-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Nvru2MD4z2ZUeU+L+qvzOlociCuEkSq4pnqgwCtouiM3/Jb5N/19oglvDQNxgRPp TzuSQPyU+bzBqYLhB7/VYA== 0000930661-98-000827.txt : 19980416 0000930661-98-000827.hdr.sgml : 19980416 ACCESSION NUMBER: 0000930661-98-000827 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980415 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: SILVERADO FOODS INC CENTRAL INDEX KEY: 0000879425 STANDARD INDUSTRIAL CLASSIFICATION: COOKIES & CRACKERS [2052] IRS NUMBER: 731369218 STATE OF INCORPORATION: OK FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-13260 FILM NUMBER: 98594720 BUSINESS ADDRESS: STREET 1: 6846 SOUTH CANTON SUITE 110 CITY: TULSA STATE: OK ZIP: 74136 BUSINESS PHONE: 9184962400 MAIL ADDRESS: STREET 1: 6846 S CANTON STREET 2: STE 110 CITY: TULSA STATE: OK ZIP: 74136 10-K 1 FORM 10-K ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to COMMISSION FILE NUMBER 1-13260 SILVERADO FOODS, INC. (Exact name of registrant as specified in its charter) OKLAHOMA 73-1369218 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 6846 SOUTH CANTON, SUITE 110 TULSA, OKLAHOMA 74136 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (918) 496-2400 Securities registered pursuant to Section 12(b) of the Act: NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- ------------------- Common Stock, $.01 Par Value American Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. As of April 14, 14,858,121 shares of the Registrant's Common Stock were outstanding, and the aggregate market value of the Common Stock held by non- affiliates was approximately $4,629,289. DOCUMENTS INCORPORATED BY REFERENCE None ================================================================================ SILVERADO FOODS, INC. FORM 10-K YEAR ENDED DECEMBER 31, 1997 TABLE OF CONTENTS PART I Page ---- Item 1. Business..................................................... 1 Item 2. Properties................................................... 5 Item 3. Legal Proceedings............................................ 5 Item 4. Submission of Matters to a Vote of Security-Holders.......... 5 PART II Item 5. Market for Registrant's Common Equity and Related Shareholder Matters...................................................... 6 Item 6. Selected Financial Data...................................... 7 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................... 9 Item 7a. Quantitative and Qualitative Disclosures About Market Risk... 14 Item 8. Financial Statements and Supplementary Data.................. 14 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..................................... 14 PART III Item 10. Directors and Executive Officers of the Registrant............ 15 Item 11. Executive Compensation........................................ 18 Item 12. Security Ownership of Certain Beneficial Owners and Management 21 Item 13. Certain Relationships and Related Transactions................ 23 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K...................................................... 24 Signatures.................................................... 28 i PART I ITEM 1. BUSINESS General - ------- Silverado Foods, Inc. (the "Company") manufactures and markets various lines of branded specialty baked goods, including Nonni's/(R)/ biscotti and The Natural/(R)/ bagel bars, which are sold through multiple distribution channels. The Company sells to retail grocery and convenience stores, wholesale club stores, the food service industry and the vending industry. The Company sold its mail order catalog business in the third quarter of 1997 and discontinued its snack tray business in the fourth quarter of 1997. The Company was incorporated in Oklahoma on August 15, 1990. The Company's principal office is located at 6846 South Canton, Suite 110, Tulsa, Oklahoma 74136, and its telephone number is (918) 496-2400. Unless the context requires otherwise, all references to the "Company" include Silverado Foods, Inc. and its consolidated subsidiaries. DIVESTITURE OF NONNI'S - ---------------------- On April 6, 1998, the Company announced that it had entered into a letter of intent regarding a transaction whereby LF Capital Partners LLC, an affiliate of the investment banking firm Lazard Freres & Co. LLC, will acquire 90% of the Company's Nonni's/(R)/ Biscotti business in a recapitalization. Following the transaction, the Nonni's/(R)/ Biscotti business will be part of a privately held and majority owned subsidiary of LF Capital Partners LLC (the "Nonni's Entity"). The value to be received by the Company in the proposed transaction is $32 million, including approximately $26.25 million in cash at closing (subject to adjustments), $1.25 million in a minority investment in the common equity of the Nonni's Entity that the Company would retain, and $4.5 million in an earn-out agreement. The earn-out agreement would be based on the Nonni's Entity achieving certain EBITDA (earnings before interest, taxes, depreciation and amortization) targets over the 12 months ending April, 1999, and the amounts thereunder would be payable shortly after that 12-month period. As part of the transaction, most of the Company's current management team would leave the Company and become employed by the Nonni's Entity, including Tim Bruer, the Company's current President and CEO and Dorvin Lively, the Company's Chief Financial Officer. The Nonni's Entity would provide certain transition services for a period of time to the Company for its remaining products, including bagel bars and pound cakes. The transaction would include all of Nonni's/(R)/ assets, including the brand name, the equipment owned at the Tulsa, Oklahoma production facility, working capital, the lease on the Tulsa production facility, distribution rights, and other brands used for the biscotti product line. The transaction is subject to shareholder and regulatory approval, and the final terms need to be -1- agreed upon pending due diligence by LF Capital Partners. The transaction is expected to close during the third quarter of 1998. The Company also announced that it intends to sell the remaining operations of its bagel bar and pound cake business located in Santa Ana, California. This anticipated transaction should occur by year-end. Management is currently investigating its alternatives for the future of Silverado, which include, but are not limited to, acquisitions or mergers, or liquidation of its remaining assets to shareholders. COMPANY HISTORY - --------------- The Company was formed in August of 1990 and has made numerous acquisitions. During 1997, the Company took steps to make it a more narrowly focused specialty baked goods producer with an emphasis on biscotti and bagel bars as follows: . The Company sold its mail order catalog business, which produced and sold specialty cakes and pies out of its plant in Palestine, Texas. . The Company announced its intention to discontinue the operations of its snack tray business and sold the operations of all but seven of its regional market centers, which are expected to be sold by mid-year 1998. . The Company outsourced the production of Mom's Best pound cakes. . The Company exited the traditional round bagel business, whose market has become more of a commodity business. These steps have positioned the Company to be a focused branded specialty baked goods producer, having leading brands in niche product categories in growth markets. INDUSTRY OVERVIEW - ----------------- Branded specialty baked goods are baked products, which have a unique characteristic in one or more of the following: ingredients, process, packaging, or distribution. Specialty baked goods are sold to retail grocery stores, wholesale club stores, in-store deli-bakeries, food service distributors, the vending industry and mail order customers. There are several competitors in the specialty baked goods industry, which are much larger than the Company, such as Sara Lee and Campbell Soup. In addition, there are a number of small regional specialty baked goods companies that compete with the Company. BUSINESS STRATEGY - ----------------- The Company believes its two main specialty baked goods, biscotti and bagel bars, are in attractive markets. Both markets are growing and have fragmented competition. The Company believes its differentiated offerings and ability to efficiently produce large volumes of product in each market can lead to significant market share gains in the future. -2- PRODUCTS - -------- The Company is the nation's largest producer of biscotti, an Italian cookie that is generally eaten with a cup of coffee, cappuccino, milk or espresso. Biscotti products vary as to flavor, product content and packaging and specifically due to customer preferences for flavor and package configuration. Additionally, the Company is one of the nation's largest producers of bagel bars (a hand-held, ready-to-eat, healthful meal replacement). SALES AND DISTRIBUTION - ---------------------- The Company's products are sold through multiple channels to serve customers in grocery, club, food service, vending and convenience store channels. Distribution is by direct store delivery, warehouse to warehouse and, in some cases, to independent warehouses pending orders from customers. The Company's regional sales managers are responsible for maintaining close personal contact with each key account and, when necessary, servicing key customers' needs personally. The Company has a national network of brokers who specialize in grocery stores, food service, vending, convenience store, and wholesale club channels. Each broker's objective is to maintain existing business and grow new business in each of these channels. These brokers are managed by the regional sales managers. OPERATIONS - ---------- Production and Manufacturing. The Company currently operates two leased bakery facilities, one located in Santa Ana, California (48,000 sq. feet) which manufactures the bagel bar products and the other in Tulsa, Oklahoma (47,000 sq. feet) where all biscotti products are produced. The Company uses a third party manufacturer (co-packer) for its Mom's Best/(R)/ pound cakes. The total sales from this product during 1997 were approximately 2% of consolidated net sales. Suppliers. The major raw materials and ingredients purchased by the Company are nuts, sugar, flour, eggs, and chocolate. Some of these products are purchased as commodities and are subject to variations in costs over short periods of time, which fluctuations can cause minor impacts on gross margins. COMPETITION - ----------- The specialty baked goods business is highly competitive and is comprised of a few large companies, such as Sara Lee and Campbell Soup, and numerous small regional companies. The Company believes that it has a competitive advantage in that it has the flexibility to develop products to meet the needs of key customers in a short time frame at a competitive cost and the ability to produce those products in significant quantities. Flexibility and responsiveness are believed to be an advantage over large competitors, while cost, volume and distribution are believed to be advantages over local and regional baking companies. -3- MAJOR CUSTOMERS - --------------- The Company had sales to two customers during 1997 that exceeded 10% of consolidated sales (Sam's Wholesale Club, 47%, and Price Costco, 27%.) Although these two customers make up a significant amount of the 1997 revenues, the Company believes its relationship with both customers to be excellent. TRADEMARKS - ---------- The Company owns several federally registered trademarks for certain of the trademarks that it uses. The Company believes that its registered and common law trademarks have significant value and that some of its trademarks are instrumental to its ability to create demand for and market its products. There are currently no pending challenges to the use or registration of any of the Company's significant trademarks. There can be no assurance, however, that the Company's trademarks do not or will not violate the proprietary rights of others, that they would be upheld if challenged or that the Company would, in such an event, not be prevented from using its trademarks, any of which could have an adverse effect on the Company. REGULATION - ---------- The Company, as a manufacturer and marketer of food items, is subject to regulation by various government agencies, including specifically, the United States Food and Drug Administration. Under various statutes and regulations, such agencies prescribe requirements and establish standards for quality, purity and labeling. For example, under the Nutrition Labeling and Education Act of 1990, as amended, food manufacturers are now required to disclose nutritional information on their labels in a uniform manner. The finding of a failure to comply with one or more regulatory requirements can result in a variety of sanctions, including monetary fines and/or compulsory withdrawal of products from store shelves. The Company may also be required to comply from time to time with state and local laws regulating food handling and storage. In addition to laws relating to food products, the Company is subject to various federal, state and local environmental laws and regulations, which limit the discharge, storage, handling and disposal of a variety of substances. The Company's operations are also governed by laws and regulations relating to workplace safety and worker health, principally the Occupational Safety and Health Administration Act and regulations and applicable state laws and regulations thereunder. The Company believes that it currently complies in all material respects with the foregoing laws and regulations, although there can be no assurance that future compliance with such laws or regulations will not have a material adverse effect on the Company's financial condition or results of operations. -4- EMPLOYEES - --------- As of December 31, 1997, the Company employed 487 persons on a full-time basis. The Company is not a party to any collective bargaining agreement as of March 31, 1998. The Company believes its relations with its employees are satisfactory. SEASONALITY - ----------- Historically, the Company's operations have been somewhat seasonal in nature, especially increased sales of biscotti in the fourth quarter. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." ITEM 2. PROPERTIES The Company's executive offices are located in Tulsa, Oklahoma where the Company leases 8,500 square feet of office space. This lease expires on January 1, 2000. The Company's lease on the 48,000 square foot facility in Santa Ana, California for bagel bar products expires in 2001. The Company also leases a 47,000 square foot facility in Tulsa, Oklahoma, which houses its specialty cookie products operations. This lease expires in 2006. The Company believes that its facilities are suitable and adequate for its immediate needs and that additional substitute space is available if needed to accommodate expansion of its product line. ITEM 3. LEGAL PROCEEDINGS In December 1997, Rush Truck Leasing ("Rush") brought suit against the Company and others in Superior Court of the State of California (Orange County) alleging breach of a lease agreement concerning 18 Peterbilt trucks used by the Company in its California distribution operations. Rush is seeking the recovery of the trucks, as well as unspecified monetary damages. The Company is contesting the claims made by Rush and asserts that Rush has overcharged the Company. Although the Company cannot predict the outcome of this litigation, the Company does not expect this claim to have a material adverse impact on the Company's financial position or results of operations. Additionally, the Company is a party to ordinary routine litigation incidental to its business, none of which is expected to have a material effect on the Company's financial condition or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS There were no matters submitted to the Company's stockholders during the fourth quarter of the fiscal year ended December 31, 1997. -5- PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS The Company's Common Stock is traded on the American Stock Exchange ("AMEX") under the symbol "SLV." The high and low transaction prices for each quarter during fiscal 1996 and fiscal 1997 as traded on the AMEX are set forth below. STOCK PRICES --------------------- FISCAL 1996 HIGH LOW ----------- ---- --- First Quarter $3 1/4 $2 1/2 Second Quarter $3 15/16 $3 Third Quarter $3 5/16 $2 3/8 Fourth Quarter $3 1/8 $2 1/4 FISCAL 1997 ----------- First Quarter $3 $1 7/8 Second Quarter $2 3/8 $15/16 Third Quarter $1 11/16 $3/4 Fourth Quarter $1 3/8 $1/2 April 14, 1998, the Company had 14,858,121 shares of Common Stock outstanding, excluding 26,995 shares held in the Company's treasury, which were held by approximately 960 beneficial owners, represented by 130 shareholders of record. The Company has never paid cash dividends on its Common Stock. The Company presently intends to retain any earnings for the operation and expansion of the Company's business and does not anticipate paying cash dividends in the foreseeable future. Any future determination as to the payment of dividends will depend upon results of operations, capital requirements, the financial condition of the Company and such other factors as the Board of Directors of the Company may determine. In addition, the Company's revolving credit facility restricts the Company's ability to declare or pay cash dividends under certain circumstances. See Note 6 of the "Notes to Consolidated Financial Statements." CHANGES IN SECURITIES - --------------------- During the fourth quarter of 1997, the Company issued a total of 2,643,896 shares of common stock. Each of the issuances and sales described below was effected and relies upon an exemption from registration, under Section 4(2) of the Securities Act, for transactions by an issuer not involving any public offering, or other exemptions as set forth below. In connection with the conversion of convertible debentures previously issued by the Company in transactions effected pursuant to Regulation S promulgated under the Securities Act of 1933, as amended (the "Act"), the Company issued 2,036,042 shares. The recipients of such -6- shares of common stock were accredited investors (as defined in Regulation D promulgated under the Act). The shares of common stock issued upon such conversion were exempt from registration under the Act pursuant to Section 3(a) (9) of the Act. No commission or other remuneration was paid to a broker or placement agent in connection with such conversion. The dates of the Company's issuance instructions to its transfer agent and the conversion price per shares for each of such conversions is as follows: DATE Conversion Price Number of Shares ---- ---------------- ---------------- October 2, 1997 $0.48125 311,688 October 2, 1997 0.525 523,808 October 2, 1997 0.4638 93,789 October 2, 1997 0.4463 108,222 October 2, 1997 0.5775 99,999 October 28, 1997 0.4638 300,129 October 31, 1997 0.4463 249,381 November 4, 1997 0.4375 349,026 In connection with the price guarantee provisions of the Royalty Termination Agreement, the Company issued 343,731 shares on November 5, 1997. No commission or other remuneration was paid to a broker or placement agent in connection with such conversion. In connection with consulting services performed for the Company, the Company issued 130,000 shares on October 31, 1997 with a value of $.63 per share. No commission or other remuneration was paid to a broker or placement agent in connection with such conversion. In connection with the Restricted Stock Grant Agreement and Employment Agreement with Timothy G. Bruer, the Company issued 100,000 shares on October 31, 1997 with a value of $1.25 per share. No commission or other remuneration was paid to a broker or placement agent in connection with such conversion. In connection with a Common Stock Warrant the Company issued 34,123 warrants on June 5, 1997 with an exercise price of $.44 per share. No commission or other remuneration was paid to a broker or placement agent in connection with such conversion. In connection with two Promissory Note Agreements, the Company issued 35,000 warrants with an exercise price of $.50 per share on December 16, 1997 and 35,000 warrants with an exercise price of $.62 per share on December 19, 1997. No commission or other remuneration was paid to a broker or placement agent in connection with such conversion. ITEM 6. SELECTED FINANCIAL DATA The following table of selected financial data should be read in conjunction with the Financial Statements required by Item 8 and Management's Discussion and Analysis of Financial Condition and Results of Operations included in Item 7. The data set forth below has been restated to adjust for discontinued operations. In 1997, the Company discontinued the operations of its mail order catalog business and snack tray business. The combined sales from such businesses in 1996 were $28,940,000. See Note 4 to the Company's Consolidated Financial Statements. -7- SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Year Ended December 31, /(1)/ ------------------------------------------------- STATEMENT OF OPERATIONS DATA: 1997 1996 1995 1994 1993 --------- -------- -------- -------- -------- Net sales $ 23,890 $24,524 $20,940 $15,555 $ 3,023 Gross profit 4,397 5,438 5,054 4,322 716 Operating loss (8,537) (4,179) (3,043) (1,213) (1,620) Interest and other 3,285 951 236 758 401 Loss from continuing operations (11,822) (5,130) (3,278) (1,971) (2,021) Income (loss) from discontinued operations (6,680) (2,329) (1,435) (235) 215 Net loss (18,502) (7,459) (4,713) (2,206) (1,806) Loss per share from continuing operations:/(2)/ Basic (1.11) (.80) (.56) (.70) (.64) Diluted (1.36) (.80) (.56) (.70) (.64) (Loss) Income per share from discontinued operations:/(2/) Basic (.62) (.37) (.25) (.08) .07 Diluted (.76) (.37) (.25) (.08) .07 Net loss per share Basic (1.73) (1.17) (.81) (.78) (.57) Diluted (2.12) (1.17) (.81) (.78) (.57) December 31, /(1)/ ------------------------------------------------- BALANCE SHEET DATA: 1997 1996 1995 1994 1993 -------- ------- ------- ------- ------- Working capital (deficit) $(18,524) $(8,301) $ (34) $ 2,884 $ 357 Total assets 20,908 37,776 22,637 20,766 11,659 Long-term debt 5,360 13,442 8,294 4,552 8,334 Shareholders' equity (deficit) (7,332) 1,140 5,218 9,777 (1,708)
(1) Beginning shortly after inception, the Company consummated a series of acquisitions which affect the comparability between the historical net sales, gross profit, total assets and long-term debt for all years shown above. See Note 2 of Notes to the Company's Consolidated Financial Statements. (2) The loss per share data reflects the weighted average number of shares outstanding, including contingent shares. See Note 1 and Note 8 to the consolidated financial statements. -8- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the information set forth under "Selected Financial Data" and the Company's Consolidated Financial Statements and notes thereto. The following table presents, as a percentage of net sales, certain selected financial data for the Company for the years indicated:
For the Years Ended December 31, ---------------------------------- 1997 1996 1995 --------- --------- ---------- Net sales 100% 100% 100% Gross profit 18 22 24 General and administrative 17 18 17 Selling and marketing 19 17 19 Unusual charges 15 1 - Depreciation and amortization of goodwill and other intangibles 4 3 3 Interest and other 14 4 1 Loss from continuing operations (50) (21) (16) Loss from discontinued operations (28) (10) (7) Net loss (77) (30) (23)
