ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
“FORWARD-LOOKING” INFORMATION
This report on Form 10-QSB contains certain “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934. Generally, the words “anticipates,” “expects,” “believes,” “intends,” “could,” “may,” and similar expressions identify forward looking statements. Forward-looking statements involve risks and uncertainties. We caution you that while we believe any forward-looking statement are reasonable and made in good faith, expectations almost always vary from actual results, and the differences between our expectations and actual results may be significant.
The following discussion and analysis of our results of operations and our financial condition should be read in conjunction with the information set forth in the financial statements and notes thereto included elsewhere in this report.
MANAGEMENT’S DISCSSION AND ANALYSIS OR PLAN OF OPERATIONS
Results of Operations
Sales for the three months ended March 31, 2001 increased approximately 69.4% to $442,237 from $261,043 for the three months ended March 31, 2000. The increase in sales is attributable primarily to the sale of three products that we introduced after March 31, 2000, which products we believe have broader territorial and commercial appeal than many of our discontinued products.
Cost of goods sold for the three months ended March 31, 2001 was $270,995, approximately 61% of sales, as compared to $227,427, approximately 87% of sales, for the comparable period in fiscal year 2000. We experienced a decrease in cost of goods sold as a percentage of sales for the three months ended March 31, 2001 in connection with the expiration of certain licenses and the discontinuation of our cereal product lines that we offered in the three months ended March 31, 2000. Although we expect our cost of goods sold to increase as we make more diverse products available for sale, we expect cost of goods sold to decrease as a percentage of total sales as our sales volume for particular product lines grows.
Gross profit on sales for the three months ended March 31, 2001 was $171,242, an increase of 409% as compared to gross profit of $33,616 for the three months ended March 31, 2000. The increase in gross profit is attributable to the expiration of certain licenses, the discontinuation of our cereal products in fiscal year 2000 that were sold primarily in selected regions associated with the athlete or sports entity, and the introduction of three new products after March 31, 2000 that we believe have broader territorial appeal and stronger gross profit margins than many of our former products.
For the three months ended March 31, 2001, as compared to the three months ended March 31, 2000, operating expenses decreased to $435,148 from $912,229, which represents a 52% decrease in operation expenses, and which represents, as compared to the three months ended March 31, 2000, a decrease to 98% of sales from 349% of sales. The decrease in our operating expenses is attributable to a decrease in selling expenses, associated with the discontinuation of several product lines, to $85,677 for the three months ended March 31, 2001 from $653,518 during the comparable period in fiscal year 2000, offset by an increase in general and administrative expenses to $349,471 from $258,711. Operating expenses are expected to increase as new product lines are created and as more products are sold; however, operating expenses are expected to decrease as a percentage of total sales as our sales volume grows for a particular product line.
For the three months ended March 31, 2001, we operated at a net loss of $295,453, or a loss of $.02 per share basic, as compared to a net loss of $1,222,191, or a loss of $.010 per share basic, for the three months ended March 31, 2000. The decrease in net loss is mainly due to a decrease in interest expense and financing costs. Included in the net loss of $295,453 for the three months ended March 31, 2001 are several non-cash charges to income related to interest expense and financing costs aggregating approximately $17,000 as compared to approximatelly $358,000 for the three months ended March 31, 2000. There is no assurance that additional warrants or other securities will not be issued, or that additional charges will not be incurred for future transactions. We anticipate the continuance of these types of charges against earnings when we make additional licensing transactions with celebrities and celebrity athletes or when we enter service or financing agreements.
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In fiscal year 2000, we discontinued ten cereal products in connection with the expiration of several licenses for products that we sold primarily in selected regions associated with the athlete or sports entity, and we have focused our efforts on a smaller number of products that we believe have broader territorial appeal. While the addition of new product lines may also create liquidity issues and demands on our limited resources, it is anticipated that our focus on a smaller number of products in connection with the expiration of certain licenses and discontinuation of certain products, may have a favorable impact on income and liquidity.
Our food sales business is not seasonal in nature. Inflation is not deemed to be a factor in our operations.
Financial Condition or Liquidity and Capital Resources
To date, we have funded our operations through a line of credit, bank borrowings, and borrowings from, and issuances of warrants and sales of securities to, stockholders, and from operating revenues. Our inability to obtain sufficient credit and capital financing has limited our operations and growth from inception.
In March 2000, we entered into an agreement pursuant to which certain investors agreed to purchase an aggregate of $1,000,000 principal amount of 0% convertible debentures due March 13, 2005 and warrants to purchase 2,500,000 shares of our common stock. We received gross proceeds of $1,000,000 from the transaction. The holders of the convertible debentures were entitled to convert the debentures into shares of common stock at a conversion price of $.40 per share. The warrants are exercisable before March 13, 2005 at a purchase price of $.75 per share. In October 2000, we entered into an agreement for the sale of $1,500,000 principal amount of 4% convertible debentures pursuant to which the outstanding principal amount of the 0% convertible debentures were surrendered.
