legacy Brands, Inc. and
Capitol Bay Securities, dated November 27, 1997
10.30 Common Stock Purchase Warrant issued to Capitol Bay Securities dated
January 30, 1998
10.31 Memorandum of Agreement, dated August 18, 1995, re restructuring and
recapitalization of Company**
10.32 Letter Agreement between Legacy Brands, Inc., C Brands Management LLC
and Capitol Bay Group relating to conversion and indemnification, dated
January 30, 1998
12.1 Consent of Resch Polster Alpert & Berger LLP***
12.2 Consent of PricewaterhouseCoopers LLP
24 Power of Attorney (see signature page)
27 Financial Data Schedule
-------------------
* Incorporated by reference from Legacy Brands, Inc.'s Registration Statement
on Form 10-SB filed with the Securities and Exchange Commission on July 31,
1997.
** Incorporated by reference from Legacy Brands, Inc.'s Quarterly Report on
Form 10-QSB for the Quarterly Period ended October 31, 1997.
*** To be provided by amendment.
Dates Referenced Herein and Documents Incorporated by Reference
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