RESULTS OF OPERATIONS - --------------------- The continuing operations information excludes the results from operations of the Company's snack tray business which was discontinued in the fourth quarter of 1997, the Company's direct store delivery business located in Southern California held for sale, and the Company's mail order business sold in the third quarter of 1997. No income tax benefit has been recognized in connection with these discontinued operations due to the Company's net operating loss carry forward position. FISCAL 1997 COMPARED TO FISCAL 1996 - ----------------------------------- Net Sales. Total sales for 1997 decreased slightly from $24,524,000 to $23,890,000. However, during this period Nonni's biscotti sales increased 14% from $12,903,000 to $14,747,000 as the Company's wholesale club sales continue to enjoy double-digit growth. In addition, the Company introduced new products into the grocery, vending, and convenience store channels. Bagel bar sales also increased over the prior year by 25% from $6,793,000 to $8,474,000, a portion of which was due to the acquisition of certain assets of The Bagel Place, Inc. in August 1996 and due to the Company expanding its product offering into the wholesale club channel. Offsetting these increased sales were sales declines in pound cakes of $1,818,000, a decrease in sales of crispy marshmallow square treats of $1,779,000 and other decreases of $562,000. -9- Gross Profit. Gross profit decreased by 19% from $5,438,000 to $4,397,000 and decreased as a percent of net sales from 22% to 18%. This decline was driven by a decrease in crispy marshmallow square treats of $374,000 caused by lower sales volumes in 1997, lower gross margin from bagel bar sales of $233,000, and lower gross margin from pound cakes of $90,000. The Company believes that changes made in late 1997 and in the first quarter of 1998 have improved both the biscotti and bagel bar gross margins over the full year 1997 level. These changes include reducing fixed plant overhead, repositioning the bagel bar program with wholesale clubs, rolling out new products of biscotti in the grocery, vending, and convenience store channels, and improvements in the Company's purchasing and logistics to capture savings throughout the supply chain. General and Administrative. General and administrative expenses decreased by $391,000 from $4,333,000 to $3,942,000 and decreased from 18% to 17% of net sales. This decline was primarily in direct general and administrative expenses associated with the two manufacturing plants which decreased by $382,000 or 29% due to plant consolidations in late 1996 that reduced the Company's four manufacturing plants to two plants. Selling and Marketing. Selling and marketing expenses increased by 8% from $4,111,000 to $4,435,000 and increased from 17% to 19% of net sales. This increase was due to higher demonstration expenses associated with the Company's bagel bar program with wholesale club customers. Offsetting this increase was lower selling and marketing expenses associated with biscotti, pound cakes, and lower corporate selling and marketing expenses. Unusual Charges. Operating income for 1997 has been reduced for unusual items of $3,500,000 compared to $344,000 for 1996 and increased as a percentage of net sales from 1% to 15%. These charges included a $1,000,000 reserve against a note receivable arising from the 1996 sale of the Company's Gift and Gourmet business, $2,050,000 related to the settlement of three employment agreements with the former owners of Nonni's biscotti, and $450,000 related to a consulting study which took place in 1997 which ultimately resulted in the Company's decision to divest the mail order catalog business, the snack tray business, and other smaller non-strategic related business activities. Depreciation and Amortization of Goodwill and Other Intangibles. Depreciation and amortization of goodwill and other intangibles increased by $227,000 to $1,057,000, or 27% and increased from 3% to 4% of net sales. Depreciation included in cost of goods sold was $638,000 in 1997 and $355,000 in 1996. Interest and Other. Interest and other expenses increased by $2,334,000 to $3,285,000 and increased as a percent of net sales from 4% to 14%. This increase was caused by certain factors including a non-cash interest charge in the first quarter of $1,150,000 from a Regulation S offering. FISCAL 1996 COMPARED TO FISCAL 1995 - ----------------------------------- Net Sales. Total sales for 1996 increased by $3,584,000 to $24,524,000, an increase of 17%. Sales from businesses acquired accounted for $2,133,000 of the increase. The Company -10- acquired certain assets of The MarveLoaf Corp. in January 1996 and certain assets of The Bagel Place, Inc. in August 1996. Sales were higher primarily because the Company's biscotti sales increased 77% over the 1995 level (an increase of $5,595,000) and sales from the bagel bar products increased by 54% (an increase of $2,370,000). These increases were partially offset by a decrease in sales from the Company's snack product line of $3,372,000 when sales from the crispy marshmallow square treat decreased over the prior year as other competitors entered the market place and the Company lost market share of its product. Gross Profit. Gross profit increased by 8% from $5,054,000 to $5,438,000 and decreased as a percentage of net sales from 24% to 22% due to a number of factors, including higher than anticipated manufacturing costs during the fourth quarter as the Company consolidated its Hayward and Carpenteria, California plants and its Orlando, Florida plant into both the Tulsa, Oklahoma and the Santa Ana, California manufacturing facilities. This consolidation resulted in the elimination of certain products, adjustments to the carrying values for certain inventory items, lower margins during the start-up stages of these two new plants and other expenses, some of which management believes are non- recurring in nature but are included in cost of goods sold. General and Administrative. General and administrative expenses increased by $754,000 to $4,333,000 and increased as a percentage of net sales from 17% to 18%. This decrease as a percentage of net sales was a result of the Company centralizing certain general and administrative functions with the plant consolidation program discussed above. Corporate overhead expenses increased as the Company consolidated certain functions from the closed plants into the corporate office and as the Company provided for a reserve against receivables related to the sale of the Gift and Gourmet division of $500,000. Sales and Marketing. Sales and marketing expenses increased by $227,000 or 6% and decreased slightly as a percentage of net sales from 19% to 17%. Unusual Charges. As a result of the Company's plant consolidation program in 1996, the Company incurred $344,000 of costs that management believes are non- recurring in nature. These expenses were associated with the plant shut-down and the consolidation program, including severance, rent expense and other costs associated with closing these facilities. These expenses represent 1% of net sales in 1996. Depreciation and Amortization and Goodwill and Other Intangibles. Depreciation and amortization increased from $633,000 to $829,000, an increase of 31% while remaining at 3% of net sales. This increase relates primarily to the acquisitions and related goodwill discussed above. Other depreciation expense included in cost of goods sold above was $355,000 in 1996 and $252,000 in 1995. Interest and Other. Interest expense increased from $236,000 to $951,000, an increase of $715,000. This increase was primarily due to higher debt outstanding during 1996 as compared to 1995 as the Company's borrowings increased primarily as a result of the acquisition of certain assets of The Bagel Place, Inc., capital expenditures incurred from the start-up of the Tulsa plant and funding for current year operating losses. These acquisitions and capital expenditures increased debt outstanding by approximately $8,000,000. -11- Loss from Discontinued Operations. Operating losses from discontinued operations increased from 7% to 10% of net sales, an increase of $894,000. This change was driven by an increase in depreciation and amortization of goodwill and other intangibles, higher sales and marketing expenses and higher general and administrative expenses as discussed above. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- Net cash used in operations was $6,275,000 for the year ended December 31, 1997, compared with $4,749,000 in the prior year. Net cash provided by investing activities was $352,000. Net cash generated from financing activities in 1997 was $5,815,000. The Company's principal credit facilities include a $7,000,000 revolving credit agreement with a bank, of which the full amount had been drawn as of December 31, 1997. Borrowings under this facility are based upon a borrowing base defined as 80% of eligible accounts receivable and 50% of eligible inventories. This credit facility which expires in April 1998 is classified as current in the financial statements at December 31, 1997. On April 10, 1998, the Company entered into a factoring transaction using trade accounts receivable receiving approximately $1,869,000 in proceeds. Of this amount, $750,000 was used to reduce the revolving line of credit to $6,000,000. At the same time, the bank and the Company's Chairman and his spouse entered into an agreement whereby the remaining $6,000,000 owed to the bank was transferred from the Company to Mr. and Mrs. Field and the bank released the lien on accounts receivables and inventories. The Company also signed a note agreement with Mr. and Mrs. Field in the amount of $6,000,000. This note will become due on August 31, 1998 and interest is at local bank prime plus 1 1/2%. As of April 10, 1998, the Company owes the Chairman and his spouse $12,350,000. In addition to the revolving credit facility, the Company has a $6,000,000 term note from another bank. At December 31, 1997, $6,000,000 was outstanding and interest is at prime. Interest is payable monthly and principal payments begin in May 1998, with a final balloon payment due in May 1999 based on a five-year amortization. This note is collateralized by the Company's machinery and equipment and also guaranteed by the Company's Chairman, his spouse and another family member of the Chairman. Subsequent to year-end the Company placed $200,000 of debentures (due January 1999 with an interest rate of 8%) pursuant to Regulation S of the Securities Act of 1933, as amended. These debentures can be converted at any time after a holding period of 45 days at the lower of (a) 75% of the closing price of the common stock for the day immediately preceding the conversion date or (b) 75% of the average of the closing prices of the common stock for the five business days immediately preceding the date of subscription by the purchaser. These funds were used for working capital purposes. As of April 7, 1998, $50,000 of these debentures were converted into 94,715 shares of common stock. The continuing losses from prior years and losses for 1997 combined with start up costs, acquisitions and consolidations, have required substantial capital and, have left the Company in a highly leveraged financial position as of December 31, 1997 with most of the Company's debt -12- classified as current. However, on April 6, 1998, the Company announced that it had entered into a letter of intent to sell 90% of the Nonni's/(R)/ biscotti business for $32 million including a retained equity interest and an earn-out agreement of up to $4.5 million based upon Nonni's earnings before interest, taxes, depreciation and amortization for the twelve-month period ending April 30, 1999. The proceeds from this transaction will be used to pay all current and long-term debt as well as other obligations of the Company. This transaction is expected to close during the third quarter of 1998, but it is subject to the negotiation of a definitive agreement, as well as shareholder and regulatory approval. Accordingly, there can be no assurance that the transaction will occur. The Company also announced on April 6, 1998 that it planned to dispose of the bagel bar business and its pound cake business located in Santa Ana, California. The Company believes that such a transaction will be consummated during 1998. The Company will use the proceeds from the Nonni's sale along with the proceeds from the disposition of the remaining snack tray operations to satisfy current obligations of the Company. These proceeds should provide sufficient cash flow to the Company to pay off all current and long-term debt as well as provide any necessary working capital for the Company. The Company's operations for the first quarter of 1998 including biscotti, bagel bar, and pound cake businesses, generated positive cash flow and are expected to continue to be cash flow positive until ultimately disposed of later in 1998. See Note 14 to the notes to Consolidated Financial Statements for further information. Prior to the occurrence of the transaction, it may be necessary for the Company to utilize other short-term financing to fund its operations. INFLATION - --------- The Company's business operations are subject to inflationary pressures. There can be no assurance that the Company will be able to increase prices in the event of increased labor and material costs. FORWARD LOOKING STATEMENTS - -------------------------- This Management's Discussion and Analysis of Financial Condition and Results of Operations and other sections of this Form 10-K include certain statements that may be "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. All statements in this Form 10-K, other than statement of historical facts, that address activities, events or developments that the Company expects, believes or anticipates will or may occur in the future are forward-looking statements. Although the Company believes the expectations expressed in such forward-looking statements are based on reasonable assumptions within the bounds of its knowledge of its business, such statements are not guarantees of future performance and actual results or developments may differ materially from those in the forward-looking statements. Forward-looking statements involve risks and uncertainties including, but not limited to, general economic trends, continued acceptance of the Company's products in the marketplace, competitive factors, manufacturing and raw material costs, the Company's dependence upon third-party suppliers, and other risks detailed from time to time in the Company's periodic reports filed with the Securities and Exchange Commission. The -13- Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. YEAR 2000 - --------- In the next two years, most companies will face a potentially serious information systems problem because many software applications and operational programs written in the past may not properly recognize calendar dates beginning in the year 2000. This problem could force computers to either shut down or provide incorrect data or information. The Company began the process of identifying the changes required to its computer programs and hardware in 1997. Software upgrades designed to correct the year 2000 problem have been implemented. The Company is currently evaluating the effect of the year 2000 problem on its hardware, and will correct any problems during 1998 and 1999. The Company does not anticipate the cost of these software and hardware changes to have a material adverse impact on its business, financial condition, or results of operation. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Financial Statements and Supplementary Data are set forth herein commencing on page F-1 of this Form 10-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. -14- PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Set forth below is certain information with respect to the executive officers and directors of the Company. Directors are generally elected at the annual meeting of shareholders and hold office until the next annual meeting of shareholders and until their successors are elected and qualified. Executive officers are elected by the Board of Directors and serve at its discretion. NAME AGE POSITION Lawrence D. Field 38 Director, Chairman of the Board Timothy G. Bruer 40 Director, President and Chief Executive Officer Dorvin D. Lively 39 Vice President, Chief Financial Officer and Secretary Richard A. Hall 58 Vice President of Operations Robert W. Luttman 52 President of Silverado Marketing Services, Inc. Gerald E. Milton 54 Director James K. Tolbert/(3)(1)/ 41 Director Milton D. McKenzie/(2)(1)(3)/ 61 Director Sam L. Susser/(2)/ 34 Director James H. Bankard/(1)(2)(3)/ 53 Director (1) Member of Compensation Committee (2) Member of Audit Committee (3) Member of Stock Option Committee Lawrence D. Field, age 38, the founder of the Company, has been a Director and Chairman of the Board of Directors of the Company since its inception in August 1990. He was also Chief Executive Officer of the Company from August 1990 to March 1997 and President of the Company from August 1990 to February 1994. Mr. Field has also served as President of Regent Private Capital Corp., an investment company, since February 1990. From September 1984 to February 1990, Mr. Field was Vice President and a shareholder of Capital Advisors, Inc., an investment management firm headquartered in Tulsa, Oklahoma, which managed investments for pension and profit sharing plans, foundations and individuals in the United States. From August 1982 to September 1984, Mr. Field served as Vice President of American Central Oil Corporation, an independent oil and gas company. Mr. Field graduated from the University of Texas at Austin in 1982 with a Bachelor of Science degree in Communications. Timothy G. Bruer, age 40, joined the Company as a Director, Chief Executive Officer and President in April 1997. Immediately prior to joining the Company, Mr. Bruer served as Vice President/General Manager of the Culinary Division of Nestle USA. He joined Nestle in 1992 as Vice President of Business Development. From 1985 to 1992, he was a partner with Bain and Company, Inc., a national consulting firm. Mr. Bruer graduated from Stanford University in -15- 1979 with a Bachelor of Arts degree in Economics and from the University of Chicago in 1985 with a Master of Business Administration degree. Gerald E. Milton, age 54, has been a Director of the Company since January 1994, and served as President of the Company from February 1994 until March 1997. He also served as Chief Financial Officer of the Company from June 1993 until February 1995. From May 1989 to June 1993, Mr. Milton worked as an independent consultant and investor. From August 1987 to October 1989, he served as President and Chief Executive Officer of Engineered Films, Inc., a manufacturer of industrial packaging films. From September 1980 to August 1986, Mr. Milton was Chief Financial Officer of Linear Films, Inc., a manufacturer of industrial packaging films. He graduated from Oklahoma State University with a Bachelor of Science degree in Business and a Master of Business Administration. James K. Tolbert, age 41, joined the Company as a Director in November 1990. Mr. Tolbert has been President of Tolbert Enterprises, Inc. in Tulsa, Oklahoma, a company that owns and operates several restaurants in Oklahoma and Texas, since April 1986. Prior to that time, he was a Land Manager of Texas Oil & Gas Corp., an independent oil and gas company, for seven years. He has a Bachelor of Business Administration Management degree from the University of Oklahoma. Milton D. McKenzie, age 61, joined the Company as a Director in November 1990. He has been Chairman of the Board of Directors of GPM, Inc. and its predecessors, the General Partner of CAPMAC Eight-Two Limited Partnership ("CAPMAC"), since October 1983. CAPMAC is an investment company specializing in oil and gas exploration. From February 1970 to October 1983, he was President and/or Chairman of the Board of Directors of Viking Petroleum, Inc., an oil and gas exploration and production company located in Tulsa, Oklahoma. He has a Juris Doctor from the University of Denver Law School and an Engineering degree from Tulsa University. Sam L. Susser, age 34, joined the Company as a Director in November 1990. In 1995, Mr. Susser became President and Chief Executive Officer of SSP, a joint venture of the Circle K Corporation and the Southguard Corporation ("Southguard"), which operates 173 convenience stores. Mr. Susser has been Chief Executive Officer of Southguard since January 1991, and served as Vice President, General Manager and Chief Financial Officer of Southguard from its founding in 1988 until January 1991. Prior to 1988, he was with the investment- banking firm of Salomon Brothers Inc. in New York, New York, for three years. Mr. Susser formed a new company, which he owns, Susser Holding, LLC which acquired Southguard Corporation, SSP Partners and its affiliates on January 29, 1998. Mr. Susser graduated from the University of Texas at Austin in 1985 with a Bachelor of Business Administration in Finance degree. James H. Bankard, age 53, joined the Company as a Director in November 1996. Also in 1996, Mr. Bankard became President and Chief Operating Officer of Home Juice Company. The Company was founded in 1946 as a supplier and manufacturer for a variety of juice beverage products for the retail food industry. From 1988 to 1995 he was employed by the Quaker Oats Corporation serving as President of the Continental Coffee Products Company, then as President of Quaker Beverage Company. From 1973 to 1988 Mr. Bankard was employed by CFS -16- Continental, Inc./Continental Coffee Products Co. serving in various general management and senior management positions. Mr. Bankard has a Bachelor of Science degree in Industrial Administration from Yale University and an MBA from the Harvard Business School. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE - ------------------------------------------------------- Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company's directors and executive officers, and persons who own more than ten percent of the Common Stock, to report their initial ownership of the Common Stock and any subsequent changes in that ownership to the SEC and the American Stock Exchange, and to furnish the Company with a copy of each such report. SEC regulations impose specific due dates for such reports, and the Company is required to disclose in this Proxy Statement any failure to file by these dates during and with respect to fiscal 1997. To the Company's knowledge, based solely on review of the copies of such reports furnished to the Company and written representations that no other reports were required, during and with respect to fiscal 1997, all Section 16(a) filing requirements applicable to its officers, directors and more than ten percent shareholders were complied with, except as follows: (a) Lawrence D. Field, Chairman of the Board of the Company, filed late four Form 4 reports covering 23 transactions consisting of purchases of Common Stock in the open market, (b) Richard A. Hall, Vice President of Operations of the Company, filed late one Form 4 report covering one transaction consisting of the purchase of Common Stock in the open market and (c) Milton D. McKenzie, Director, filed late one Form 4 report covering one transaction consisting of the issuance of warrants for the purchase of common stock. -17- COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION - ----------------------------------------------------------- During 1997, the Company's Compensation Committee was composed of Milton D. McKenzie, James H. Bankard and James K. Tolbert who also served the Company as independent Directors. ITEM 11. EXECUTIVE COMPENSATION Each Director of the Company is reimbursed for expenses incurred in attending meetings of the Board of Directors and meetings of committees of the Board of Directors. The Directors currently do not receive any additional fees for their services as Directors of the Company. The Company's By-laws provide that the Company shall indemnify its Directors and Officers to the fullest extent permitted by Oklahoma law. The Company has also entered into indemnification agreements with and carries liability insurance on behalf of all of its Directors. -18- SUMMARY COMPENSATION TABLE - -------------------------- The following table sets forth certain information with respect to the compensation of the Company's Chief Executive Officer and each of the Company's other executive officers whose cash compensation, based on salary and bonus, exceeded $100,000 during 1997, for services in all capacities to the Company and its subsidiaries during each of the Company's last three fiscal years. No information is given as to any person for any fiscal year during which such person was not an executive officer of the Company.
LONG-TERM COMPENSATION ------------------------------------------------ ANNUAL COMPENSATION AWARDS PAYOUTS ----------------------------------------------------------------------------------- RESTRICTED SECURITIES LONG-TERM OTHER ANNUAL STOCK UNDERLYING INCENTIVE ALL OTHER NAME AND PRINCIPAL SALARY BONUS COMPENSATION AWARD(S) OPTIONS/SARS PAYOUTS COMPENSATION POSITION YEAR ($) ($) ($) (1) ($) (#) (2) ($) ($) Lawrence D. Field, 1997 104,487 0 0 0 0 0 11,709(5) Chairman 1996 106,607 0 0 0 0 0 0 1995 100,000 0 0 0 15,000(3) 0 0 Timothy G. Bruer, 1997 162,180 0 0 62,500 0 0 157,256(6) President and Chief Executive Officer Dorvin D. Lively, 1997 125,654 0 0 0 0 0 0 Vice President, 1996 124,602 0 0 0 0 0 0 Chief Financial 1995 110,492 0 0 0 20,000(4) 0 0 Officer and Secretary Richard A. Hall, 1997 104,487 0 0 0 0 0 0 Vice President of 1996 114,365 0 0 0 0 0 0 Operations 1995 13,462 0 0 0 0 0 0 Michael W. Knapik, 1997 142,962 0 0 0 0 0 0 (7) Vice President 1996 2,718 0 0 0 0 0 0 of Sales and Marketing
(1) Does not include the value of prerequisites and other personal benefits because the aggregate amount of such compensation, if any, does not exceed the lesser of $50,000 or 10 percent of the total amount of annual salary and bonus for any individual named. (2) Consists solely of options to acquire share of Common Stock. (3) Such option is subject to vesting upon the achievement of earnings target for 1997. (4) Consists of two separate options, each of which provides for the option to purchase 10,000 shares of Common Stock. One of such options was subject to vesting upon the achievement of certain earnings target for 1995, which was not met. (5) Consists of payment of automobile lease. (6) Consists of reimbursement of moving expenses of $94,756 and $62,500 of stock awards. (7) Michael W. Knapik resigned from the Company on March 6, 1998. Options/SAR Grants in the Last Fiscal Year The Company did not grant any options to the named executive officers of the Company during fiscal 1997. The Company has never granted any stock appreciation rights. -19- AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES - ---------------------------- The following table sets forth certain information with respect to options exercised by the named executive officers of the Company during fiscal 1997, and the number and value of unexercised options held by such executive officers at the end of the fiscal year. The Company has never granted any stock appreciation rights.
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY SHARES OPTIONS/SARS AT FY-END OPTIONS/SARS AT FY-END ACQUIRED ON VALUE (#) (2) ($) (1) (3) EXERCISE REALIZED ------------------------------ ------------------------------- NAME (#) ($) (1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - --------------------- ----- ----------- ------------- ---------- ------------- Lawrence D. Field 0 0 0 15,000 0 0 Timothy G. Bruer 0 0 0 0 0 0 Dorvin D. Lively 0 0 10,000 0 0 0 Richard A. Hall 0 0 0 0 0 0 Robert W. Luttman 0 0 0 0 0 0
(1) Market value of the underlying securities at exercise date or fiscal year- end, as the case may be, minus the option exercise price. (2) Does not include option shares pursuant to the Company's 1994 Stock Option Plan, which failed to vest in 1996. (3) The closing price of the Common Stock on the American Stock Exchange on December 31, 1997, the last trading day of the fiscal year, was $0.5625 EMPLOYMENT AGREEMENTS AND CHANGE IN CONTROL ARRANGEMENTS - -------------------- The Company has one employment agreement and change in control arrangement with the Company's Chief Executive Officer. This agreement sets his base salary at $250,000, provides for a performance bonus of up to 75% of his base salary, awards restricted and unrestricted stock at the commencement of his employment and awards stock options on an annual basis. In addition, Mr. Bruer is eligible for all Company benefits. Under a change of control within two years from the commencement of his employment, he immediately vests in all restricted stock and stock options. -20- ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT PRINCIPAL SHAREHOLDERS AND SECURITY OWNERSHIP OF MANAGEMENT - ----------------------------------------------------------- The following table sets forth certain information as of April 14, 1998, regarding the ownership of the Company's common Stock by (a) all persons known by the Company to be beneficial owners of more than five percent of such stock, (b) each director and nominee for director of the Company, (c) each of the executive officers of the Company named in the Summary Compensation Table, and (d) all executive officers and directors of the Company as a group. Unless otherwise noted, the persons named below have sole voting and investment power with respect to such shares. -21-
============================================================================================================================ SHARES BENEFICIALLY OWNED NAME AND OWNER OR IDENTITY OF GROUP (1) PERCENT OF CLASS(1) ============================================================================================================================ Lawrence D. Field 6846 South Canton, Suite 110 Tulsa, Oklahoma 74136 6,664,865 (2) 44.7 ML Oklahoma Venture Partners, Limited Partnership 5100 East Skelly Drive, Suite 1060 Tulsa, Oklahoma 74135 792,802 (3) 5.3 Milton D. McKenzie 5727 South Lewis, Suite 125 Tulsa, Oklahoma 74105 863,680 (4) 5.8 Timothy G. Bruer 275,000 (5) 1.9 Gerald E. Milton 95,880 (6) * James H. Bankard 10,000 (7) * Sam L. Susser 6,525 * James K. Tolbert 43,800 * Dorvin D. Lively 24,493 (8) * Richard A. Hall 5,500 * Robert W. Luttman 0 -- All executive officers and directors as a group (10 persons) 7,989,743 (9) 53.1 ============================================================================================================================
* Represents less than 1% of the Common Stock outstanding. (1) Shares of Common Stock which were not outstanding but which could be acquired by a person upon exercise of an option or warrant within 60 days of April 14, 1998, are deemed outstanding for the purpose of computing the number of shares and the percentage of outstanding shares beneficially owned by such person. However, such shares are not deemed to be outstanding for the purpose of computing the percentage of outstanding shares beneficially owned by any other person. (2) Includes 721,063 shares owned by Regent Private Capital Corp. ("Regent"), with respect to which Mr. Field has sole voting and investment control as the controlling shareholder thereof, 42,424 shares purchasable pursuant to presently exercisable stock purchase warrants held by Mr. Field and Regent, 22,500 shares owned by Legacy Investment Partnership in which Mr. Field shares voting and investment control over such shares, and 7,875 shares held by the Silverado Foods, Inc. 401(k) Plan which are allocated to the account of Mr. Field. (3) Includes 87,121 shares purchasable pursuant to presently exercisable stock purchase warrants. MLOK Co., Limited Partnership is the managing general partner of ML Oklahoma Venture Partners, Limited Partnership ("ML Oklahoma"). Merrill Lynch Venture Capital Inc., an indirect wholly owned subsidiary of Merrill Lynch & Co., Inc. is the sole general partner of MLOK Co., Limited Partnership. Merrill Lynch & Co., Inc. is a widely held public company. MLOK Co., Limited Partnership, Merrill Lynch Venture Capital Inc. and Merrill Lynch & Co., Inc. may be deemed to be the beneficial owners of these shares. Merrill Lynch & Co., Inc. disclaims beneficial ownership of these shares. (4) Includes 191,250 shares owned by CAPMAC Eighty-Two Limited Partnership ("CAPMAC"), with respect to which Mr. McKenzie has sole voting and investment control as the general partner, 70,000 shares which may be acquired pursuant to common stock purchase warrants held by CAPMAC, and 25,000 shares owned by GPM, Inc. with respect to which Mr. McKenzie has sole voting and ownership control. (5) Includes 50,000 shares which are restricted and vest over two years. (6) Includes 6,061 shares purchasable pursuant to presently exercisable stock purchase warrants. (7) Includes 10,000 shares purchasable pursuant to presently exercisable stock options. (8) Includes 10,000 shares purchasable pursuant to presently exercisable stock options and 3,393 shares held by the Silverado Foods, Inc., 401(k) Plan which are allocated to the account of Mr. Lively. (9) Includes 538,485 shares purchasable pursuant to presently exercisable stock options and stock purchase warrants and which may be acquired pursuant to presently convertible debentures. -22- ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS From time to time, Lawrence D. Field, the Chairman of the Board of Directors of the Company, has provided financing to the Company. For 1997, the largest amount of indebtedness to Mr. Field was $9,388,000, the lowest amount of indebtedness incurred was $6,085,000, at September 30, 1997, the amount of indebtedness repaid was $350,000, and the amount of indebtedness at year-end was $6,275,000, excluding accrued interest payable to Mr. Field. On September 30, 1997, Mr. Field forgave approximately $2,300,000 of debt in return for 1,790,694 shares of common stock. During 1997, Mr. Field also converted $2,900,000 of debentures to paid in capital. The amount of indebtedness as of April 10, 1998, was $12,350,000. Of such indebtedness, $6,275,000 bears interest at the rate of 8% per annum $6,000,000 bears interest at local prime plus 1 1/2%. The Company believes the terms of such financing are as favorable to the Company as those which it might have been able to obtain from an unaffiliated third party. Also, from time to time, Mr. Field has guaranteed obligations of the Company. Currently, Mr. Field has guaranteed the Company's obligations with respect to a vehicle lease agreement with Timmer Leasing. Also, Mr. Field and his wife, Cynthia Field, have guaranteed the Company's line of credit with Bank One of Tulsa in the amount of $7,000,000, which bears interest at the prime rate published in The Wall Street Journal, and a term note with Bank of Oklahoma in the amount of $6,000,000, which bears interest at 8 1/2%. As compensation for providing such guaranty of the Company's lines of credit, the Company accrues to Mrs. Field a monthly fee of 1/12 of 1% of the outstanding balance under such line of credit. The Company believes that the terms of the arrangement with Mrs. Field are as favorable as those which it might have been able to obtain from an unaffiliated third party. Another family member of Mr. Field has also guaranteed the $6,000,000 term note at Bank of Oklahoma. On December 11, 1997, CAPMAC Eighty-Two Limited Partnership ("CAPMAC"), a limited partnership of which Milton D. McKenzie, a shareholder and Director of the Company, has sole voting and investment control as the general partner, purchased $250,000 in principal amount of the Company's 14% notes. Mr. McKenzie also received Common Stock purchase warrants of 35,000 exercisable at $.50 per share. The Company believes the terms of such financing are as favorable to the Company as those which it might have been able to obtain from an unaffiliated third party. On December 19, 1997, ML Oklahoma, a holder of 5.3% of the Company's stock purchased $250,000 in principal amount of the Company's 14% notes. ML Oklahoma also received Common Stock purchase warrants of 35,000 exercisable at $.63 per share. The Company believes the terms of such financing are as favorable to the Company as those which it might have been able to obtain from an unaffiliated third party. -23- PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) (1) Financial Statements: The Financial Statements listed in the accompanying Index to Financial Statements are filed as a part of this Form 10-K. (2) Financial Statement Schedules: All schedules are omitted as inapplicable or because the required information is contained in the financial statements or included in the footnotes thereto. (3) Exhibits: The following documents are included as exhibits to this Form 10-K. Those exhibits below incorporated by reference herein are indicated as such by the information supplied in the parenthetical thereafter. If no parenthetical appears after an exhibit, such exhibit is filed herewith. EXHIBIT NO. - ----------- 2.1 Asset Purchase Agreement dated July 25, 1996, between the Company and The Bagel Place, Inc. (filed as Exhibit 2.1 to the Company's Form 8-K filed August 22, 1996). 3.1 Certificate of Incorporation of the Company (filed as Exhibit 3.1 to the Company's Registration Statement on Form S-1 Registration No. 33-79736 (the "S-1 Registration Statement")). 3.2. Certificate of Amendment of Certificate of Incorporation of the Company filed June 17, 1992 (filed as Exhibit 3.2 to the S-1 Registration Statement). 3.3 Certificate of Amendment of Certificate of Incorporation of the Company filed August 4, 1993 (filed as Exhibit 3.3 to the S-1 Registration Statement). 3.4 Certificate of Amendment of Certificate of Incorporation of the Company filed June 2, 1994 (filed as Exhibit 3.6 to the S-1 Registration Statement). 3.5 Bylaws of the Company (filed as Exhibit 3.7 to the S-1 Registration Statement). 4.1 Form of Note Purchase Agreement (filed as Exhibit 4.3 to the Company's Form 10-Q for the quarterly period ended September 30, 1996). -24- 4.2 Form of Common Stock Purchase Warrant (filed as Exhibit 4.3 to the Company's Form 8-K filed February 18, 1997). 4.3 Form of Registration Rights Agreement (filed as Exhibit 4.4 to the Company's Form 8-K filed February 18, 1997). 4.4 Form of 8% Convertible Debenture due December 31, 1999 (filed as Exhibit 4.2 to the Company's Form 8-K filed February 11, 1998). 4.5 Form of Offshore Securities Subscription (filed as Exhibit 4.1 to the Company's Form 8-K filed February 11, 1998.) 10.1 Industrial Real Estate Lease dated January 16, 1992, between the Company and Acquiport Two Corporation, as amended (filed as Exhibit 10.8 to the S-1 Registration Statement). 10.2 Master Vehicle Lease Agreement dated November 24, 1993, between Timmer Leasing Company and Honor Snack, Inc. (filed as Exhibit 10.9 to the S-1 Registration Statement). 10.3 Open-Ended Master Lease Agreement dated February 20, 1991, between Figgie Leasing Corporation and Honor Snack, Inc. (as assignee of Nationwide Gourmets, Inc.) (filed as Exhibit 10.10 to the S-1 Registration Statement). 10.4 Agreement dated July 16, 1993, between the Company and Le Groupe La Cantinere, Inc. (filed as Exhibit 10.11 to the S-1 Registration Statement). 10.5 Form of Warrant issued as of May 4, 1993, to Leslie M. Hannafey (filed as Exhibit 10.12 to the S-1 Registration Statement). 10.6 Form of Warrant issued to Regent Private Capital Corp. in 1993 in connection with certain short-term financing (filed as Exhibit 10.13 to the S-1 Registration Statement). 10.7 Common Stock Purchase Warrants dated June 2, 1994, issued to: (i) ML Oklahoma Venture Partners, Limited Partnership, for 12,121 shares, (ii) Lawrence D. Field for 42,424 shares, and (iii) Gerald E. Milton for 6,061 shares (filed as Exhibit 10.14 to the S-1 Registration Statement). 10.8 Form of Warrant Issued to Commonwealth Associates in connection with the initial public offering of the Company's common stock (filed as Exhibit 10.15 to the S-1 Registration Statement). 10.9 Loan Agreement dated April 11, 1995, between the Company and Liberty Bank and Trust Company of Tulsa, National Association (filed as Exhibit 10.1 to the Company's Form 10-Q for the quarterly period ended March 31, 1995). -25- 10.10 Security Agreement dated April 11, 1995, from the Company to Liberty Bank and Trust Company of Tulsa, National Association (filed as Exhibit 10.2 to the Company's Form 10-Q for the quarterly period ended March 31, 1995). 10.11 Third Amendment to Loan Agreement dated September 13, 1996, among the Company, Silverado Marketing Services, Inc., Texas B&B, Inc., Lawrence D. Field, Cynthia Field and Liberty Bank and Trust Company of Tulsa, National Association (filed as Exhibit 10.2 to the Company's Form 10-Q for the quarterly period ended September 30, 1996). 10.12 Form of Indemnification Agreement between the Company and each officer and director of the Company (filed as Exhibit 10.27 to the S-1 Registration Statement). 10.13* Stock Option Agreement dated as of June 2, 1994, in favor of David A. Hentschel for 3,000 shares (filed as Exhibit 10.29 to the S-1 Registration Statement). 10.14 Amended and Restated Registration Rights Agreement dated August 18, 1993, and Amendment to Amended and Restated Registration Rights Agreement dated December 20, 1993 (filed as Exhibit 10.30 to the S-1 Registration Statement). 10.15* Silverado Foods, Inc. 1994 Stock Option Plan (filed as Exhibit 10.31 to the S-1 Registration). 10.16* Amendment Number 1 to Silverado Foods, Inc. 1994 Stock Option Plan (filed as Exhibit A to the Company's Proxy Statement for Annual Meeting of Shareholders held May 12, 1995). 10.17 Lease Agreement dated November 3, 1995, between DCA Grantor Trust, as lessor, and The Company, as lessee (filed as Exhibit 10.32 to the Company's Form 10-K for the fiscal year ended December 31, 1995). 10.18* Silverado Foods, Inc. 401(k) Plan (filed as Exhibit 4(f)) to the Company's Registration Statement on Form S-8 as filed with the Securities and Exchange Commission on December 8, 1995). 10.19 Royalty Termination Agreement dated November 8, 1996, among the Company, Nonni's Inc., Steve Sirianni, Tim Soldati and Rich Martin (filed as Exhibit 10.1 to the Company's Form 10-Q for the quarterly period ended September 30, 1996). 10.20* Settlement of Employment Agreement dated April 1, 1998 between the Company and Tim Soldati. 10.21* Settlement of Employment Agreement dated April 1, 1998 between the Company and Rich Martin. 10.22* Settlement of Employment Agreement dated April 1, 1998 between the Company and Steve Sirianni. 10.23* Employment Contract with Timothy G. Bruer (filed as Exhibit 10.1 to the Company's Form 10-Q for the quarterly period ended March 31, 1997). 10.24* Restricted Stock Grant Agreement with Timothy G. Bruer (filed as Exhibit 10.2 to the Company's Form 10Q for the quarterly period ended March 31, 1997). 10.25 Promissory Note dated April 29, 1997 in the original principal amount of $6,000,000 payable to Bank of Oklahoma, N.A. (filed as Exhibit 10.1 to the Company's Form 10Q for the quarterly period ended June 30, 1997.) 10.26 Security Agreement dated April 29, 1997, from the Company to Bank of Oklahoma (filed as Exhibit 10.2 to the Company's Form 10Q for the quarterly period ended June 30, 1997). -26- 10.27 Form of Promissory Note Agreement dated December 16, 1997 in the original principal amount of $250,000 payable to CAPMAC EIGHTY-TWO LIMITED PARTNERSHIP. 10.28 Form of Common Stock Purchase Warrant to CAPMAC EIGHTY TWO LIMITED PARTNERSHIP. 10.29 Form of Promissory Note Agreement dated December 19, 1997 in the original principal amount of $250,000 payable to ML Oklahoma. 10.30 Form of Common Stock Purchase Warrant to ML Oklahoma. 21. Subsidiaries of the Company (filed as Exhibit 21 to the Company's Form 10-K for the fiscal year ended December 31, 1995). 23. Consent of Arthur Andersen LLP. 27. Financial Data Schedule. * Management contract or compensatory plan or arrangement. (b) Reports on Form 8-K None. -27- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SILVERADO FOODS, INC. Date: April 14, 1998 By: /s/ Lawrence D. Field ------------------------ Lawrence D. Field Chairman of the Board Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: NAME TITLE DATE - ---- ----- ---- /s/ Lawrence D. Field Director and Chairman of the Board April 14, 1998 - ------------------------ Lawrence D. Field /s/ Timothy G. Bruer President and Chief Executive Officer April 14, 1998 - ------------------------ Timothy G. Bruer /s/ James H. Bankard Director April 14, 1998 - ------------------------ James H. Bankard /s/ Milton D. McKenzie Director April 14, 1998 - ------------------------ Milton D. McKenzie /s/ Gerald E. Milton Director April 14, 1998 - ------------------------ Gerald E. Milton /s/ Sam L. Susser Director April 14, 1998 - ------------------------ Sam L. Susser /s/ James K. Tolbert Director April 14, 1998 - ------------------------ James K. Tolbert /s/ Dorvin D. Lively Vice President, Chief Financial April 14, 1998 - ------------------------ Officer and Secretary (Principal Dorvin D. Lively Financial Officer and Principal Accounting Officer) -28- INDEX TO FINANCIAL STATEMENTS SILVERADO FOODS, INC. AND SUBSIDIARIES Report of independent public accountants F-2 Consolidated balance sheets as of December 31, 1997 and 1996 F-3 Consolidated statements of operations for the years ended December 31, 1997, 1996 and 1995 F-4 Consolidated statements of shareholders' equity for the years ended December 31, 1997, 1996 and 1995 F-5 Consolidated statements of cash flows for the years ended December 31, 1997, 1996 and 1995 F-6 Notes to consolidated financial statements F-7 F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Shareholders of Silverado Foods, Inc.: We have audited the accompanying consolidated balance sheets of Silverado Foods, Inc. (an Oklahoma corporation) and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of operations, shareholders' equity (deficit) and cash flows for the years ended December 31, 1997, 1996 and 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Silverado Foods, Inc. and subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for the years ended December 31, 1997, 1996 and 1995, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Tulsa, Oklahoma April 10, 1998 F-2 SILVERADO FOODS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31 -------------------------- ASSETS 1997 1996 ---- ---- CURRENT ASSETS: Cash $ 56,359 $ 164,118 Accounts receivable, net 2,689,893 4,605,632 Inventories, net 1,204,321 5,974,719 Prepaid expenses and other 365,069 560,372 ------------ ------------ Total current assets 4,315,642 11,304,841 ------------ ------------ NET ASSETS HELD FOR SALE 2,835,459 188,324 NOTES RECEIVABLE 1,178,582 1,315,584 PROPERTY, PLANT AND EQUIPMENT, net 7,086,488 11,829,580 GOODWILL AND OTHER INTANGIBLES, net 5,492,027 13,137,613 ------------ ------------ Total assets $ 20,908,198 $ 37,775,942 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Current maturities of long-term debt $ 14,257,040 $ 8,637,272 Short-term notes payable 500,000 - Trade accounts payable 4,516,522 8,338,029 Accrued liabilities 3,291,737 2,324,039 Other liabilities 274,283 306,974 ------------ ------------ Total current liabilities 22,839,582 19,606,314 ------------ ------------ LONG-TERM DEBT, less current maturities 5,360,086 13,442,197 OTHER 40,967 3,587,632 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY (DEFICIT) Common stock, $.01 par value, 20,000,000 shares 117,018 72,583 authorized 11,701,757 issued, 11,674,762 outstanding Warrants 46,549 61,563 Additional paid-in-capital 28,843,461 18,843,454 Accumulated deficit (36,274,813) (17,773,149) ------------ ------------ (7,267,785) 1,204,451 Less: Treasury stock (64,652) (64,652) ------------ ------------ Total shareholders' equity (deficit) (7,332,437) 1,139,799 ------------ ------------ Total liabilities and shareholders' equity (deficit) $ 20,908,198 $ 37,775,942 ============ ============ The accompanying notes are an integral part of these consolidated financial statements. F-3 SILVERADO FOODS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, ------------------------------------------ 1997 1996 1995 ---- ---- ---- NET SALES $ 23,890,141 $ 24,524,007 $ 20,939,961 COST OF SALES 19,492,693 19,085,864 15,885,340 ------------ ------------ ------------ Gross profit 4,397,448 5,438,143 5,054,621 ------------ ------------ ------------ OPERATING EXPENSES: General and administrative 3,942,493 4,332,690 3,579,127 Selling and marketing 4,434,757 4,111,457 3,884,560 Unusual charges 3,500,000 344,000 - Depreciation 144,502 148,801 134,402 Amortization of goodwill and other intangibles 912,279 680,633 499,068 ------------ ------------ ------------ 12,934,031 9,617,581 8,097,157 ------------ ------------ ------------ OPERATING LOSS (8,536,583) (4,179,438) (3,042,536) OTHER INCOME (EXPENSE): Interest (1,939,298) (957,975) (139,648) Accretion of debenture discount (1,150,000) - - Other, net (195,965) 7,376 (96,030) ------------ ------------ ------------ (3,285,263) (950,599) (235,678) ------------ ------------ ------------ LOSS FROM CONTINUING OPERATIONS (11,821,846) (5,130,037) (3,278,214) DISCONTINUED OPERATIONS Operating Loss (3,458,216) (2,328,963) (1,434,797) Loss on Disposal (3,221,602) - - ------------- ------------ ------------ LOSS FROM DISCONTINUED OPERATIONS (6,679,818) (2,328,963) (1,434,797) ------------- ------------ ------------ NET LOSS $ (18,501,664) $ (7,459,000) $ (4,713,011) ============= ============ ============ BASIC LOSS PER SHARE FROM: CONTINUING OPERATIONS $ (1.11) $ (0.80) $ (0.56) OPERATING LOSS FROM DISCONTINUED OPERATIONS (0.32) (0.37) (0.25) LOSS ON DISPOSAL (0.30) - - ------------- ------------ ------------ NET LOSS PER SHARE $ (1.73) $ (1.17) $ (0.81) ============= ============ ============ DILUTED: CONTINUING OPERATIONS $ (1.36) $ (0.80) $ (0.56) OPERATING LOSS FROM DISCONTINUED OPERATIONS (0.39) (0.37) (0.25) LOSS ON DISPOSAL (0.37) - - ------------- ------------ ------------ NET LOSS PER SHARE $ (2.12) $ (1.17) $ (0.81) ============= ============ ============ The accompanying notes are an integral part of these consolidated financial statements. F-4 SILVERADO FOODS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
Common Stock Treasury Stock ------------------- ------------------- Additional Number Number Paid-In Accumulated of Shares Amount of Shares Amount Warrants Capital Deficit Total --------- ------ --------- ------ -------- ------- ------- ----- Balance, December 31, 1994 5,752,680 57,528 (26,995) (64,652) 149,528 15,235,563 (5,601,138) 9,776,829 Conversion of warrants 162,829 1,628 - - (72,120) 142,612 - 72,120 Exercise of common stock options 67,500 675 - - - 81,675 - 82,350 Net loss - - - - - - (4,713,011) (4,713,011) ---------- --------- ------- --------- --------- ------------ ------------ ------------ Balance, December 31, 1995 5,983,009 59,831 (26,995) (64,652) 77,408 15,459,850 (10,314,149) 5,218,288 Accretion of common stock subject to price guarantee - (131,250) - (131,250) Exercise of Warrants 35,651 356 - - (15,845) 31,334 - 15,845 Issuance of common stock in connection with acquisition 200,000 2,000 - - - 598,000 - 600,000 Issuance of common stock in connection with settlement of royalty agreement 700,000 7,000 - - - 1,993,000 - 2,000,000 Issuance of common stock in connection with debenture conversion 187,012 1,870 - - - 605,919 - 607,789 Exercise of common stock options 90,000 900 - - - 108,900 - 109,800 Issuance of common stock 62,571 626 - - - 177,701 - 178,327 Net loss - - - - - - (7,459,000) (7,459,000) ---------- --------- ------- --------- --------- ------------ ------------ ------------ Balance, December 31, 1996 7,258,243 $ 72,583 (26,995) $ (64,652) $ 61,563 $ 18,843,454 $(17,773,149) $ 1,139,799 Issuance of common stock in connection with debenture conversion 3,611,293 36,114 - - - 2,813,886 - 2,850,000 Exercise of warrants 34,123 341 - - (15,014) 29,687 - 15,014 Contribution of capital - - - - - 2,595,601 - 2,595,601 Accretion of debenture discount - - - - - 1,150,000 - 1,150,000 Issuance of common stock in connection with settlement of royalty agreement 543,731 5,437 - - - (5,437) - - Purchase of common stock by foregiveness of indebtedness 16,367 163 - - - 2,362,400 - 2,362,563 Stock Grant 100,000 1,000 - - - 124,000 - 125,000 Issuance of common stock in return for consulting services 130,000 1,300 - - - 79,950 - 81,250 Purchase of common stock by management 8,000 80 - - - 9,920 - 10,000 Issuance of common stock in connection with settlement of employment agreement - - - - - 840,000 - 840,000 Net loss - - - - - - (18,501,664) (18,501,664) ---------- --------- ------- --------- --------- ------------ ------------ ------------ Balance, December 31, 1997 11,701,757 $ 117,018 (26,995) $ (64,652) $ 46,549 $ 28,843,461 $(36,274,813) $ (7,332,437) ---------- --------- ------- --------- --------- ------------ ------------ ------------
The accompanying notes are an integral part of these consolidated financial statements. F-5 SILVERADO FOOD, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Year Ended December 31, ---------------------------------------------- 1997 1996 1995 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net loss $(18,501,664) $ (7,459,000) $ (4,713,011) ------------- -------------- ------------- Adjustments to reconcile net loss to cash used in operating activities-- Depreciation and amortization 2,220,053 2,139,414 1,362,379 Accretion of debenture discount 1,150,000 - - Provision for note receivable 1,000,000 - - Loss on sale of assets and assets held for sale 3,473,599 - - Employment Agreement Expense 840,000 - - Change in assets and liabilities, net of effect of acquisitions (Increase) decrease in accounts receivable 1,225,810 (2,431,908) 626,109 (Increase) decrease in inventory 1,535,135 (356,735) (603,780) (Increase) decrease in prepaid expenses and other 227,701 238,722 (166,901) Increase in assets held for disposal (731,699) - - Increase (decrease) in payables and accrued liabilities 1,099,599 3,578,552 1,636,557 (Increase) decrease in intangibles and other 185,616 (458,110) (501,229) ------------- -------------- ------------- Total adjustments 12,225,814 2,709,935 2,353,135 ------------- -------------- ------------- Cash used in operating activities (6,275,850) (4,749,065) (2,359,876) ------------- -------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (978,406) (3,891,533) (630,852) Payments for acquisitions - (4,224,376) (2,378,952) Proceeds from dispositions 1,530,755 - - Note receivable (200,000) - - ------------- -------------- ------------- Cash provided by (used in) investing activities 352,349 (8,115,909) (3,009,804) ------------- -------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from stock issuance 25,013 128,141 154,470 Borrowings from long-term debt 11,545,000 13,743,629 9,308,150 Payments on notes payable and long-term debt (5,754,271) (971,079) (4,522,749) ------------- -------------- ------------- Cash provided by financing activities 5,815,742 12,900,691 4,939,871 ------------- -------------- ------------- NET INCREASE (DECREASE) IN CASH (107,759) 35,717 (429,809) CASH, beginning of period 164,118 128,401 558,210 ------------- -------------- ------------- CASH, end of period $ 56,359 $ 164,118 $ 128,401 ============= ============== ============= Non-cash Financing Activities: Issuance of stock for debenture conversion $ 2,850,000 $ - $ - Addition to paid-in-capital for debenture discount accretion 1,150,000 - - Debenture conversion to paid in capital 2,595,601 - - Reclassification of capitalized lease obligation to operating lease (3,768,880) 5,115,153 - Receipt of note receivable for sale of assets 1,012,383 - - Stock issued for buyout option of royalty - 2,000,000 - Purchase of common stock by forgiveness of indebtedness 2,362,563 - - Issuance of common stock in connection with termination of employment agreements 840,000 - - Exercise of warrants for common stock 15,014 15,845 72,120 SUPPLEMENTAL CASH FLOWS INFORMATION: Cash paid for- interest $ 1,289,269 $ 930,230 $ 757,922 The accompanying notes are an integral part of these consolidated financial statements. F-6 SILVERADO FOODS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: BUSINESS Silverado Foods, Inc. (the Company), an Oklahoma corporation, was incorporated on August 15, 1990. The Company manufactures and markets a diversified line of specialty baked goods through multiple distribution channels throughout the United States and parts of Canada. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Silverado Foods, Inc. and its wholly-owned subsidiaries. Acquired businesses are included in results of operations effective with the closing dates of the various acquisitions (see Note 2). All significant intercompany accounts and transactions have been eliminated in consolidation. RECLASSIFICATIONS Certain reclassifications to the consolidated financial statements for the year ended December 31, 1996 and 1995 have been made to conform to the presentation of the December 31, 1997 consolidated financial statements. As discussed in Note 4, the Company discontinued certain operations in 1997. The 1997 balance sheet and related disclosures appropriately reflect the net assets of those operations as "held for sale". The 1996 balance sheet and related disclosures have not been restated to reflect those net assets as "held for sale". INVENTORIES Inventories consist primarily of finished goods, ingredients and packaging supplies which are stated at the lower of cost (first-in, first-out basis) or market as follows: December 31, ------------------------ 1997 1996 ---- ---- Raw materials $ 908,105 $2,348,945 Finished goods 370,192 3,709,774 ---------- ---------- 1,278,297 6,058,719 Less - allowance for excess and obsolete inventory (73,976) (84,000) ---------- ---------- $1,204,321 $5,974,719 ========== ========== F-7 PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost. Depreciation on property, plant and equipment is provided using the straight-line method over estimated service lives ranging from three-to-forty years. Maintenance, repairs and betterments, including replacement of minor items of physical properties, are charged to expense. Major additions to physical properties are capitalized. The cost of the assets retired or sold is credited to the asset accounts and the related accumulated depreciation is charged to the accumulated depreciation accounts. The gain or loss from sale or retirement of property, if any, is included in the consolidated statement of operations. GOODWILL AND OTHER INTANGIBLES Goodwill and other intangibles were recorded in conjunction with the acquisitions discussed in Note 2. Amortization is provided using the straight- line method using lives as described in Note 5. The Company annually evaluates all goodwill and other intangibles to determine if the remaining estimated useful life of goodwill and other intangibles may warrant revision or that the remaining balance may not be recoverable. When factors indicate that goodwill or other intangibles should be evaluated for possible impairment, the Company uses an estimate of the related business segment's undiscounted cash flows over the remaining life in measuring whether the asset is recoverable in accordance with the provisions of Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for the Impairment of Long-Lived Assets to be Disposed Of." REVENUE RECOGNITION Revenues are recognized upon shipment of the product. FEDERAL AND STATE INCOME TAXES The Company uses the liability method of accounting for income taxes. Under the liability method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws in effect or that will be in effect when the differences are expected to reverse. LOSS PER SHARE In February 1997, Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share" was issued. SFAS No. 128 replaces primary earnings per share with basic earnings per share and fully diluted earnings per share with diluted earnings per share. Under SFAS No. 128, the loss per share calculations include the weighted average number of shares outstanding for the years ending December 31, 1997, 1996, and 1995. As discussed in Note 8, included in basic loss per share are 1,973,094 contingent shares. The diluted loss per share does not reflect the contingent shares, stock options, or convertible instruments because the inclusion of such items would be anti-dilutive. The weighted average number of shares outstanding for the basic earnings per share were 10,697,561, 6,384,651, and 5,832,896, respectively. The weighted average number of shares calculated for the diluted earnings per share were 8,724,467, F-8 6,384,651, and 5,832,896, respectively. Adoption of SFAS No. 128 did not affect the 1996 and 1995 weighted average number of shares outstanding calculations. CASH FLOWS INFORMATION For purposes of the consolidated statements of cash flows, all highly liquid investments purchased with a maturity of three months or less are considered to be cash equivalents. CONCENTRATION OF CREDIT RISK The Company extends trade credit to various companies in the food sales markets in the normal course of business. Within these markets, certain concentrations of credit risk exist. These concentrations of credit risk may be similarly affected by changes in economic or other conditions and may, accordingly, impact the Company's overall credit risk. However, management does not believe that there are material risks associated with consolidated receivables and that allowances for doubtful accounts are adequate to absorb estimated future losses. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. FAIR VALUE OF FINANCIAL INSTRUMENTS The Company values financial instruments as required by Statement of Financial Accounting Standards No. 107, "Disclosures About Fair Value of Financial Instruments". The Company estimates the value of its debt based on the estimated borrowing rates currently available to the Company for debt with similar terms and remaining maturities. The estimated fair value of the Company's debt at December 31, 1997 and 1996, was $18.5 million and $20.1 million, respectively, compared with a carrying value of $20.1 million and $22.1 million, respectively. The carrying value of other financial instruments approximates fair value because of the short maturity of those instruments. 2. ACQUISITIONS: During the three year period ended December 31, 1997, the Company's acquisitions have all been accounted for using the purchase method of accounting. The significant acquisitions and their terms are summarized below: F-9 MARVELOAF In June, 1997, the Company sold the previously acquired assets of the MarveLoaf Corporation back to the original owner for $50,000 cash and a note receivable for $1,069,000. No gain or loss was recognized. THE BAGEL PLACE On August 7, 1996, the Company acquired certain assets of The Bagel Place, Inc. in Santa Ana, California (Bagel Place) for approximately $2,800,000 including the assumption of certain liabilities of approximately $342,000. The assets acquired were previously used in the business of producing bagels and bagel related products. NONNI'S In December 1993, the Company purchased certain assets of Nonni's for a purchase price of approximately $990,000. The Company paid approximately $295,000 in cash, issued $180,000 of notes payable, assumed certain liabilities and issued 78,750 shares of the Company's common stock. Approximately $272,000 of the assumed liabilities were paid at the acquisition date. The Company also entered into a seven-year royalty agreement with the sellers, which was amended in October 1994 and was terminated in July 1996. The amended agreement provided the Company with the option to purchase the royalty obligation for $3,200,000. The termination of this royalty agreement in July 1996 was effected by the Company issuing 700,000 shares of common stock and recognizing an additional $2,000,000 of goodwill. Additionally, the agreement provided for the issuance of an additional 200,000 shares of common stock if sales of products, which were subject to the original royalty, exceeded $10,000,000 for any twelve month period beginning July 1996 through July 1999. This target was met and an additional 200,000 shares were issued in 1997. The Company guaranteed a market price of $5.71 per share for both the 700,000 and 200,000 shares under certain circumstances. Such guarantee is payable in cash or stock, at the option of the Company. As of December 31, 1997, the Company has the obligation to issue 3,018,539 additional shares under this price guarantee. Also in connection with the acquisition, the Company entered into a seven-year employment agreement with the three selling shareholders. Effective October 1, 1994, this agreement was amended and then terminated in 1997 by the Company agreeing to pay $1,125,000 and issue 840,000 shares of common stock to the three selling shareholders. As of December 31, 1997, $204,949 of this amount had been paid and the Company was obligated to issue the 840,000 shares. F-10 SUPPLEMENTARY CASH FLOW INFORMATION The following summarizes the liabilities assumed/issued in connection with all the acquisitions discussed above, net of cash held by the companies acquired, if any. December 31, ---------------------- 1996 1995 ---- ---- Fair value of assets acquired $4,783,535 $2,266,174 Cash paid 4,112,415 2,255,975 ---------- ---------- Liabilities assumed/issued $ 671,120 $ 10,199 ========== ========== UNAUDITED PRO FORMA INFORMATION Unaudited pro forma results of operations for the year ended December 31, 1996, and 1995 give effect to acquisitions as if they had occurred on January 1, 1996. The unaudited pro forma information is presented in response to applicable accounting rules relating to acquisition transactions. It is not necessarily indicative of the actual results that would have been achieved had the transactions occurred on January 1 of the respective years, and is not necessarily indicative of future results. 1996 1995 ---- ---- Net sales $ 28,629,000 32,572,000 Gross profit 6,213,000 8,434,000 Loss from continuing operations (6,633,000) (24,809,000) 3. UNUSUAL CHARGES: Operating income for 1997 has been reduced for unusual items of $3,500,000. These charges included a $1,000,000 reserve against a note receivable arising from the 1996 sale of the Company's Gift and Gourmet business, $2,050,000 related to the settlement of three employment agreements with the former owners of Nonni's biscotti, and $450,000 related to a consulting study which took place in 1997 which ultimately resulted in the Company's decision to divest the mail order catalog business, the snack tray business, and other smaller non-strategic related business activities. 4. DISCONTINUED OPERATIONS: In December 1996, the Company discontinued its direct store delivery distribution business located in Southern California. In the second quarter of 1997, the Company discontinued its mail order catalog business (sold in August 1997), and in the fourth quarter of 1997, the Company discontinued its snack tray business. The net assets of these businesses not yet sold are reflected in the accompanying balance sheet at the lower of their cost or their estimated fair market value. The consolidated statement of operations for 1997, 1996, and 1995 have been presented to reflect the results of continuing operations. Included in the loss from discontinued operations is $647,000 of interest expense for each of the years ended 1997, 1996 and 1995. F-11 Additionally, interest expense of $324,000 for January 1998 through the expected disposal date was included in the loss on disposal. The allocation of interest expense was based on estimated proceeds from the disposals because such proceeds were less than the original debt incurred from the acquisitions and to finance the operations of the discontinued operations. Due to the Company's net operating loss carryforward position, no income tax benefit was recognized from this transaction. The Company expects to complete these disposals by the end of 1998. Operating results for these businesses for the three year period ending December 31, 1997, 1996 and 1995 are as follows:
1997 1996 1995 ---- ---- ---- Net sales $ 27,679,800 $ 28,939,992 $ 20,071,032 Cost of sales (15,337,274) (17,277,713) (11,758,653) Selling, general and administrative and other (19,022,344) (13,991,242) (9,747,176) ------------ ------------ ----------- Loss from discontinued operations $ (6,679,818) $ (2,328,963) $(1,434,797) ============ ============ ===========
Net assets held for sale include the following: December 31, 1997 ----------------- Accounts receivable $ 1,233,950 Inventory 2,356,906 Other current assets 21,773 Property, plant and equipment 1,191,924 Goodwill and other intangibles 3,967,615 Notes payable (511,424) Accounts payable (2,407,186) Accrued liabilities (1,811,352) Other liabilities (388,389) Non-current liabilities (818,358) ------------ Net assets held for sale $ 2,835,459 ============ 5. DETAILS TO CONSOLIDATED BALANCE SHEETS:
Depreciation Property, Plant and Equipment Period December 31, - ----------------------------- ------ --------------------------- 1997 1996 ------------ ----------- Land and improvements $ -- $ 25,000 Building and improvements 5 to 40 years 2,424,739 6,316,320 Machinery and equipment 5 to 20 years 5,272,956 5,729,586 Office equipment 3 to 10 years 620,569 1,029,944 ------------ ----------- 8,318,264 13,100,850 Less - accumulated depreciation 1,231,776 1,271,270 ------------ ----------- $ 7,086,488 $11,829,580 ============ ===========
F-12
Amortization Intangibles Period December 31, - ----------- ------ ------------------------ 1997 1996 ---- ---- Goodwill 15 years $5,913,801 $14,225,517 Recipes 7 years 50,000 70,000 Deferred loan costs 3 years 215,084 148,792 Trademarks 7 years 120,541 160,876 Customer data base 7 years 25,000 127,834 Other 3 years 621,733 561,790 ---------- ----------- 6,946,159 15,294,809 Less - accumulated amortization 1,454,132 2,157,196 ---------- ----------- $5,492,027 $13,137,613 ========== ===========
December 31, -------------------------------------- 1997 1996 1995 ---- ---- ---- Allowances for accounts receivable: Balance, beginning of year $ (676,495) $ (55,502) $ (168,820) Provision for losses on receivables (126,000) (660,191) (97,094) Receivables written-off, net of recoveries 483,887 39,198 210,412 ----------- ----------- ----------- Balance, end of year $ (318,608) $ (676,495) $ (55,502) =========== =========== =========== Allowances for inventories: Balance, beginning of year $ (84,000) $ (29,073) $ (11,000) Provision (397,699) (202,573) (244,781) Inventories written-off 407,723 147,646 226,708 ----------- ----------- ----------- Balance, end of year $ (73,976) $ (84,000) $ (29,073) =========== =========== =========== Accumulated amortization of goodwill and other intangibles: Balance, beginning of year $(2,157,195) $(1,477,781) $ (607,113) Provision (748,429) (1,058,200) (870,668) Retirements and other 1,451,492 378,786 - ----------- ----------- ----------- Balance, end of year $(1,454,132) $(2,157,195) $(1,477,781) =========== =========== ===========
6. LONG-TERM DEBT: The Company's revolving credit facility provides for a revolving line of credit of up to $7,000,000 based upon the borrowing base which is defined as 80% of eligible accounts receivable and 50% of eligible inventories ($7,000,000 outstanding at December 31, 1997). On April 10, 1998, the Company entered into a factoring transaction using trade accounts receivable receiving approximately $1,869,000 in proceeds. Of this amount, $750,000 was used to reduce the revolving line of credit to $6,000,000. At the same time, the bank and the Company's Chairman and his spouse entered into a note agreement whereby the remaining $6,000,000 owed F-13 to the bank will be transferred from the Company to the Chairman and his spouse and the bank released its lien on accounts receivables and inventories. The Company also signed a note agreement with the Chairman and his spouse in the amount of $6,000,000. This note will become due on August 31, 1998 and interest is at local bank prime plus 1 1/2%. In the event that funds are not available as of August 31, 1998, the Chairman has agreed to extend the note until the funds become available. In addition, the Company has a two-year $6,000,000 term loan with another bank. Interest is at prime and is payable monthly. Principal payments of $123,000 begin in May 1998 with a balloon payment due in April 1999. This term loan is collateralized by the Company's machinery and equipment. Borrowings are guaranteed as to repayment of principal and interest by the Company's Chairman and his spouse and borrowings under the term loan are guaranteed by the Company's Chairman, his spouse, and another family member. Long-term debt consists of the following at December 31:
1997 1996 ---- ---- 8% notes payable to the Company's Chairman, due in June 1998. $ 6,275,335 5,927,197 9% convertible debenture payable to the Company's Chairman converted in 1997. - 3,000,000 Revolving credit agreement, interest at prime, payable monthly, principal due in June 1998. 7,000,000 7,000,000 Term loan, interest at prime, payable in equal monthly installments beginning May 1998, through April 1999. 6,000,000 5,000,000 9% note, paid in January 1997. - 200,000 9% three year convertible subordinated debentures, due 1999, interest payable quarterly. 300,000 550,000 Other notes payable. 41,791 402,272 ----------- ----------- Total long-term debt 19,617,126 22,079,469 Less - current maturities 14,257,040 8,637,272 ----------- ----------- $ 5,360,086 $13,442,197 =========== ===========
The annual maturities of long-term debt are: 1998 - $14,257,040; 1999 - $5,360,086; 2000 - $-0-; 2001 - $-0- and 2002 - $-0-. F-14 7. INCOME TAXES: The Company paid no income taxes and recorded no income tax expense or benefit from its inception through December 31, 1997. Therefore, the effective tax rate is zero in each reporting period versus the 34% federal statutory rate. Deferred income taxes reflect the net tax effects of (i) temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and (ii) operating loss and tax credit carry forwards. The effects of significant items comprising the Company's net deferred tax assets are as follows: December 31, -------------------------- 1997 1996 ---- ---- Deferred tax liabilities: Fixed asset basis differences $ (13,600) $ (176,863) Intangible asset basis differences (79,828) (18,986) ----------- ----------- Total deferred tax liabilities (93,428) (195,849) ----------- ----------- Deferred tax assets: Net operating loss carryforwards 8,500,000 5,142,266 Reserves not currently deductible 645,659 429,310 Intangible asset basis differences 414,406 307,305 Other 8,045 8,040 ----------- ----------- Total deferred tax assets 9,568,110 5,886,921 ----------- ----------- Valuation allowance for deferred tax assets (9,474,682) (5,691,072) ----------- ----------- 93,428 195,849 ----------- ----------- Net deferred tax assets $ - $ - =========== =========== Due to the history of losses, management has provided valuation allowances against all of its net deferred tax assets. The net change in the valuation allowance was attributable to current year temporary differences. At December 31, 1997, the Company had net operating loss (NOL) carry forwards for federal income tax purposes of approximately $25,000,000 potentially available to offset future federal taxable income. The utilization for federal income tax purposes of this NOL is limited on an annual basis by Section 382 of the Internal Revenue Code. The federal NOL carry forwards begin to expire in 2005. The Company has state NOL carry forwards of varying amounts available to offset future state taxable income which begin to expire in 1999. F-15 8. SHAREHOLDERS' EQUITY (DEFICIT): COMMON STOCK WARRANTS In connection with the Company's initial public offering in 1994, 230,000 warrants were issued to Commonwealth Associates, representative of the underwriters, to purchase common stock at $11.55 per share over a four-year period. From time to time the Company has issued additional warrants. Total warrants outstanding were 584,590 and 423,713 at December 31, 1997 and 1996, respectively, and range in exercise price from $0.44 to $11.55 per warrant, expiring in 1998 through 2002. COMMON STOCK OPTIONS In June 1994, the Company established the Silverado Foods, Inc. 1994 Stock Option Plan (the Plan). The Plan provides for the grant of a total of 500,000 incentive stock options, other forms of statutory stock options and non- statutory stock options to employees of the Company. The total amount of common stock options currently outstanding under the Plan as of December 31, 1997 and 1996 were 10,000 and 40,000, respectively, with 30,000 options expiring in 1997. Of this amount, 10,000 shares are fully vested at December 31, 1997. These shares have an exercise price of $7.00 and expire in 2000. Additionally, the Board of Directors granted 10,000 options to a director in 1997, all of which are fully vested at December 31, 1997. These options have an exercise price of $3.50 and expire in 2002. The Company has adopted the disclosure-only provision of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123). SFAS No. 123 established financial accounting and reporting standards for stock-based compensation plans and transactions in which an entity issues its equity instruments to acquire goods and services from non-employees. Since the effect of SFAS No. 123 is not material, the Company has made no disclosure of pro forma net income and earnings per share as if SFAS No. 123 had been adopted. CONTINGENT COMMON STOCK As of December 31, 1997, the Company was obligated to issue 6,392,964 shares to former employees, shareholders, and others related to fulfillment of a price guarantee, conversion of debt instruments and other transactions. In addition, the Company may be required to issue additional stock under the remaining price guarantee provisions (see Note 2). PREFERRED STOCK At December 31, 1997, 1996 and 1995, the Company had 1,000,000 authorized shares of preferred stock, $0.01 par value, but no shares are issued and outstanding. F-16 9. RELATED PARTY TRANSACTIONS: Significant related party transactions of the Company for the three years ended December 31, 1997 are summarized below: The Company has entered into numerous short-term and long-term financing transactions with the Company's Chairman, with companies principally owned by the Company's Chairman and with a director of the Company. At December 31, 1997, the Company has notes payable to a director for $250,000 and notes payable to the Company's Chairman for $6,275,335 and accrued interest payable of $1,066,000. See also Notes 6 and 14 for further discussion regarding amounts owed to the Company's Chairman. Also from time to time, the Company's Chairman has guaranteed obligations of the Company. Currently, the Company's Chairman has guaranteed the Company's obligations with respect to certain vehicle lease agreements. Also, Mr. Field and his spouse have guaranteed the Company's two credit facilities with a bank in the amount of $13,000,000, which bears interest at the prime rate published in The Wall Street Journal (see Note 14). 10. COMMITMENTS AND CONTINGENCIES: During 1997, management determined it would not exercise a bargain purchase option to purchase the Tulsa plant facility. Consequently, the lease no longer met the qualifications of a capital lease. The net amount capitalized and remaining lease payable were removed from their respective accounts. No material gain or loss on the transaction was recognized. The remaining lease payments on the plant are reflected as operating lease payments and along with other operating leases are included in the following table: Operating Leases ---------------- 1998 $ 728,337 1999 726,727 2000 623,384 2001 492,675 2002 400,000 Thereafter 1,166,667 ---------- Total $4,137,790 The Company's rental expense for operating leases was $820,000, $1,201,000, and $729,000, for 1997, 1996, and 1995, respectively. In August 1997, the Company sold its mail-order catalog business located in Palestine, Texas. The results from this business are shown as discontinued in the consolidated income statement. F-17 The Company has an earn-out based on 1998 sales which could pay the Company an additional $100,000. 11. SIGNIFICANT CUSTOMERS: During 1997, the Company had sales to two customers, Price Costco and Sam's, representing 27% and 47%, respectively, of net sales. During 1996, the Company had sales to two customers, Price Costco and Sam's, representing 39% and 31%, respectively. During 1995, sales to one customer, Price Costco, was approximately 20% of total net sales. 12. NOTE RECEIVABLE: In April 1996, the Company sold its Gift and Gourmet division in consideration for a note receivable of $1,390,000 which bears interest at 11% and is secured by a security interest in the related tangible and intangible assets. During 1997, the Company foreclosed on this note and has repossessed the remaining assets from the buyer. In connection with this, the Company has written down these assets to their estimated realizable value of $114,000. In June 1997, the Company sold the assets of the Marveloaf Corporation for a note receivable of $1,069,000. 13. QUARTERLY RESULTS (UNAUDITED): The quarterly unaudited results for the Company for the year ended December 31, 1997 are as follows:
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER TOTAL ------- ------- ------- ------- ----- Revenues $ 5,715,000 $ 5,709,000 $ 6,288,000 $ 6,178,000 $ 23,890,000 Gross profit 948,000 1,117,000 951,000 1,382,000 4,398,000 General & administrative 978,000 1,090,000 1,183,000 691,000 3,942,000 Unusual charges - 1,000,000 2,500,000 - 3,500,000 Selling & marketing 1,271,000 1,221,000 1,281,000 662,000 4,435,000 Depreciation & Amortization 237,000 234,000 374,000 213,000 1,058,000 ----------- ----------- ----------- ----------- ------------ Operating loss (1,538,000) (2,428,000) (4,387,000) (184,000) (8,537,000) Loss from discontinued operations 528,000 1,738,000 922,000 3,492,000 6,680,000 Interest & other 1,537,000 417,000 689,000 632,000 3,285,000 ----------- ----------- ----------- ----------- ------------ Net loss (3,603,000) (4,583,000) (5,998,000) (4,318,000) (18,502,000) =========== =========== =========== =========== ============
F-18 14. FINANCIAL CONDITION AND MANAGEMENTS PLANS: The accompanying financial statements have been prepared on a going concern basis, which assumes the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the consolidated financial statements, during the years ended December 31, 1997, 1996 and 1995, the Company incurred net losses of approximately $18,500,000, $7,500,000 and $4,200,000, respectively, and has a deficit in retained earnings of approximately $36,300,000 and a deficit in stockholders' equity of approximately $7,300,000 at December 31, 1997. These conditions have combined to create a working capital deficit of approximately $18,500,000 at December 31, 1997. The Company's management is actively pursuing several alternatives to resolve the Company's liquidity and capital needs. As discussed further in Note 15, on April 10, 1998 the Company transferred the remaining $6,000,000 on the revolving line of credit ($7,000,000 at December 31, 1997) to the Company's Chairman and his spouse. Additionally, all collateral under the line of credit, including inventory and accounts receivable, was released by the bank. The amount transferred to the Chairman is due in August 1998; however, if excess cash is not available to repay the note, the due date will be extended. Further, as discussed in Note 15, management has announced plans to sell certain assets, including those related to the Nonni's biscotti business. Management believes that these actions, combined with improved operations, will provide sufficient liquidity to meet their obligations through December 31, 1998 and to continue as a going concern. 15. SUBSEQUENT EVENT: On April 6, 1998, the Company announced that it had reached a preliminary agreement to sell 90% of the Company's Nonni's(R) Biscotti business. This preliminary agreement includes all of Nonni's assets, including the brand, the equipment owned at the Tulsa, Oklahoma production facilities, the distribution rights, and other brands used for the biscotti products. The estimated proceeds of $32,000,000, which include $4,500,000 in an earn-out agreement based on future earnings, will exceed the net book value of the assets to be disposed. Management intends to use the proceeds from the sale to pay bank debt, the borrowings from the Company's Chairman, other notes payable, and other obligations of the Company. In addition, the Company has decided to sell the remaining operations of the retail food segment, including the bagel bar and pound cakes. These assets are appropriately reflected in the accompanying balance sheet at their expected fair value. Management is also evaluating other alternatives, which include, but are not limited to, acquisitions, mergers or liquidations of its remaining assets to shareholders. F-19 On April 10, 1998, the Company entered into a factoring transaction using trade accounts receivable receiving approximately $1,869,000 in proceeds. Of this amount, $750,000 was used to reduce the revolving line of credit to $6,000,000. At the same time, the bank and the Company's Chairman and his spouse entered into a note agreement whereby the remaining $6,000,000 owed to the bank will be transferred from the Company to the Chairman and his spouse and the bank released its lien on accounts receivables and inventories. The Company also signed a note agreement with the Chairman and his spouse in the amount of $6,000,000. This note will become due on August 31, 1998 and interest is at local bank prime plus 1 1/2%. F-20 INDEX TO EXHIBITS The following documents are included as exhibits to this Form 10-K. Those exhibits below incorporated by reference herein are indicated as such by the information supplied in the parenthetical thereafter. If no parenthetical appears after an exhibit, such exhibit is filed herewith. EXHIBIT NO. 2.1 Asset Purchase Agreement dated July 25, 1996, between the Company and The Bagel Place, Inc. (filed as Exhibit 2.1 to the Company's Form 8-K filed August 22, 1996). 3.1 Certificate of Incorporation of the Company (filed as Exhibit 3.1 to the Company's Registration Statement on Form S-1 Registration No. 33-79736 (the "S-1 Registration Statement")). 3.2. Certificate of Amendment of Certificate of Incorporation of the Company filed June 17, 1992 (filed as Exhibit 3.2 to the S-1 Registration Statement). 3.3 Certificate of Amendment of Certificate of Incorporation of the Company filed August 4, 1993 (filed as Exhibit 3.3 to the S-1 Registration Statement). 3.4 Certificate of Amendment of Certificate of Incorporation of the Company filed June 2, 1994 (filed as Exhibit 3.6 to the S-1 Registration Statement). 3.5 Bylaws of the Company (filed as Exhibit 3.7 to the S-1 Registration Statement). 4.1 Form of Note Purchase Agreement (filed as Exhibit 4.3 to the Company's Form 10-Q for the quarterly period ended September 30, 1996). 4.2 Form of Common Stock Purchase Warrant (filed as Exhibit 4.3 to the Company's Form 8-K filed February 18, 1997). 4.3 Form of Registration Rights Agreement (filed as Exhibit 4.4 to the Company's Form 8-K filed February 18, 1997). 4.6 Form of 8% Convertible Debenture due December 31, 1999 (filed as Exhibit 4.2 to the Company's Form 8-K filed February 11, 1998). 4.7 Form of Offshore Securities Subscription (filed as Exhibit 4.1 to the Company's Form 8-K filed February 11, 1998.) 10.1 Industrial Real Estate Lease dated January 16, 1992, between the Company and Acquiport Two Corporation, as amended (filed as Exhibit 10.8 to the S-1 Registration Statement). 10.2 Master Vehicle Lease Agreement dated November 24, 1993, between Timmer Leasing Company and Honor Snack, Inc. (filed as Exhibit 10.9 to the S-1 Registration Statement). 10.3 Open-Ended Master Lease Agreement dated February 20, 1991, between Figgie Leasing Corporation and Honor Snack, Inc. (as assignee of Nationwide Gourmets, Inc.) (filed as Exhibit 10.10 to the S-1 Registration Statement). 10.4 Agreement dated July 16, 1993, between the Company and Le Groupe La Cantinere, Inc. (filed as Exhibit 10.11 to the S-1 Registration Statement). 10.5 Form of Warrant issued as of May 4, 1993, to Leslie M. Hannafey (filed as Exhibit 10.12 to the S-1 Registration Statement). 10.6 Form of Warrant issued to Regent Private Capital Corp. in 1993 in connection with certain short-term financing (filed as Exhibit 10.13 to the S-1 Registration Statement). 10.7 Common Stock Purchase Warrants dated June 2, 1994, issued to: (i) ML Oklahoma Venture Partners, Limited Partnership, for 12,121 shares, (ii) Lawrence D. Field for 42,424 shares, and (iii) Gerald E. Milton for 6,061 shares (filed as Exhibit 10.14 to the S-1 Registration Statement). 10.9 Form of Warrant Issued to Commonwealth Associates in connection with the initial public offering of the Company's common stock (filed as Exhibit 10.15 to the S-1 Registration Statement). 10.9 Loan Agreement dated April 11, 1995, between the Company and Liberty Bank and Trust Company of Tulsa, National Association (filed as Exhibit 10.1 to the Company's Form 10-Q for the quarterly period ended March 31, 1995). 10.10 Security Agreement dated April 11, 1995, from the Company to Liberty Bank and Trust Company of Tulsa, National Association (filed as Exhibit 10.2 to the Company's Form 10-Q for the quarterly period ended March 31, 1995. 10.11 Third Amendment to Loan Agreement dated September 13, 1996, among the Company, Silverado Marketing Services, Inc., Texas B&B, Inc., Lawrence D. Field, Cynthia Field and Liberty Bank and Trust Company of Tulsa, National Association (filed as Exhibit 10.2 to the Company's Form 10-Q for the quarterly period ended September 30, 1996). 10.12 Form of Indemnification Agreement between the Company and each officer and director of the Company (filed as Exhibit 10.27 to the S-1 Registration Statement). 10.13* Stock Option Agreement dated as of June 2, 1994, in favor of David A. Hentschel for 3,000 shares (filed as Exhibit 10.29 to the S-1 Registration Statement). 10.14 Amended and Restated Registration Rights Agreement dated August 18, 1993, and Amendment to Amended and Restated Registration Rights Agreement dated December 20, 1993 (filed as Exhibit 10.30 to the S-1 Registration Statement). 10.15* Silverado Foods, Inc. 1994 Stock Option Plan (filed as Exhibit 10.31 to the S-1 Registration). 10.16* Amendment Number 1 to Silverado Foods, Inc. 1994 Stock Option Plan (filed as Exhibit A to the Company's Proxy Statement for Annual Meeting of Shareholders held May 12, 1995). 10.17 Lease Agreement dated November 3, 1995, between DCA Grantor Trust, as lessor, and The Company, as lessee (filed as Exhibit 10.32 to the Company's Form 10-K for the fiscal year ended December 31, 1995). 10.18* Silverado Foods, Inc. 401(k) Plan (filed as Exhibit 4(f)) to the Company's Registration Statement on Form S-8 as filed with the Securities and Exchange Commission on December 8, 1995). 10.19 Royalty Termination Agreement dated November 8, 1996, among the Company, Nonni's Inc., Steve Sirianni, Tim Soldati and Rich Martin (filed as Exhibit 10.1 to the Company's Form 10-Q for the quarterly period ended September 30, 1996). 10.20* Settlement of Employment Agreement dated April 1, 1998 between the Company and Tim Soldati. 10.21* Settlement of Employment Agreement dated April 1, 1998 between the Company and Rich Martin. 10.22* Settlement of Employment Agreement dated April 1, 1998 between the Company and Steve Sirianni. 10.23* Employment Contract with Timothy G. Bruer (filed as Exhibit 10.1 to the Company's Form 10-Q for the quarterly period ended March 31, 1997). 10.24* Restricted Stock Grant Agreement with Timothy G. Bruer (filed as Exhibit 10.2 to the Company's Form 10Q for the quarterly period ended March 31, 1997). 10.25 Promissory Note dated April 29, 1997 in the original principal amount of $6,000,000 payable to Bank of Oklahoma, N.A. (filed as Exhibit 10.1 to the Company's Form 10Q for the quarterly period ended June 30, 1997.) 10.26 Security Agreement dated April 29, 1997, from the Company to Bank of Oklahoma (filed as Exhibit 10.2 to the Company's Form 10Q for the quarterly period ended June 30, 1997). 10.27 Form of Promissory Note Agreement dated December 16, 1997 in the original principal amount of $250,000 payable to CAPMAC EIGHTY-TWO LIMITED PARTNERSHIP. 10.28 Form of Common Stock Purchase Warrant to CAPMAC EIGHTY TWO LIMITED PARTNERSHIP. 10.29 Form of Promissory Note Agreement dated December 19, 1997 in the original principal amount of $250,000 payable to ML Oklahoma. 10.30 Form of Common Stock Purchase Warrant to ML Oklahoma. 21. Subsidiaries of the Company (filed as Exhibit 21 to the Company's Form 10-K for the fiscal year ended December 31, 1995). 23. Consent of Arthur Andersen LLP. 27. Financial Data Schedule. * Management contract or compensatory plan or arrangement. (c) Reports on Form 8-K None. EX-10.20 2 EMPLOYMENT TERMINATION AGREEMENT EXHIBIT 10.20 EMPLOYMENT TERMINATION AGREEMENT -------------------------------- THIS AGREEMENT, dated as of the 29th day of March, 1998, is by and between Silverado Foods, Inc., an Oklahoma corporation ("Silverado"), and Tim Soldati ("Soldati"). R E C I T A L S A. Silverado and Soldati entered an Employment Agreement dated December 31, 1993, which was amended pursuant to an agreement dated March 21, 1995 (as amended, the "Employment Agreement"). B. Silverado and Soldati are parties to a Royalty Termination Agreement dated November 8, 1996 (the "Royalty Termination Agreement"). C. Silverado and Soldati desire to resolve certain issues relating to the Employment Agreement and the Royalty Termination Agreement. D. Pursuant to the Royalty Termination Agreement, Silverado issued to Soldati the Primary Shares and the Contingent Shares (as such terms are defined in the Royalty Termination Agreement). As of the date of this Agreement, Soldati owns 195,300 shares of the original Primary Shares and Contingent Shares. NOW, THEREFORE, in consideration of the mutual promises and covenants herein contained, the parties agree as follows: 1. Effective Date. The Effective Date of this Agreement shall be September 1, 1997 (the "Effective Date"). 2. Termination of Employment Agreement. The Employment Agreement and Soldati's employment with Silverado are hereby terminated as of the Effective Date. Accordingly, all rights, duties and obligations of Silverado and Soldati relating to the Employment Agreement are hereby terminated. 3. Payment to Soldati. Silverado shall pay to Soldati the amount of $350,000.00. Such amount shall accrue interest at the rate of 9% per annum, paid monthly, from the Effective Date until the date on which such amount is paid to Soldati. The accrued interest shall be payable to Soldati on such payment date. If the $350,000 is not paid by December 31, 1997, interest shall begin accruing at the rate of 18% until paid. 4. Issuance of Stock. Silverado shall issue to Soldati 300,000 shares of Silverado's common stock (the "Settlement Shares"). Following the execution of this Agreement, Silverado shall make application to the American Stock Exchange for the listing of such shares and deliver instructions to its transfer agent for the issuance of such shares. In addition, Silverado will, after receiving approval of listing by the American Stock Exchange, prepare a registration statement with the Securities and Exchange Commission to register these shares. 5. Loan to Soldati. Silverado shall loan to Soldati the amount of $200,000, which loan shall be evidenced by a promissory note (the "Note"). The Note shall bear interest at the rate of 9% per annum, with interest payable at maturity, and the principal amount thereof together with any accrued interest shall be payable on the date 15 months from the date of the Note. The Note shall be secured by the Primary and Contingent shares (195,300) meaning as any of the Primary and Contingent shares are sold, Soldati must repay a portion of the principal (plus interest) back to Silverado. Soldati shall deliver to Silverado appropriate documents monthly evidencing the balance of the Primary and Contingent shares held. The parties acknowledge that the loan contemplated by this Section 5 was advanced to Soldati prior to the execution of this Agreement. If Soldati sells any of the Primary Shares or the Contingent Shares while any portion of the Note remains unpaid, Soldati shall within 30 business days of the settlement date of any such sale, pay to Silverado (i) one dollar per each share sold as a reduction of principal indebtedness, plus (ii) all accrued interest attributable to the amount of principal repaid. 6. Stock Price Guarantee. (a) Amendments. Section 4 of the Royalty Termination Agreement provided for certain stock price guarantees (the "Price Guarantee") by Silverado with respect to the Primary Shares and the Contingent Shares. Following the Effective Date, Soldati may sell, at his discretion, portions of the Primary Shares and Contingent Shares, subject to applicable securities laws and the repayment obligations of Section 5 hereof. However, following the Effective Date, the Price Guarantee shall not be in effect, except in accordance with the following schedule: Effective Date through December 31, 1997....Price Guarantee not in effect. January 1, 1998 through April 15, 1998......If the Net Sales Price (as defined in the Royalty Termination Agreement) is below $2.50 per share, the Price Guarantee will not be in effect. If the Net Sales Price is $2.50 per share or above, the Price Guarantee will be in effect. April 15, 1998 through August 14, 1998......Price Guarantee will be in effect. The Price Guarantee shall terminate as to the Primary Shares and the Contingent Shares after August 14, 1998. The Royalty Termination Agreement shall be deemed to be amended as set forth in this section. -2- (b) Guarantee of Settlement Shares. In addition, the parties agree that Silverado shall guarantee the stock price of the Settlement Shares on the same terms as the Price Guarantee, except as follows: (i) the guaranteed Net Sales Price (as defined in the Royalty Termination Agreement) for the Settlement Shares shall be $1.25 per share, and (ii) the period of time in which sales must occur to be eligible for such guarantee shall commence on September 1, 1998 and end on August 31, 1999, and (iii) any amounts due under this guarantee for the Settlement shares shall be payable in cash. Soldati must notify Silverado of his intent to sell these shares at least 10 days prior to the date of the sale of such shares. If Silverado fails to pay any amount under this cash guarantee provision within 30 days from the date of sale of such shares, Soldati shall give written notice to Silverado of such failure to pay. If Silverado does not cure such failure to pay within 15 days after receipt of such notice, Silverado shall thereupon be deemed to be in default, and such amount in default shall bear interest from the end of the 15 day cure period until paid at the rate of 18% per annum paid monthly. 7. Investment Representations. Soldati represents and warrants as follows: (a) Access to Information. Respecting Silverado, its business, plans and financial condition, the terms of this transaction, and any other matters relating to this transaction: Soldati has received all materials which have been requested by Soldati; Soldati has had a reasonable opportunity to ask questions of Silverado and its representatives; and Silverado has answered all inquiries that Soldati or Soldati's representatives have put to it. Soldati has had access to all additional information necessary to verify the accuracy of the information set forth in this Agreement and any other materials furnished herewith and has taken all the steps necessary to evaluate the merits and risks of an investment as proposed hereunder. (b) Experience. Soldati or his representatives have such knowledge and experience in finance, securities, investments and other business matters so as to be able to protect the interest of Soldati in connection with this transaction. (c) Risks. Soldati understands the various risks of an investment in Silverado as proposed herein and can afford to bear such risks, including, but not limited to, the risks of losing the entire investment. (d) No Registration. Soldati has been advised by Silverado that none of the shares of common stock of Silverado issuable hereunder (collectively, the "Securities") have been registered under the Act, that the Securities will be issued on the basis of the statutory exemption provided by Section 4(2) of the Securities Act of 1933, as amended (the "Act") or Regulation D promulgated thereunder, or both, relating to transactions by an issuer not involving any public offering and under similar exemptions under certain state securities laws, that this transaction has not been reviewed by, passed on or submitted to any Federal or state agency or self-regulatory -3- organization where an exemption is being relied upon, and that Silverado's reliance thereon is based in part upon the representations made by Soldati in this Agreement. Soldati acknowledges that Soldati has been informed by Silverado of, or is otherwise familiar with, the nature of the limitations imposed by the Act and the rules and regulations thereunder on the transfer of securities. In particular, Soldati agrees that no sale, assignment, or transfer of any of the Securities shall be valid or effective, and Silverado shall not be required to give any effect to any such sale, assignment or transfer, unless (i) the sale, assignment or transfer of such Securities is registered under the Act, it being understood that the Securities are not currently registered for sale but that it is Silverado's intent to register these shares as discussed in Section 4 of this agreement, or (ii) such Securities are sold, assigned or transferred in accordance with all the requirements and limitations of Rule 144 under the Act, it being understood that Rule 144 is not available at the present time for the sale of the Securities, or (iii) such sale, assignment or transfer is otherwise exempt from registration under the Act. Soldati further understands that an opinion of counsel and other documents may be required to transfer the Securities. Soldati acknowledges that the Securities shall be subject to a stop transfer order and the certificate or certificates evidencing any Securities shall bear the following legend or a substantially similar legend and such other legends as may be required by state blue sky laws: "The securities represented by this certificate have not been registered under the Securities Act of 1933, as amended (the "Act"), or any state securities laws and neither such securities nor any interest therein may be offered, sold, pledged, assigned, or otherwise transferred unless (1) a registration statement with respect thereto is effective under the Act and any applicable state securities laws or (2) Silverado receives an opinion of counsel to the holder of such securities, which counsel and opinion are reasonably satisfactory to Silverado, that such securities may be offered, sold, pledged, assigned, or transferred in the manner contemplated without an effective registration statement under the Act or applicable state securities laws." (e) Investment Intent. Soldati will acquire the Securities for his own account for investment and not with a view to the sale or distribution thereof or the granting of any participation therein, and has no present intention of distributing or selling to others any of such interest or granting any participation therein except in the event when said shares are registered. (f) Blue Sky Legends. Soldati understands and agrees that certain legends required by the laws of the State of California may be placed on certificates representing the Securities. (g) Survival. Soldati acknowledges that the representations, warranties and Agreements made by him herein shall survive the execution and delivery of this Agreement and the issuance of the Securities hereunder. -4- 8. Release by Silverado. Except as to any claims arising under this Agreement, Silverado hereby releases and forever discharges Soldati from any and all claims, rights, causes of action, suits, demands, costs and expenses (including, without limitation, reasonable attorneys' fees) of any nature whatsoever, whether presently known or unknown, whether the same be upon statute, contract or tort, to the fullest extent permitted by law, which it has or may have, against Soldati. 9. Release by Soldati. Except as to any and all of Silverado's and its agents, employees, officers, directors and shareholders obligations dealing with the Royalty Termination Agreement dated November 8, 1996 (as amended as to the Registration Rights Agreement dated November 8, 1996, as to any claims arising under this Agreement, except as to any claims arising under this Agreement, Soldati hereby releases and forever discharges Silverado and its agents, employees, officers, directors and shareholders from any and all claims, rights, causes of action, suits, demands, costs and expenses (including, without limitation, reasonable attorneys' fees) of any nature whatsoever, whether presently known, whether the same be upon statute, contract or tort, to the fullest extent permitted by law, which he has or may have, against Silverado except for Section 4 of the Royalty Termination Agreement dated November 8, 1996 related to the stock price guarantee. 10. Restrictive Covenants. In the course of his employment with Silverado, Soldati has had access to proprietary information regarding Silverado, its customers and its business. Accordingly, the parties agree as follows: (a) Confidentiality. Soldati agrees that he will not divulge to anyone (other than Silverado or any persons employed or designated by Silverado) any knowledge or information of any type whatsoever of a confidential nature relating to the business of Silverado or any of its subsidiaries or affiliates, including without limitation all types of trade secrets (unless readily ascertainable from public or published information or trade sources). Soldati further agrees not to at any time disclose, publish or make use of any such knowledge or information of a confidential nature without the prior written consent of Silverado. (b) Diversion of Employees or Clients. Soldati agrees that during the period of two years following the Effective Date he shall not in any manner, directly or indirectly: (i) Entice, encourage or influence, or attempt to entice, encourage or influence, anyone who is an employee of Silverado at the time of such termination to quit or leave the employ of Silverado, or (ii) Solicit, induce or attempt to induce any person or entity who is a client or customer of Silverado at the time of such termination to cease being a client or customer of Silverado or divert or take away, or attempt to divert or take away, from Silverado the business or patronage of such clients or customers, -5- it being the general intent hereof that during such two year period after the Effective Date Soldati will maintain a "hands off" policy with regard to Silverado's employees, clients and customers. (c) Noncompetition. Soldati covenants and agrees with Silverado that during the period commencing on the Effective Date and ending on the date two years after the Effective Date, he will not, either directly or indirectly, whether as agent or principal, or on his own, or with any other person, firm or company, or in any other capacity, in any manner engage within the United States of America in any business which involves the development, manufacture, sale or distribution of biscotti or similar products. (d) Silverado's Remedies. In the event of an actual or threatened breach by Soldati of the provisions of this Section 10, Silverado shall be entitled to an injunction restraining Soldati from breaching or continuing to breach the same; provided, however, that nothing herein stated shall be construed as prohibiting Silverado from pursuing any other remedies available to it for such breach or threatened breach, including but not limited to the recovery of damages from Soldati. 11. Miscellaneous. (a) Notices. All notices and other communications required or permitted to be given hereunder shall be in writing and shall be deemed to have been duly given, delivered and received (a) if delivered personally, or (b) if sent by facsimile, registered or certified mail (return receipt requested) postage prepaid, or by courier guaranteeing next day delivery, in each case to the party to whom it is directed at the addresses set forth below (or at such other address for any party as shall be specified by notice given in accordance with the provisions hereof, provided that notices of a change of address shall be effective only upon receipt thereof). Notices delivered personally shall be effective on the day so delivered; notices sent by registered or certified mail shall be effective on the third day after mailing; notices sent by facsimile shall be effective when receipt is acknowledged; and notices sent by courier guaranteeing next day delivery shall be effective on the earlier of the second business day after timely delivery to the courier or the day of actual delivery by the courier: (i) if to Silverado: Silverado Foods, Inc. 6846 South Canton, Suite 110 Tulsa, Oklahoma 74136 Fax: (918) 491-6290 Attention: President -6- (ii) if to Soldati: Tim Soldati 3122 Devereux Court Pleasanton, CA 94588 Fax: (510) 484-9075 (b) Agreement Binding on Successors. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, successors and assigns. (c) Headings. The headings in this Agreement are solely for convenience of reference and shall be given no effect in the construction or interpretation of this Agreement. (d) Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. (e) Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of California, without giving effect to conflict of laws. (f) Entire Agreement. This Agreement and the exhibits hereto set forth the entire understanding of the parties with respect to the subject matter hereof, supersede all existing Agreements among them concerning such subject matter may be modified only by a written instrument duly executed by the party to be charged. No party has made any representations with respect hereto, other than those contained herein. (g) Attorneys' Fees. In the event of any litigation arising out of this Agreement, the party not prevailing in such proceedings shall pay the reasonable costs of the prevailing party in connection with such proceedings, including but not limited to attorneys' fees and expenses, witness fees and expenses and court costs. (h) Authority. Each of the parties represents and warrants to the other that (i) such party has the power and authority to enter this Agreement, and (ii) such party has been represented by counsel in connection with this Agreement and has carefully read and fully understands all aspects of this Agreement. Silverado's Board of Directors has taken all action necessary to approve the execution, delivery and performance of this Agreement, and the person signing below on behalf of Silverado is duly authorized to execute this Agreement. -7- (i) Changes in Stock. In the event Silverado issues any shares of its capital stock as a stock dividend or subdivides the number of its outstanding shares through means such as a stock split, or in the event Silverado combines its outstanding shares through means such as a reverse stock split, then the amount repayable upon a sale of stock pursuant to Section 5 hereof and the amount of the Price Guarantee pursuant to the Royalty Termination Agreement shall be proportionately adjusted to reflect the original intent of the applicable agreements. IN WITNESS WHEREOF, this Agreement was executed by the parties as of the date first above written. SILVERADO FOODS, INC. By:/s/ DORVIN D. LIVELY ---------------------------------- Name: Dorvin D. Lively -------------------------------- Title: Chief Financial Officer ------------------------------- /s/ TIM SOLDATI ---------------------------------- Tim Soldati -8- EX-10.21 3 EMPLOYMENT TERMINATION AGREEMENT EXHIBIT 10.21 EMPLOYMENT TERMINATION AGREEMENT -------------------------------- THIS AGREEMENT, dated as of the 1st day of April, 1998, is by and between Silverado Foods, Inc., an Oklahoma corporation ("Silverado"), and Rich Martin ("Martin"). R E C I T A L S A. Silverado and Martin entered an Employment Agreement dated December 31, 1993, which was amended pursuant to an agreement dated March 21, 1995 (as amended, the "Employment Agreement"). B. Silverado and Martin are parties to a Royalty Termination Agreement dated November 8, 1996 (the "Royalty Termination Agreement"). C. Silverado and Martin desire to resolve certain issues relating to the Employment Agreement and the Royalty Termination Agreement. D. Pursuant to the Royalty Termination Agreement, Silverado issued to Martin the Primary Shares and the Contingent Shares (as such terms are defined in the Royalty Termination Agreement). NOW, THEREFORE, in consideration of the mutual promises and covenants herein contained, the parties agree as follows: 1. Effective Date. The Effective Date of this Agreement shall be September 30, 1997 (the "Effective Date"). 2. Termination of Employment Agreement. The Employment Agreement and Martin's employment with Silverado are hereby terminated as of the Effective Date. Accordingly, all rights, duties and obligations of Silverado and Martin relating to the Employment Agreement are hereby terminated. 3. Payment to Martin. Silverado shall pay to Martin $90,000 on October 30, 1997 and $350,000 on May 1, 1998. Should this amount not be paid within 45 days of the date due, interest will accrue from May 1, 1998 at the rate of 9%. 4. Issuance of Stock. Silverado shall issue to Martin 300,000 shares of Silverado's common stock (the "Settlement Shares"). Following the execution of this Agreement, Silverado shall make application to the American Stock Exchange for the listing of such shares and deliver instructions to its transfer agent for the issuance of such shares. In addition, Silverado will, after receiving approval of listing by the American Stock Exchange, prepare a registration statement with the Securities and Exchange Commission to register these shares. 5. Waiver of Interest. (a) Amendments. Section 4(c) of the Royalty Termination Agreement provided for interest charges on amounts due under the stock price guarantee provision (the "Price Guarantee") by Silverado with respect to the Primary Shares and the Contingent Shares. Martin agrees to waive any interest charges due him under the provision of the Royalty Termination Agreement for the period of time from the effective date of this agreement until 45 days after the next shareholders meeting of Silverado Foods, Inc. scheduled to be on or about May 8, 1998. (b) Guarantee of Settlement Shares. In addition, the parties agree that Silverado shall guarantee the stock price of the Settlement Shares on the same terms as the Price Guarantee, except as follows: (i) the guaranteed Net Sales Price (as defined in the Royalty Termination Agreement) for the Settlement Shares shall be $1.25 per share, and (ii) the period of time in which sales must occur to be eligible for such guarantee shall commence on May 1, 1999 and end on April 30, 2000, and (iii) any amounts due under this guarantee for the Settlement shares shall be payable in cash. Martin must notify Silverado of his intent to sell these shares at least 10 days prior to the date of the sale of such shares. If Silverado fails to pay any amount under this cash guarantee provision within 30 days from the date of sale of such shares, Martin shall give written notice to Silverado of such failure to pay. If Silverado does not cure such failure to pay within 15 days after receipt of such notice, Silverado shall thereupon be deemed to be in default, and such amount in default shall bear interest from the end of the 15 day cure period until paid at the rate of 9% per annum paid monthly. 6. Investment Representations. Martin represents and warrants as follows: (a) Access to Information. Respecting Silverado, its business, plans and financial condition, the terms of this transaction, and any other matters relating to this transaction: Martin has received all materials which have been requested by Martin; Martin has had a reasonable opportunity to ask questions of Silverado and its representatives; and Silverado has answered all inquiries that Martin or Martin's representatives have put to it. Martin has had access to all additional information necessary to verify the accuracy of the information set forth in this Agreement and any other materials furnished herewith and has taken all the steps necessary to evaluate the merits and risks of an investment as proposed hereunder. (b) Experience. Martin or his representatives have such knowledge and experience in finance, securities, investments and other business matters so as to be able to protect the interest of Martin in connection with this transaction. (c) Risks. Martin understands the various risks of an investment in -2- Silverado as proposed herein and can afford to bear such risks, including, but not limited to, the risks of losing the entire investment. (d) No Registration. Martin has been advised by Silverado that none of the shares of common stock of Silverado issuable hereunder (collectively, the "Securities") have been registered under the Act, that the Securities will be issued on the basis of the statutory exemption provided by Section 4(2) of the Securities Act of 1933, as amended (the "Act") or Regulation D promulgated thereunder, or both, relating to transactions by an issuer not involving any public offering and under similar exemptions under certain state securities laws, that this transaction has not been reviewed by, passed on or submitted to any Federal or state agency or self-regulatory organization where an exemption is being relied upon, and that Silverado's reliance thereon is based in part upon the representations made by Martin in this Agreement. Martin acknowledges that Martin has been informed by Silverado of, or is otherwise familiar with, the nature of the limitations imposed by the Act and the rules and regulations thereunder on the transfer of securities. In particular, Martin agrees that no sale, assignment, or transfer of any of the Securities shall be valid or effective, and Silverado shall not be required to give any effect to any such sale, assignment or transfer, unless (i) the sale, assignment or transfer of such Securities is registered under the Act, it being understood that the Securities are not currently registered for sale but that it is Silverado's intent to register these shares as discussed in Section 4 of this agreement, or (ii) such Securities are sold, assigned or transferred in accordance with all the requirements and limitations of Rule 144 under the Act, it being understood that Rule 144 is not available at the present time for the sale of the Securities, or (iii) such sale, assignment or transfer is otherwise exempt from registration under the Act. Martin further understands that an opinion of counsel and other documents may be required to transfer the Securities. Martin acknowledges that the Securities shall be subject to a stop transfer order and the certificate or certificates evidencing any Securities shall bear the following legend or a substantially similar legend and such other legends as may be required by state blue sky laws: "The securities represented by this certificate have not been registered under the Securities Act of 1933, as amended (the "Act"), or any state securities laws and neither such securities nor any interest therein may be offered, sold, pledged, assigned, or otherwise transferred unless (1) a registration statement with respect thereto is effective under the Act and any applicable state securities laws or (2) Silverado receives an opinion of counsel to the holder of such securities, which counsel and opinion are reasonably satisfactory to Silverado, that such securities may be offered, sold, pledged, assigned, or transferred in the manner contemplated without an effective registration statement under the Act or applicable state securities laws." (e) Investment Intent. Martin will acquire the Securities for his own account for investment and not with a view to the sale or distribution thereof or the -3- granting of any participation therein, and has no present intention of distributing or selling to others any of such interest or granting any participation therein except in the event when said shares are registered. (f) Blue Sky Legends. Martin understands and agrees that certain legends required by the laws of the State of California may be placed on certificates representing the Securities. (g) Survival. Martin acknowledges that the representations, warranties and Agreements made by him herein shall survive the execution and delivery of this Agreement and the issuance of the Securities hereunder. 7. Release by Silverado. Except as to any claims arising under this Agreement, Silverado hereby releases and forever discharges Martin from any and all claims, rights, causes of action, suits, demands, costs and expenses (including, without limitation, reasonable attorneys' fees) of any nature whatsoever, whether presently known or unknown, whether the same be upon statute, contract or tort, to the fullest extent permitted by law, which it has or may have, against Martin. 8. Release by Martin. Except as to any and all of Silverado's and its agents, employees, officers, directors and shareholders obligations dealing with the Royalty Termination Agreement dated November 8, 1996 (as amended as to the Registration Rights Agreement dated November 8, 1996, and except as to any claims arising under this Agreement, Martin hereby releases and forever discharges Silverado and its agents, employees, officers, directors and shareholders from any and all claims, rights, causes of action, suits, demands, costs and expenses (including, without limitation, reasonable attorneys' fees) of any nature whatsoever, whether presently known, whether the same be upon statute, contract or tort, to the fullest extent permitted by law, which he has or may have, against Silverado. 9. Restrictive Covenants. In the course of his employment with Silverado, Martin has had access to proprietary information regarding Silverado, its customers and its business. Accordingly, the parties agree as follows: (a) Confidentiality. Martin agrees as an employee that he will not divulge to anyone (other than Silverado or any persons employed or designated by Silverado) any knowledge or information of any type whatsoever of a confidential nature relating to the business of Silverado or any of its subsidiaries or affiliates, including without limitation all types of trade secrets (unless readily ascertainable from public or published information or trade sources). Martin further agrees not to at any time disclose, publish or make use of any such knowledge or information of a confidential nature without the prior written consent of Silverado. (b) Diversion of Employees or Clients. Martin agrees that during the period of two years following the Effective Date he shall not in any manner, directly -4- or indirectly: (i) Entice, encourage or influence, or attempt to entice, encourage or influence, anyone who is an employee of Silverado at the time of such termination to quit or leave the employ of Silverado, or (ii) Solicit, induce or attempt to induce any person or entity who is a client or customer of Silverado at the time of such termination to cease being a client or customer of Silverado or divert or take away, or attempt to divert or take away, from Silverado the business or patronage of such clients or customers, it being the general intent hereof that during such two year period after the Effective Date Martin will maintain a "hands off" policy with regard to Silverado's employees, clients and customers. (c) Noncompetition. Martin covenants and agrees with Silverado that during the period commencing on the Effective Date and ending on the date two years after the Effective Date, he will not, either directly or indirectly, whether as agent or principal, or on his own, or with any other person, firm or company, or in any other capacity, in any manner engage within the United States of America in any business which involves the development, manufacture, sale or distribution of biscotti or similar products. (d) Silverado's Remedies. In the event of an actual or threatened breach by Martin of the provisions of this Section 10, Silverado shall be entitled to an injunction restraining Martin from breaching or continuing to breach the same; provided, however, that nothing herein stated shall be construed as prohibiting Silverado from pursuing any other remedies available to it for such breach or threatened breach, including but not limited to the recovery of damages from Martin. -5- 10. Miscellaneous. (a) Notices. All notices and other communications required or permitted to be given hereunder shall be in writing and shall be deemed to have been duly given, delivered and received (a) if delivered personally, or (b) if sent by facsimile, registered or certified mail (return receipt requested) postage prepaid, or by courier guaranteeing next day delivery, in each case to the party to whom it is directed at the addresses set forth below (or at such other address for any party as shall be specified by notice given in accordance with the provisions hereof, provided that notices of a change of address shall be effective only upon receipt thereof). Notices delivered personally shall be effective on the day so delivered; notices sent by registered or certified mail shall be effective on the third day after mailing; notices sent by facsimile shall be effective when receipt is acknowledged; and notices sent by courier guaranteeing next day delivery shall be effective on the earlier of the second business day after timely delivery to the courier or the day of actual delivery by the courier: (i) if to Silverado: Silverado Foods, Inc. 6846 South Canton, Suite 110 Tulsa, Oklahoma 74136 Fax: (918) 491-6290 Attention: President (ii) if to Martin: Rich Martin --------------------- --------------------- Fax: ( ) --- ----------- (b) Agreement Binding on Successors. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, successors and assigns. (c) Headings. The headings in this Agreement are solely for convenience of reference and shall be given no effect in the construction or interpretation of this Agreement. (d) Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. (e) Governing Law. This Agreement shall be governed by and -6- construed in accordance with the laws of the State of California, without giving effect to conflict of laws. (f) Entire Agreement. This Agreement and the exhibits hereto set forth the entire understanding of the parties with respect to the subject matter hereof, supersede all existing Agreements among them concerning such subject matter may be modified only by a written instrument duly executed by the party to be charged. No party has made any representations with respect hereto, other than those contained herein. (g) Attorneys' Fees. In the event of any litigation arising out of this Agreement, the party not prevailing in such proceedings shall pay the reasonable costs of the prevailing party in connection with such proceedings, including but not limited to attorneys' fees and expenses, witness fees and expenses and court costs. (h) Authority. Each of the parties represents and warrants to the other that (i) such party has the power and authority to enter this Agreement, and (ii) such party has been represented by counsel in connection with this Agreement and has carefully read and fully understands all aspects of this Agreement. Silverado's Board of Directors has taken all action necessary to approve the execution, delivery and performance of this Agreement, and the person signing below on behalf of Silverado is duly authorized to execute this Agreement. (i) Changes in Stock. In the event Silverado issues any shares of its capital stock as a stock dividend or subdivides the number of its outstanding shares through means such as a stock split, or in the event Silverado combines its outstanding shares through means such as a reverse stock split, then the amount repayable upon a sale of stock pursuant to Section 5 hereof and the amount of the Price Guarantee pursuant to the Royalty Termination Agreement shall be proportionately adjusted to reflect the original intent of the applicable agreements. IN WITNESS WHEREOF, this Agreement was executed by the parties as of the date first above written. SILVERADO FOODS, INC. By:/s/ DORVIN D. LIVELY ------------------------------------ Name: Dorvin D. Lively ---------------------------------- Title: Chief Financial Officer --------------------------------- /s/ RICH MARTIN ------------------------------------ Rich Martin -7- EX-10.22 4 EMPLOYMENT TERMINATION AGREEMENT EXHIBIT 10.22 EMPLOYMENT TERMINATION AGREEMENT THIS AGREEMENT, dated as of the 1st day of April 1998, is by and between Silverado Foods, Inc., an Oklahoma corporation ("Silverado"), and Steve Sirianni ("Sirianni"). R E C I T A L S A. Silverado and Sirianni entered an Employment Agreement dated December 31, 1993, which was amended pursuant to an agreement dated March 21, 1995 (as amended, the "Employment Agreement"). B. Silverado and Sirianni are parties to a Royalty Termination Agreement dated November 8, 1996 (the "Royalty Termination Agreement"). C. Silverado and Sirianni desire to resolve certain issues relating to the Employment Agreement and the Royalty Termination Agreement. D. Pursuant to the Royalty Termination Agreement, Silverado issued to Sirianni the Primary Shares and the Contingent Shares (as such terms are defined in the Royalty Termination Agreement). As of the date of this Agreement, Sirianni owns 34 shares of the original Primary Shares and Contingent Shares. NOW, THEREFORE, in consideration of the mutual promises and covenants herein contained, the parties agree as follows: 1. Effective Date. The Effective Date of this Agreement shall be September 1, 1997 (the "Effective Date"). 2. Termination of Employment Agreement. The Employment Agreement and Sirianni's employment with Silverado are hereby terminated as of the Effective Date. Accordingly, all rights, duties and obligations of Silverado and Sirianni relating to the Employment Agreement are hereby terminated. 3. Payment to Sirianni. Silverado shall pay to Sirianni the amount of $425,000.00. Such amount shall accrue interest at the rate of $16,000 payable each month from the Effective Date until the date on which the total $425,000 is paid to Sirianni with a pro rata portion of the $16,000 being paid during the month the $425,000 is paid. 4. Issuance of Stock. Silverado shall issue to Sirianni 240,000 shares of Silverado's common stock (the "Settlement Shares"). Following the execution of this Agreement, Silverado shall make application to the American Stock Exchange for the listing of such shares and deliver instructions to its transfer agent for the issuance of such shares. In addition, Silverado will, after receiving approval of listing by the American Stock Exchange, prepare a registration statement with the Securities and Exchange Commission to register these shares. 5. Waiver of Interest. (a) Amendments. Section 4(c) of the Royalty Termination Agreement provided for interest charges on amounts due under the stock price guarantee provision (the "Price Guarantee") by Silverado with respect to the Primary Shares and the Contingent Shares. Of the $425,000 due Sirianni in Section 3 of this agreement, $75,000 is in lieu of Sirianni waiving interest due him under the Royalty Termination Agreement. This Settlement of Employment Agreement terminates such provision for interest payments or the accruing of interest on amounts due to Sirianni for the period of time from the effective date of this agreement until 45 days after the next shareholders meeting of Silverado Foods, Inc. scheduled to be on or about May 8, 1998. (b) Guarantee of Settlement Shares. In addition, the parties agree that Silverado shall guarantee the stock price of the Settlement Shares on the same terms as the Price Guarantee, except as follows: (i) the guaranteed Net Sales Price (as defined in the Royalty Termination Agreement) for the Settlement Shares shall be $1.25 per share, and (ii) the period of time in which sales must occur to be eligible for such guarantee shall commence on September 1, 1998 and end on August 31, 1999, and (iii) any amounts due under this guarantee for the Settlement shares shall be payable in cash. Sirianni must notify Silverado of his intent to sell these shares at least 10 days prior to the date of the sale of such shares. If Silverado fails to pay any amount under this cash guarantee provision within 60 days from the date of sale of such shares, Sirianni shall give written notice to Silverado of such failure to pay. If Silverado does not cure such failure to pay within 15 days after receipt of such notice, Silverado shall thereupon be deemed to be in default, and such amount in default shall bear interest from the end of the 15 day cure period until paid at the rate of 18% per annum paid monthly. 6. Investment Representations. Sirianni represents and warrants as follows: (a) Access to Information. Respecting Silverado, its business, plans and financial condition, the terms of this transaction, and any other matters relating to this transaction: Sirianni has received all materials which have been requested by Sirianni; Sirianni has had a reasonable opportunity to ask questions of Silverado and its representatives; and Silverado has answered all inquiries that Sirianni or Sirianni's representatives have put to it. Sirianni has had access to all additional information necessary to verify the accuracy of the information set forth in this Agreement and any other materials furnished herewith and has taken all the steps necessary to evaluate the merits and risks of an investment as proposed hereunder. (b) Experience. Sirianni or his representatives have such knowledge and -2- experience in finance, securities, investments and other business matters so as to be able to protect the interest of Sirianni in connection with this transaction. (c) Risks. Sirianni understands the various risks of an investment in Silverado as proposed herein and can afford to bear such risks, including, but not limited to, the risks of losing the entire investment. (d) No Registration. Sirianni has been advised by Silverado that none of the shares of common stock of Silverado issuable hereunder (collectively, the "Securities") have been registered under the Act, that the Securities will be issued on the basis of the statutory exemption provided by Section 4(2) of the Securities Act of 1933, as amended (the "Act") or Regulation D promulgated thereunder, or both, relating to transactions by an issuer not involving any public offering and under similar exemptions under certain state securities laws, that this transaction has not been reviewed by, passed on or submitted to any Federal or state agency or self-regulatory organization where an exemption is being relied upon, and that Silverado's reliance thereon is based in part upon the representations made by Sirianni in this Agreement. Sirianni acknowledges that Sirianni has been informed by Silverado of, or is otherwise familiar with, the nature of the limitations imposed by the Act and the rules and regulations thereunder on the transfer of securities. In particular, Sirianni agrees that no sale, assignment, or transfer of any of the Securities shall be valid or effective, and Silverado shall not be required to give any effect to any such sale, assignment or transfer, unless (i) the sale, assignment or transfer of such Securities is registered under the Act, it being understood that the Securities are not currently registered but it is the intention of Silverado to register these shares and will use its best efforts to register these Securities or (ii) such Securities are sold, assigned or transferred in accordance with all the requirements and limitations of Rule 144 under the Act, it being understood that Rule 144 is not available at the present time for the sale of the Securities, or (iii) such sale, assignment or transfer is otherwise exempt from registration under the Act. Sirianni further understands that an opinion of counsel and other documents may be required to transfer the Securities. Sirianni acknowledges that the Securities shall be subject to a stop transfer order and the certificate or certificates evidencing any Securities shall bear the following legend or a substantially similar legend and such other legends as may be required by state blue sky laws: "The securities represented by this certificate have not been registered under the Securities Act of 1933, as amended (the "Act"), or any state securities laws and neither such securities nor any interest therein may be offered, sold, pledged, assigned, or otherwise transferred unless (1) a registration statement with respect thereto is effective under the Act and any applicable state securities laws or (2) Silverado receives an opinion of counsel to the holder of such securities, which counsel and opinion are reasonably satisfactory to Silverado, that such securities may be offered, sold, pledged, assigned, or transferred in the manner contemplated without an effective registration statement under the Act or applicable state securities laws." -3- (e) Investment Intent. Sirianni will acquire the Securities for his own account for investment and not with a view to the sale or distribution thereof or the granting of any participation therein, and has no present intention of distributing or selling to others any of such interest or granting any participation therein except in the event when said shares are registered. (f) Blue Sky Legends. Sirianni understands and agrees that certain legends required by the laws of the State of California may be placed on certificates representing the Securities. (g) Survival. Sirianni acknowledges that the representations, warranties and Agreements made by him herein shall survive the execution and delivery of this Agreement and the issuance of the Securities hereunder. 7. Release by Silverado. Except as to any and all of Silverado's and its agents, employees, officers, directors and shareholders obligations dealing with the Royalty Termination Agreement dated November 8, 1996 Silverado hereby releases and forever discharges Sirianni from any and all claims, rights, causes of action, suits, demands, costs and expenses (including, without limitation, reasonable attorneys' fees) of any nature whatsoever, whether presently known or unknown, whether the same be upon statute, contract or tort, to the fullest extent permitted by law, which it has or may have, against Sirianni. 8. Release by Sirianni. Except as to any and all of Silverado's and its agents, employees, officers, directors and shareholders obligations dealing with the Royalty Termination Agreement dated November 8, 1996 (as amended) and as to the Registration Rights Agreement dated November 8, 1996, and as to any claims arising under this Agreement, Sirianni hereby releases and forever discharges Silverado and its agents, employees, officers, directors and shareholders from any and all claims, rights, causes of action, suits, demands, costs and expenses (including, without limitation, reasonable attorneys' fees) of any nature whatsoever, whether presently known, whether the same be upon statute, contract or tort, to the fullest extent permitted by law, which he has or may have, against. 9. Restrictive Covenants. In the course of his employment with Silverado, Sirianni has had access to proprietary information regarding Silverado, its customers and its business. Accordingly, the parties agree as follows: (a) Confidentiality. Sirianni agrees that he will not divulge to anyone (other than Silverado or any persons employed or designated by Silverado) any knowledge or information of any type whatsoever of a confidential nature relating to the business of Silverado or any of its subsidiaries or affiliates, including without limitation all types of trade secrets (unless readily ascertainable from public or published information or trade sources). Sirianni further agrees not to at any time -4- disclose, publish or make use of any such knowledge or information of a confidential nature without the prior written consent of Silverado. (b) Diversion of Employees or Clients. Sirianni agrees that during the period of three years following the Effective Date he shall not in any manner, directly or indirectly: (i) Entice, encourage or influence, or attempt to entice, encourage or influence, anyone who is an employee of Silverado at the time of such termination to quit or leave the employ of Silverado, or (ii) Solicit, induce or attempt to induce any person or entity who is a client or customer of Silverado at the time of such termination to cease being a client or customer of Silverado or divert or take away, or attempt to divert or take away, from Silverado the business or patronage of such clients or customers, it being the general intent hereof that during such three year period after the Effective Date Sirianni will maintain a "hands off" policy with regard to Silverado's employees, clients and customers. (c) Noncompetition. Sirianni covenants and agrees with Silverado that during the period commencing on the Effective Date and ending on the date three years after the Effective Date, he will not, either directly or indirectly, whether as agent or principal, or on his own, or with any other person, firm or company, or in any other capacity, in any manner engage within the United States of America in any business which involves the development, manufacture, sale or distribution of biscotti or similar products. (d) Silverado's Remedies. In the event of an actual or threatened breach by Sirianni of the provisions of this Section 10, Silverado shall be entitled to an injunction restraining Sirianni from breaching or continuing to breach the same; provided, however, that nothing herein stated shall be construed as prohibiting Silverado from pursuing any other remedies available to it for such breach or threatened breach, including but not limited to the recovery of damages from Sirianni. -5- 10. Miscellaneous. (a) Notices. All notices and other communications required or permitted to be given hereunder shall be in writing and shall be deemed to have been duly given, delivered and received (a) if delivered personally, or (b) if sent by facsimile, registered or certified mail (return receipt requested) postage prepaid, or by courier guaranteeing next day delivery, in each case to the party to whom it is directed at the addresses set forth below (or at such other address for any party as shall be specified by notice given in accordance with the provisions hereof, provided that notices of a change of address shall be effective only upon receipt thereof). Notices delivered personally shall be effective on the day so delivered; notices sent by registered or certified mail shall be effective on the third day after mailing; notices sent by facsimile shall be effective when receipt is acknowledged; and notices sent by courier guaranteeing next day delivery shall be effective on the earlier of the second business day after timely delivery to the courier or the day of actual delivery by the courier: (i) if to Silverado: Silverado Foods, Inc. 6846 South Canton, Suite 110 Tulsa, Oklahoma 74136 Fax: (918) 491-6290 Attention: President (ii) if to Sirianni: Steve Sirianni 717 San Miguel Lane Foster City, California 94404 Fax: (650) 345-1211 (b) Agreement Binding on Successors. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, successors and assigns. (c) Headings. The headings in this Agreement are solely for convenience of reference and shall be given no effect in the construction or interpretation of this Agreement. (d) Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. (e) Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of California, without giving effect to conflict -6- of laws. (f) Entire Agreement. This Agreement and the exhibits hereto set forth the entire understanding of the parties with respect to the subject matter hereof, supersede all existing Agreements among them concerning such subject matter may be modified only by a written instrument duly executed by the party to be charged. No party has made any representations with respect hereto, other than those contained herein. (g) Attorneys' Fees. In the event of any litigation arising out of this Agreement, the party not prevailing in such proceedings shall pay the reasonable costs of the prevailing party in connection with such proceedings, including but not limited to attorneys' fees and expenses, witness fees and expenses and court costs. (h) Authority. Each of the parties represents and warrants to the other that (i) such party has the power and authority to enter this Agreement, and (ii) such party has been represented by counsel in connection with this Agreement and has carefully read and fully understands all aspects of this Agreement. Silverado's Board of Directors has taken all action necessary to approve the execution, delivery and performance of this Agreement, and the person signing below on behalf of Silverado is duly authorized to execute this Agreement. (i) Changes in Stock. In the event Silverado issues any shares of its capital stock as a stock dividend or subdivides the number of its outstanding shares through means such as a stock split, or in the event Silverado combines its outstanding shares through means such as a reverse stock split, then the amount repayable upon a sale of stock pursuant to Section 5 hereof and the amount of the Price Guarantee pursuant to the Royalty Termination Agreement shall be proportionately adjusted to reflect the original intent of the applicable agreements. IN WITNESS WHEREOF, this Agreement was executed by the parties as of the date first above written. SILVERADO FOODS, INC. By:/s/ DORVIN D. LIVELY --------------------------------- Name: Dorvin D. Lively ------------------------------- Title: Chief Financial Officer ------------------------------ /s/ STEVE SIRIANNI ------------------------------------ Steve Sirianni -7- EX-10.27 5 FORM OF PROMISSORY NOTE AGREEMENT [SILVERADO LOGO APPEARS HERE] EXHIBIT 10.27 $250,000 PROMISSORY NOTE Tulsa, Oklahoma December 16, 1997 FOR VALUE RECEIVED, the undersigned, SILVERADO FOODS, INC., PROMISES TO PAY TO THE ORDER OF CAPMAC EIGHTY-TWO LIMITED PARTNERSHIP, AT TULSA, OKLAHOMA, THE PRINCIPAL SUM OF TWO HUNDRED FIFTY THOUSAND AND 00/100 DOLLARS ($250,000.00), WITH INTEREST THEREON FROM THE DATE HEREOF UNTIL MATURITY AT A RATE PER ANNUM OF FOURTEEN PERCENT (14%). PRINCIPAL AND ACCRUED INTEREST SHALL BE DUE AND PAYABLE ON JANUARY 26, 1998. THIS NOTE WILL BE REPAID OUT OF THE PROCEEDS FROM SILVERADO FOODS, INC.'S DEBT REFINANCING TRANSACTION CONTEMPLATED TO BE CLOSED BY JANUARY 15, 1998 OR FROM THE PROCEEDS FROM THE SALE OF SILVERADO MARKETING SERVICES, INC.'S TAMPA, FLORIDA HONOR SNACK BUSINESS TO BE CLOSED BY JANUARY 16, 1998. CAPMAC EIGHTY-TWO LIMITED PARTNERSHIP SHALL ALSO RECEIVE 35,000 WARRANTS FOR SILVERADO FOODS, INC.'S COMMON STOCK WITH AN EXERCISE PRICE OF $.50 PER SHARE. THE TERM OF THESE WARRANTS IS FIVE YEARS FROM THE DATE OF ISSUANCE. IF ALL OR ANY PORTION OF THE INDEBTEDNESS HEREBY EVIDENCED IS NOT PAID WHEN DUE, DISSOLUTION, INSOLVENCY, BANKRUPTCY, RECEIVERSHIP, OR BUSINESS FAILURE OF MAKER, ENDORSER AND GUARANTOR HEREOF, THE HOLDER MAY, WITHOUT NOTICE OR DEMAND, DECLARE THIS INDEBTEDNESS TO BE IMMEDIATELY DUE AND PAYABLE. THIS NOTE IS PERSONALLY GUARANTEED BY LAWRENCE D. FIELD, CHAIRMAN OF SILVERADO FOODS, INC. AS TO REPAYMENT IN THE EVENT THAT THIS NOTE IS NOT PAID WHEN DUE BY SILVERADO FOODS, INC. THE UNDERSIGNED AGREES THAT IF, AND AS OFTEN AS, THIS NOTE IS PLACED IN THE HANDS OF AN ATTORNEY FOR COLLECTION OR TO DEFEND OR ENFORCE ANY OF THE HOLDER'S RIGHTS HEREUNDER OR UNDER ANY INSTRUMENTS SECURING PAYMENT OF THIS NOTE, THE UNDERSIGNED WILL PAY TO THE HOLDER ITS REASONABLE ATTORNEY'S FEES AND ALL COURT COSTS AND OTHER EXPENSES INCURRED IN CONNECTION THEREWITH. THE MAKER, ENDORSER, GUARANTOR AND ALL OTHER PERSONS WHO MAY BECOME LIABLE FOR ALL OR ANY PART OF THIS OBLIGATION SEVERALLY WAIVE PRESENTMENT FOR PAYMENT, PROTEST AND NOTICE OF NONPAYMENT. THIS NOTE IS TO BE CONSTRUED ACCORDING TO THE LAWS OF THE STATE OF OKLAHOMA. By:/s/ GPM Inc. G.P. By:/s/ DORVIN D. LIVELY ---------------------------------- -------------------------------------- CAPMAC EIGHTY-TWO LIMITED PARTNERSHIP DORVIN D. LIVELY, CHIEF FINANCIAL OFFICER Milton D. McKenzie SILVERADO FOODS, INC. DATE: Dec. 16/1997 DATE: 12-16-97 -------------------- ------------- BY GUARANTOR:/s/ LAWRENCE D. FIELD ----------------------- LAWRENCE D. FIELD DATE: Dec. 16, 1997 ----------------- EX-10.28 6 FORM OF COMMON STOCK PURCHASE WARRANT EXHIBIT 10.28 SILVERADO FOODS, INC. COMMON STOCK PURCHASE WARRANT - ------------------------------------------------------------------------------- Number of Shares: 35,000 Holder: CAPMAC Eighty Two Limited Partnership Purchase Price: $.50 per share Expiration Date: December 11, 2002 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Silverado Foods, Inc., an Oklahoma corporation (the "Company"), hereby certifies that, for value received, CAPMAC Eighty Two Limited Partnership, or assigns, is entitled, subject to the terms set forth below, to purchase from the Company at any time or from time to time after the date hereof and prior to the fifth anniversary hereof (the "Exercise Period"), at the Purchase Price hereinafter set forth, 35,000 shares of the fully paid and nonassessable Common Stock of the Company. The number and character of such shares of Common Stock and the Purchase Price are subject to adjustment as provided herein. The purchase price per share of Common Stock issuable upon exercise of this Warrant (the "Purchase Price") shall be $.50. As used herein the following terms, unless the context otherwise requires, have the following respective meanings: (a) The term "Company" shall include Silverado Foods, Inc. and any corporation that shall succeed or assume the obligations of the Company hereunder. (b) The term "Common Stock" includes (a) the Company's common stock, par value $.01 per share, (b) any other capital stock of any class or classes (however designated) of the Company, authorized on or after such date, the holders of which shall have the right, without limitation as to amount, either to all or to a share of the balance of current dividends and liquidating dividends after the payment of dividends and distributions on any shares entitled to preference, and the holders of which shall ordinarily, in the absence of contingencies, be entitled to vote for the election of a majority of directors of the Company (even though the right so to vote has been suspended by the happening of such a contingency) and (c) any other securities into which or for which any of the securities described in (a) or (b) may be converted or exchanged pursuant to a plan of recapitalization, reorganization, merger, sale of assets or otherwise. 1. Exercise of Warrant. 1.1. Method of Exercise. This Warrant may be exercised in whole or in part (but not as to a fractional share of Common Stock), at any time and from time to time during the Exercise Period, by the holder hereof by surrender of this Warrant, with the form of subscription at the end hereof duly executed by such holder, to the Company at its principal office, accompanied by payment of the Purchase Price multiplied by the number of shares of Common Stock for which this Warrant is being exercised (the "Exercise Price"). Payment of the Exercise Price shall be made by check or bank draft payable to the order of the Company or by wire transfer to the account of the Company. Upon exercise, the holder shall be entitled to receive, promptly after payment in full, one or more certificates, issued in the holder's name or in such name or names as the holder may direct, subject to the limitations on transfer contained herein, for the number of shares of Common Stock so purchased. The shares so purchased shall be deemed to be issued as of the close of business on the date on which this Warrant shall have been exercised (the "Exercise Date"). 1.2. Company Acknowledgment. The Company will, at the time of the exercise of this Warrant, upon the request of the holder hereof, acknowledge in writing its continuing obligation to afford to such holder the registration rights to which such holder shall continue to be entitled after such exercise in accordance with the provisions of a Registration Rights Agreement dated the date hereof. If the holder shall fail to make any such request, such failure shall not affect the continuing obligation of the Company to afford to such holder any such rights. 2. Delivery of Stock Certificates, etc., on Exercise. As soon as practicable after the exercise of this Warrant will cause to be issued in the name of and delivered to the holder thereof, or, to the extent permissible hereunder, to such other person as such holder may direct, a certificate or certificates for the number of fully paid and nonassessable shares of Common Stock to which such holder shall be entitled on such exercise, plus, in lieu of any fractional share to which such holder would otherwise be entitled, cash equal to such fraction multiplied by the then applicable Purchase Price, together with any other stock or other securities and property to which such holder is entitled upon such exercise pursuant to Section 1 or otherwise. The Company covenants that upon the expiration of the applicable restrictive period relating to the shares of Common Stock underlying this Warrant, if any, it will use its best lawful efforts to issue or cause the transfer agent of the Company to issue one or more certificates representing such shares of Common Stock 3. Adjustment for Dividends in Other Stock Property, etc.; Reclassification, etc. In case at any time or from time to time, the holders of Common Stock shall have received, or (on or after the record date fixed for the determination of shareholders eligible to receive) shall have become entitled to receive, without payment therefor, (a) other or additional stock or other securities or property (other than cash) by way of dividend, or (b) any cash (excluding cash dividends payable solely out of earnings or earned surplus of the Company), or (c) other or additional stock or other securities or property (including cash) by way of spinoff, splitup, reclassification, recapitalization, combination of shares or similar corporate rearrangement, COMMON STOCK PURCHASE WARRANT - Page 2 other than additional shares of Common Stock issued as a stock dividend or in a stock split then and in each such case the holder of this Warrant, on the exercise hereof as provided in Section 1, shall be entitled to receive the amount of stock that such holder would hold on the date of such exercise if on the date hereof it had been the holder of record of the number of shares of Common Stock called for on the face of this Warrant and had thereafter, during the period from the date hereof to and including the date of such exercise, retained such shares and all such other or additional stock receivable by him as aforesaid during such period, giving effect to all adjustments called for during such. 4. Adjustment for Reorganization, Consolidation, Merger, etc. 4.1. Reorganization, etc. In case at any time or from time to time, the Company shall (a) effect a reorganization, (b) consolidate with or merge into any other person, or (c) transfer all or substantially all of its properties or assets to any other person under any plan or arrangement contemplating the dissolution of the Company, then, in each such case, the holder of this Warrant, on the exercise hereof as provided in Section 1 at any time after the consummation of such reorganization, consolidation or merger or the effective date of such dissolution, as the case may be, shall receive, in lieu of the Common Stock issuable on such exercise prior to such consummation or such effective date, the stock to which such holder would have been entitled upon such consummation or in connection with such dissolution, as the case may be, if such holder had so exercised this Warrant, immediately prior thereto, all subject to further adjustment thereafter. 4.2. Dissolution. In the event of any dissolution of the Company following the transfer of all or substantially all of its properties or assets, the Company, prior to such dissolution, shall at its expense deliver or cause to be delivered the stock receivable by the holder of this Warrant after the effective date of such. 4.3. Continuation of Terms. Upon any reorganization, consolidation, merger or transfer (and any dissolution following any transfer) referred to in this Section 4, this Warrant shall continue in full force and effect and the terms hereof shall be applicable to the shares of stock receivable on the exercise of this Warrant after the consummation of such reorganization, consolidation or merger or the effective date of dissolution following any such transfer, as the case may be, and shall be binding upon the issuer of any such stock or other securities, including, in the case of any such transfer, the person acquiring all or substantially all of the properties or assets of the Company, whether or not such person shall have expressly assumed the terms of this Warrant. 5. Adjustment for Extraordinary Events. In the event that the Company shall (i) issue additional shares of the Common Stock as a dividend or other distribution on outstanding Common Stock, (ii) subdivide its outstanding shares of Common Stock, or (iii) combine its outstanding shares of the Common stock into a smaller number of shares of the Common Stock, then, in each such event, the Purchase Price shall, simultaneously with the happening of such event, be adjusted by multiplying the then Purchase Price by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such event and the denominator of COMMON STOCK PURCHASE WARRANT - Page 3 which shall be the number of shares of Common Stock outstanding immediately after such event, and the product so obtained shall thereafter be the Purchase Price then in effect. The Purchase Price, as so adjusted, shall be readjusted in the same manner upon the happening of any successive event or events. The holder of this Warrant shall thereafter, on the exercise hereof, be entitled to receive that number of shares of Common Stock determined by multiplying the number of shares of Common Stock that would otherwise be issuable on such exercise by a fraction of which (i) the numerator is the Purchase Price that would otherwise be in effect, and (ii) the denominator is the Purchase Price in effect on the date of such exercise. 6. No Impairment. The Company will not, by amendment of its Certificate of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the holder of this Warrant against impairment. Without limiting the generality of the foregoing, the Company (a) will not increase the par value of any shares of stock receivable on the exercise of this Warrant above the amount payable therefor on such exercise, (b) will take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable shares of stock on the exercise of this Warrant, and (c) will not transfer all or substantially all of its properties and assets to any other person (corporate or otherwise), or consolidate with or merge into any other person or permit any such person to consolidate with or merge into the Company (if the Company is not the surviving person), unless such other person shall expressly assume in writing and will be bound by all the terms of this Warrant. 7. Notices of Record Date, etc. In the event of (a) any taking by the Company of a record of the holders of any class or securities for the purpose of determining the holders thereof who are entitled to receive any dividend or other distribution, or any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, or (b) any capital reorganization of the Company, any reclassification or recapitalization of the capital stock of the Company or any transfer of all or substantially all the assets of the Company to or consolidation or merger of the Company with or into any other person, or (c) any voluntary or involuntary dissolution, liquidation or windingup of the Company, then and in each such event the Company will mail or cause to be mailed to the holder of this Warrant a notice specifying (i) the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and stating the amount and character of such dividend, distribution or right, and (ii) the date on which any such reorganization, reclassification, recapitalization, transfer, consolidation, merger, dissolution, liquidation or windingup is to take place, and the time, if any, as of which the holders of record of Common Stock shall be entitled to exchange their shares of Common Stock for securities or other property deliverable on such reorganization, reclassification, recapitalization, transfer, consolidation, merger, dissolution, liquidation or windingup. Such notice shall be mailed at least 20 days prior to the date specified in such notice on which any action is to be taken. COMMON STOCK PURCHASE WARRANT - Page 4 8. Reservation of Stock, etc. Issuable on Exercise of Warrant. The Company will at all times reserve and keep available, solely for issuance and delivery on the exercise of this Warrant, all shares of Common Stock from time to time issuable on the exercise of this Warrant. 9. Exchange of Warrant. On surrender for exchange of this Warrant, properly endorsed and in compliance with the restrictions on transfer set forth in the legend on the face of this Warrant, to the Company, the Company at its expense will issue and deliver to or on the order of the holder thereof a new Warrant of like tenor, in the name of such holder or as such holder (on payment by such holder of any applicable transfer taxes) may direct, calling in the aggregate on the face or faces thereof for the number of shares of Common Stock called for on the face of the Warrant so surrendered. 10. Replacement of Warrant. On receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of any such loss, theft or destruction of this Warrant, on delivery of an indemnity agreement or security reasonably satisfactory in form and amount to the Company or, in the case of any such mutilation, on surrender and cancellation of this Warrant, the Company at its expense will execute and deliver, in lieu thereof, a new Warrant of like tenor. 11. Remedies. The Company stipulates that the remedies at law of the holder of this Warrant in the event of any default or threatened default by the Company in the performance of or compliance with any of the terms of this Warrant are not and will not be adequate, and that such terms may be specifically enforced by a decree for the specific performance of any agreement contained herein or by an injunction against a violation of any of the terms hereof or otherwise. 12. Negotiability, etc. This Warrant is issued upon the following terms, to all of which each holder or owner hereof by the taking hereof consents and agrees: (a) title to this Warrant may be transferred by endorsement (by the holder hereof executing the form of assignment at the end hereof) and delivery in the same manner as in the case of a negotiable instrument transferable by endorsement and delivery. (b) Any person in possession of this Warrant properly endorsed is authorized to represent himself as absolute owner hereof and is empowered to transfer absolute title hereto by endorsement and delivery hereof to a bona fide purchaser hereof for value; each prior taker or owner waives and renounces all of his equities or rights in this Warrant in favor of each such bona fide purchaser, and each such bona fide purchaser shall acquire absolute title hereto and to all rights represented hereby; (c) until this Warrant is transferred on the books of the Company, the Company may treat the registered holder hereof as the absolute owner hereof for all purposes, notwithstanding any notice to the contrary; and (d) notwithstanding the foregoing, this Warrant may not be sold, transferred or assigned except pursuant to an effective registration statement under the Securities Act of 1933, as amended or, pursuant to an applicable exemption therefrom or in accordance with Regulation S COMMON STOCK PURCHASE WARRANT - Page 5 promulgated under such Act. 13. Notices, etc. All notices and other communications from the Company to the holder of this Warrant shall be mailed by first class registered or certified mail, postage prepaid, at such address as may have been furnished to the Company in writing by such holder or, until any such holder furnishes to the Company an address, then to, and at the address of, the last holder of this Warrant who has so furnished an address to the Company. 14. Miscellaneous. This Warrant and any term hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought. This Warrant shall be construed and enforced in accordance with and governed by the internal laws of the State of Oklahoma. The headings in this Warrant are for purposes of reference only, and shall not limit or otherwise affect any of the terms hereof. This Warrant is being executed as an instrument under seal. The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provision. [Signature Page Follows] COMMON STOCK PURCHASE WARRANT - Page 6 DATED as of December 11, 1997. SILVERADO FOODS, INC. By:/s/ TIMOTHY G. BRUER -------------------------------------- Name: Timothy G. Bruer -------------------------------------- Title: Chief Executive Officer -------------------------------------- [Corporate Seal] Attest: By:/s/ DORVIN D. LIVELY ------------------------------ Secretary COMMON STOCK PURCHASE WARRANT - Page 7 NOTICE OF EXERCISE ------------------ (To be executed only upon exercise or conversion of the Warrant in whole or in part) To Silverado Foods, Inc.: The undersigned registered holder of the accompanying Warrant hereby exercises such Warrant or portion thereof for, and purchases thereunder, ___________/1/ shares of Common Stock (as defined in such Warrant) and herewith makes payment therefor of $___________. The undersigned requests that the certificates for such shares of Common Stock be issued in the name of, and delivered to, ________________________________________ whose address is ___________________________________________. The undersigned, as contemplated by Section 4.2(b) of the Subscription Agreement pursuant to which this Warrant was issued, hereby states that the representations and warranties of the undersigned set forth therein are true and correct in all material respects. Dated: ------------------ ---------------------------------------- (Name must conform to name of holder as specified on the face of the Warrant) By: ------------------------------------- Name: -------------------------------- Title: ------------------------------- Address of holder: ---------------------------------------- ---------------------------------------- ---------------------------------------- - -------------------- /1/ Insert the number of shares of Common Stock as to which this Warrant is being exercised. In the case of a partial exercise, a new Warrant or Warrants will be issued and delivered, representing the unexercised portion of this Warrant, to the holder surrendering the same. EX-10.29 7 FORM OF PROMISSORY NOTE EXHIBIT 10.29 $250,000 PROMISSORY NOTE December 19, 1997 Tulsa, Oklahoma FOR VALUE RECEIVED, the undersigned, SILVERADO FOODS, INC., PROMISES TO PAY TO THE ORDER OF ML OKLAHOMA, AT TULSA, OKLAHOMA, THE PRINCIPAL SUM OF TWO HUNDRED FIFTY THOUSAND AND 00/100 DOLLARS ($250,000.00), WITH INTEREST THEREON FROM THE DATE HEREOF UNTIL MATURITY AT A RATE PER ANNUM OF FOURTEEN PERCENT (14%). PRINCIPAL AND ACCRUED INTEREST SHALL BE DUE AND PAYABLE ON FEBRUARY 1, 1998. ML OKLAHOMA, SHALL ALSO RECEIVE 35,000 WARRANTS FOR SILVERADO FOODS, INC.'S COMMON STOCK WITH AN EXERCISE PRICE OF $.625 PER SHARE. THE TERM OF THESE WARRANTS IS FIVE YEARS FROM THE DATE OF ISSUANCE. IF ALL OR ANY PORTION OF THE INDEBTEDNESS HEREBY EVIDENCED IS NOT PAID WHEN DUE, DISSOLUTION, INSOLVENCY, BANKRUPTCY, RECEIVERSHIP, OR BUSINESS FAILURE OF MAKER, ENDORSER AND GUARANTOR HEREOF, THE HOLDER MAY, WITHOUT NOTICE OR DEMAND, DECLARE THIS INDEBTEDNESS TO BE IMMEDIATELY DUE AND PAYABLE. THE UNDERSIGNED AGREES THAT IF, AND AS OFTEN AS, THIS NOTE IS PLACED IN THE HANDS OF AN ATTORNEY FOR COLLECTION OR TO DEFEND OR ENFORCE ANY OF THE HOLDER'S RIGHTS HEREUNDER OR UNDER ANY INSTRUMENTS SECURING PAYMENT OF THIS NOTE, THE UNDERSIGNED WILL PAY TO THE HOLDER ITS REASONABLE ATTORNEY'S FEES AND ALL COURT COSTS AND OTHER EXPENSES INCURRED IN CONNECTION THEREWITH. THE MAKER, ENDORSER, GUARANTOR AND ALL OTHER PERSONS WHO MAY BECOME LIABLE FOR ALL OR ANY PART OF THIS OBLIGATION SEVERALLY WAIVE PRESENTMENT FOR PAYMENT, PROTEST AND NOTICE OF NONPAYMENT. THIS NOTE IS TO BE CONSTRUED ACCORDING TO THE LAWS OF THE STATE OF OKLAHOMA. BY: /s/ ML OKLAHOMA BY: /s/ DORVIN D. LIVELY ------------------------------ -------------------------------- ML OKLAHOMA DORVIN D. LIVELY, CHIEF FINANCIAL OFFICER SILVERADO FOODS, INC. DATE: 12/29/97 DATE: 12-29-97 ---------------- ---------------- COMMON STOCK PURCHASE WARRANT - Page 8 EX-10.30 8 FORM OF COMMON STOCK PURCHASE WARRANT EXHIBIT 10.30 SILVERADO FOODS, INC. COMMON STOCK PURCHASE WARRANT - -------------------------------------------------------------------------------- Number of Shares: 35,000 Holder: ML Oklahoma Purchase Price: $.625 Expiration Date: December 19, 2002 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Silverado Foods, Inc., an Oklahoma corporation (the "Company"), hereby certifies that, for value received, ML Oklahoma, or assigns, is entitled, subject to the terms set forth below, to purchase from the Company at any time or from time to time after the date hereof and prior to the fifth anniversary hereof (the "Exercise Period"), at the Purchase Price hereinafter set forth, 35,000 shares of the fully paid and nonassessable Common Stock of the Company. The number and character of such shares of Common Stock and the Purchase Price are subject to adjustment as provided herein. The purchase price per share of Common Stock issuable upon exercise of this Warrant (the "Purchase Price") shall be as follows: Notwithstanding any provisions herein to the contrary, if the fair market value of one share of Silverado Foods, Inc. common stock is greater than the exercise price (at the date of calculation as set forth below), in lieu of exercising this Warrant for cash, the Holder may elect to receive shares equal to the value (as determined below) of this Warrant (or the portion thereof being canceled) by surrender of this Warrant at the principal office of the Company together with the properly endorsed Notice of Exercise and notice of such election in which event the Company shall issue to the Holder a number of shares of Silverado Foods, Inc. common stock computed using the following formula: Number of SLV Shares = 35,000 X (Market Value/share-.625) ---------------------------------- Market Value/share of SLV For purposes of the above calculation, the fair market value per share shall be the product of (i) the average of the closing bid and asked prices of the Common Stock quoted by the American Stock Exchange or on any exchange on which the Common Stock is listed, whichever is applicable, as published in the Western Edition of The Wall Street Journal for the five (5) trading days prior to the date of determination of fair market value and (ii) the number of shares of Common Stock into which each share of Silverado Foods, Inc. common stock is convertible at the time of such exercise. As used herein the following terms, unless the context otherwise requires, have the following respective meanings: (a) The term "Company" shall include Silverado Foods, Inc. and any corporation that shall succeed or assume the obligations of the Company hereunder. (b) The term "Common Stock" includes (a) the Company's common stock, par value $.01 per share, (b) any other capital stock of any class or classes (however designated) of the Company, authorized on or after such date, the holders of which shall have the right, without limitation as to amount, either to all or to a share of the balance of current dividends and liquidating dividends after the payment of dividends and distributions on any shares entitled to preference, and the holders of which shall ordinarily, in the absence of contingencies, be entitled to vote for the election of a majority of directors of the Company (even though the right so to vote has been suspended by the happening of such a contingency) and (c) any other securities into which or for which any of the securities described in (a) or (b) may be converted or exchanged pursuant to a plan of recapitalization, reorganization, merger, sale of assets or otherwise. 1. Exercise of Warrant. 1.1. Method of Exercise. This Warrant may be exercised in whole or in part (but not as to a fractional share of Common Stock), at any time and from time to time during the Exercise Period, by the holder hereof by surrender of this Warrant, with the form of subscription at the end hereof duly executed by such holder, to the Company at its principal office, accompanied by payment of the Purchase Price multiplied by the number of shares of Common Stock for which this Warrant is being exercised (the "Exercise Price"). Payment of the Exercise Price shall be made by check or bank draft payable to the order of the Company or by wire transfer to the account of the Company. Upon exercise, the holder shall be entitled to receive, promptly after payment in full, one or more certificates, issued in the holder's name or in such name or names as the holder may direct, subject to the limitations on transfer contained herein, for the number of shares of Common Stock so purchased. The shares so purchased shall be deemed to be issued as of the close of business on the date on which this Warrant shall have been exercised (the "Exercise Date"). 2. Delivery of Stock Certificates, etc., on Exercise. As soon as practicable after the exercise of this Warrant will cause to be issued in the name of and delivered to the holder thereof, or, to the extent permissible hereunder, to such other person as such holder may direct, a certificate or certificates for the number of fully paid and nonassessable shares of Common Stock to which such holder shall be entitled on such exercise, plus, in lieu of any fractional share to which such holder would otherwise be entitled, cash equal to such fraction multiplied by the then applicable Purchase Price, together with any other stock or other securities and property to which such holder is entitled upon such exercise pursuant to Section 1 or otherwise. The Company covenants that upon the expiration of the applicable restrictive period relating to the shares of Common Stock underlying this Warrant, if any, it will use its best lawful efforts to issue or cause the transfer agent of the Company to issue one or more certificates representing such shares of Common Stock COMMON STOCK PURCHASE WARRANT - Page 2 3. Adjustment for Dividends in Other Stock Property, etc.; Reclassification, etc. In case at any time or from time to time, the holders of Common Stock shall have received, or (on or after the record date fixed for the determination of shareholders eligible to receive) shall have become entitled to receive, without payment therefor, (a) other or additional stock or other securities or property (other than cash) by way of dividend, or (b) any cash (excluding cash dividends payable solely out of earnings or earned surplus of the Company), or (c) other or additional stock or other securities or property (including cash) by way of spinoff, splitup, reclassification, recapitalization, combination of shares or similar corporate rearrangement, other than additional shares of Common Stock issued as a stock dividend or in a stock split then and in each such case the holder of this Warrant, on the exercise hereof as provided in Section 1, shall be entitled to receive the amount of stock that such holder would hold on the date of such exercise if on the date hereof it had been the holder of record of the number of shares of Common Stock called for on the face of this Warrant and had thereafter, during the period from the date hereof to and including the date of such exercise, retained such shares and all such other or additional stock receivable by him as aforesaid during such period, giving effect to all adjustments called for during such. 4. Adjustment for Reorganization, Consolidation, Merger, etc. 4.1. Reorganization, etc. In case at any time or from time to time, the Company shall (a) effect a reorganization, (b) consolidate with or merge into any other person, or (c) transfer all or substantially all of its properties or assets to any other person under any plan or arrangement contemplating the dissolution of the Company, then, in each such case, the holder of this Warrant, on the exercise hereof as provided in Section 1 at any time after the consummation of such reorganization, consolidation or merger or the effective date of such dissolution, as the case may be, shall receive, in lieu of the Common Stock issuable on such exercise prior to such consummation or such effective date, the stock to which such holder would have been entitled upon such consummation or in connection with such dissolution, as the case may be, if such holder had so exercised this Warrant, immediately prior thereto, all subject to further adjustment thereafter. 4.2. Dissolution. In the event of any dissolution of the Company following the transfer of all or substantially all of its properties or assets, the Company, prior to such dissolution, shall at its expense deliver or cause to be delivered the stock receivable by the holder of this Warrant after the effective date of such. 4.3. Continuation of Terms. Upon any reorganization, consolidation, merger or transfer (and any dissolution following any transfer) referred to in this Section 4, this Warrant shall continue in full force and effect and the terms hereof shall be applicable to the shares of stock COMMON STOCK PURCHASE WARRANT - Page 3 receivable on the exercise of this Warrant after the consummation of such reorganization, consolidation or merger or the effective date of dissolution following any such transfer, as the case may be, and shall be binding upon the issuer of any such stock or other securities, including, in the case of any such transfer, the person acquiring all or substantially all of the properties or assets of the Company, whether or not such person shall have expressly assumed the terms of this Warrant. 5. Adjustment for Extraordinary Events. In the event that the Company shall (i) issue additional shares of the Common Stock as a dividend or other distribution on outstanding Common Stock, (ii) subdivide its outstanding shares of Common Stock, or (iii) combine its outstanding shares of the Common stock into a smaller number of shares of the Common Stock, then, in each such event, the Purchase Price shall, simultaneously with the happening of such event, be adjusted by multiplying the then Purchase Price by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such event and the denominator of which shall be the number of shares of Common Stock outstanding immediately after such event, and the product so obtained shall thereafter be the Purchase Price then in effect. The Purchase Price, as so adjusted, shall be readjusted in the same manner upon the happening of any successive event or events. The holder of this Warrant shall thereafter, on the exercise hereof, be entitled to receive that number of shares of Common Stock determined by multiplying the number of shares of Common Stock that would otherwise be issuable on such exercise by a fraction of which (i) the numerator is the Purchase Price that would otherwise be in effect, and (ii) the denominator is the Purchase Price in effect on the date of such exercise. 6. No Impairment. The Company will not, by amendment of its Certificate of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the holder of this Warrant against impairment. Without limiting the generality of the foregoing, the Company (a) will not increase the par value of any shares of stock receivable on the exercise of this Warrant above the amount payable therefor on such exercise, (b) will take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable shares of stock on the exercise of this Warrant, and (c) will not transfer all or substantially all of its properties and assets to any other person (corporate or otherwise), or consolidate with or merge into any other person or permit any such person to consolidate with or merge into the Company (if the Company is not the surviving person), unless such other person shall expressly assume in writing and will be bound by all the terms of this Warrant. 7. Notices of Record Date, etc. In the event of (a) any taking by the Company of a record of the holders of any class or securities for the purpose of determining the holders thereof who are entitled to receive any dividend or other distribution, or any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, or (b) any capital reorganization of the Company, any reclassification or recapitalization of the capital stock of the Company or any transfer of all or substantially all the COMMON STOCK PURCHASE WARRANT - Page 4 assets of the Company to or consolidation or merger of the Company with or into any other person, or (c) any voluntary or involuntary dissolution, liquidation or windingup of the Company, then and in each such event the Company will mail or cause to be mailed to the holder of this Warrant a notice specifying (i) the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and stating the amount and character of such dividend, distribution or right, and (ii) the date on which any such reorganization, reclassification, recapitalization, transfer, consolidation, merger, dissolution, liquidation or windingup is to take place, and the time, if any, as of which the holders of record of Common Stock shall be entitled to exchange their shares of Common Stock for securities or other property deliverable on such reorganization, reclassification, recapitalization, transfer, consolidation, merger, dissolution, liquidation or windingup. Such notice shall be mailed at least 20 days prior to the date specified in such notice on which any action is to be taken. 8. Reservation of Stock, etc. Issuable on Exercise of Warrant. The Company will at all times reserve and keep available, solely for issuance and delivery on the exercise of this Warrant, all shares of Common Stock from time to time issuable on the exercise of this Warrant. 9. Exchange of Warrant. On surrender for exchange of this Warrant, properly endorsed and in compliance with the restrictions on transfer set forth in the legend on the face of this Warrant, to the Company, the Company at its expense will issue and deliver to or on the order of the holder thereof a new Warrant of like tenor, in the name of such holder or as such holder (on payment by such holder of any applicable transfer taxes) may direct, calling in the aggregate on the face or faces thereof for the number of shares of Common Stock called for on the face of the Warrant so surrendered. 10. Replacement of Warrant. On receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of any such loss, theft or destruction of this Warrant, on delivery of an indemnity agreement or security reasonably satisfactory in form and amount to the Company or, in the case of any such mutilation, on surrender and cancellation of this Warrant, the Company at its expense will execute and deliver, in lieu thereof, a new Warrant of like tenor. 11. Remedies. The Company stipulates that the remedies at law of the holder of this Warrant in the event of any default or threatened default by the Company in the performance of or compliance with any of the terms of this Warrant are not and will not be adequate, and that such terms may be specifically enforced by a decree for the specific performance of any agreement contained herein or by an injunction against a violation of any of the terms hereof or otherwise. 12. Negotiability, etc. This Warrant is issued upon the following terms, to all of which each holder or owner hereof by the taking hereof consents and agrees: (a) title to this Warrant may be transferred by endorsement (by the holder hereof executing the form of assignment at the end hereof) and delivery in the same manner as in the case of a negotiable instrument transferable by endorsement and delivery. (b) Any person in possession of this Warrant properly endorsed is authorized to represent COMMON STOCK PURCHASE WARRANT - Page 5 himself as absolute owner hereof and is empowered to transfer absolute title hereto by endorsement and delivery hereof to a bona fide purchaser hereof for value; each prior taker or owner waives and renounces all of his equities or rights in this Warrant in favor of each such bona fide purchaser, and each such bona fide purchaser shall acquire absolute title hereto and to all rights represented hereby; (c) until this Warrant is transferred on the books of the Company, the Company may treat the registered holder hereof as the absolute owner hereof for all purposes, notwithstanding any notice to the contrary; and (d) notwithstanding the foregoing, this Warrant may not be sold, transferred or assigned except pursuant to an effective registration statement under the Securities Act of 1933, as amended or, pursuant to an applicable exemption therefrom. 13. Notices, etc. All notices and other communications from the Company to the holder of this Warrant shall be mailed by first class registered or certified mail, postage prepaid, at such address as may have been furnished to the Company in writing by such holder or, until any such holder furnishes to the Company an address, then to, and at the address of, the last holder of this Warrant who has so furnished an address to the Company. 14. Miscellaneous. This Warrant and any term hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought. This Warrant shall be construed and enforced in accordance with and governed by the internal laws of the State of Oklahoma. The headings in this Warrant are for purposes of reference only, and shall not limit or otherwise affect any of the terms hereof. This Warrant is being executed as an instrument under seal. The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provision. [Signature Page Follows] COMMON STOCK PURCHASE WARRANT - Page 6 DATED as of December 29, 1997. SILVERADO FOODS, INC. By: /s/ TIM BRUER ----------------------- Name: Tim Bruer --------------------- Title: Chief Executive Officer -------------------- Attest: By: /s/ DORVIN D. LIVELY --------------------------- Secretary COMMON STOCK PURCHASE WARRANT - Page 7 EX-23 9 CONSENT OF ARTHUR ANDERSEN LLP EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included (or incorporated by reference) in this Form 10-K, into the Company's previously filed Registration Statement File No. 333-17127, Registration Statement File No. 33-80157 and Registration Statement File No. 33- 80159. ARTHUR ANDERSEN LLP Tulsa, Oklahoma April 10, 1998 EX-27 10 FINANCIAL DATA SCHEDULE
5 12-MOS 12-MOS DEC-31-1997 DEC-31-1996 JAN-01-1997 JAN-01-1996 DEC-31-1997 DEC-31-1996 56,359 164,118 0 0 2,689,893 4,605,632 0 0 1,204,321 5,974,719 4,315,642 11,304,841 8,318,264 13,100,850 1,231,776 1,271,270 20,908,198 37,775,942 22,839,582 19,606,314 0 0 0 0 0 0 117,018 72,583 (7,449,455) 1,067,216 20,908,198 37,775,942 23,890,141 24,524,007 23,890,141 24,524,007 19,492,693 19,085,864 32,426,724 28,703,445 195,966 (7,376) 0 0 3,089,298 957,975 (11,821,847) (5,130,037) 0 0 (11,821,847) (5,130,037) (6,679,818) (3,328,963) 0 0 0 0 (18,501,664) (7,459,000) (1.73) (1.17) (2.12) (1.17)
-----END PRIVACY-ENHANCED MESSAGE-----