In October 2000, we entered into an agreement pursuant to which certain investors agreed to purchase an aggregate of $1,500,000 principal amount of 4% convertible debentures due on August 7, 2001 and warrants to purchase 250,000 shares of common stock. The principal amount of the 4% convertible debentures of $1,500,000, consists of principal in the amount of $500,000 and the surrender of outstanding 0% convertible debentures with a principal amount of $1,000,000 issued in March 2000. The 4% convertible debentures are due in August 2001 with a 5% premium on the principal and the accrued unpaid interest. To date, we have not paid any accrued interest in cash. The investors have the right to convert the interest into shares of common stock based on the average of the 5 lowest closing bid prices of the common stock over a 22 trading day period immediately prior to the interest payment date. The warrants are exercisable before November 7, 2003 at a purchase price per share of $0.0588. We agreed to enter into an equity line of credit type of transaction within 10 days of this transaction. If we are unable to pay the amounts due on the maturity date but we can draw down on the equity line of credit, we are to draw down the maximum amount each draw down period to pay the investors the full amount due. On or after the maturity date, the investors may convert the 4% convertible debentures into shares of common stock if a registration statement for the equity line of credit is not effective on the maturity date or if we do not draw down the maximum amount permitted each month under the equity line under an effective equity line of credit registration statement. The conversion price shall equal the lesser of $0.054 or 85% of the average of the 5 lowest closing bid prices during the 22 trading days preceding the applicable conversion date. At the investors’ election, we shall redeem the 4% convertible debentures, including interest and a redemption premium of 30%, using up to 50% of the net proceeds received pursuant to the equity line of credit and any other equity financing permitted under the agreement, and all proceeds received in an equity financing not permitted under the future financing restrictions. At the closing of the transaction, we received gross proceeds of $500,000, less payment to the escrow agent of $10,000 for the investors’ legal, administrative and escrow costs, and less payment of a 10% placement agent fee. We also issued to the placement agent 75,000 shares of restricted common stock and a warrant to purchase 100,000 shares of common stock as part of the placement agent fee. The warrants are exercisable before November 7, 2003 at a purchase price per share of $0.0588.
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In October 2000, we entered into an agreement for the future issuance and purchase of shares of our common stock which establishes what is sometimes termed an equity line of credit or an equity drawdown facility. In general, the drawdown facility operates as follows: the investor has committed to provide us with up to $5 million as we request it over a 24 month period, in return for shares of common stock we issue to the investor. Subject to a maximum of 16 draws, once every 29 trading days, we may request a draw of up to $5 million of that money, however, no single draw can exceed $5 million. We must wait at least 7 trading days after each 22 trading day drawdown period before requesting another drawdown. The maximum amount we actually can draw down upon each request will be determined by 4.5% of the volume-weighted average daily price of our common stock for the 3 month period prior to our request and the total trading volume for the 3 months prior to our request. Each draw down must be for at least $100,000. The number of shares registered under the registration statement for the resale of the common stock upon each drawdown may limit the amount of money we receive under the common stock purchase agreement. Moreover, the funds we may receive could be further limited by a provision of the common stock purchase agreement that prevents us from issuing shares to the investor to the extent the investor would beneficially own more than 9.9% of our then outstanding common stock. At the end of a 22-day trading period following the drawdown request, the final drawdown amount is determined based on the volume-weighted average stock price during that 22-day period. We then use the formulas contained in the common stock purchase agreement to determine the number of shares we will issue to the investor in return for that money. The per share dollar amount the investor pays for our common stock for each drawdown includes a 17.5% discount to the average daily market price of our common stock for the 22-day period after our drawdown request, weighted by trading volume. We will receive the amount of the drawdown less an escrow agent fee equal to $1,500 per drawdown and less a 10% placement fee. In lieu of making a commitment to the investor to draw a minimum aggregate amount, on October 31, 2000, we issued to the investor a stock purchase warrant to purchase up to 500,000 shares of our common stock and we also agreed to issue additional warrants to purchase a number of shares equal to 50% of the shares purchased by the investor on the settlement date of each drawdown. The warrants to purchase 500,000 shares of common stock have an exercise price of $0.0636 and expire on October 31, 2003. The additional warrants issuable at each settlement date will be exercisable for 35 calendar days and have an exercise price equal to the weighted average of the purchase prices of the common stock during the applicable settlement period. At the closing we paid the escrow agent $10,000 for the investor’s legal, administrative and escrow costs. We are in the process of seeking effectiveness of a registration statement. Until an effective registration statement is in place, we cannot use and will not receive any funds from the equity line.
We believe that the funds from the 4% convertible debentures, in conjunction with revenues from our operations, will be sufficient to fund our operations for the next six months, subject to our ability to resolve the repayments due on maturity of existing obligations, including the 4% convertible debentures with a principal amount of $1.5 million which mature on August 7, 2001. The $5 million equity line of credit may be sufficient to fund our operations for the next twelve to twenty four months, depending upon our ability to draw down on the equity line, and if we are able to draw down on a substantial portion of the $5 million equity line of credit to fund our operations as well as to repay the 4% convertible debentures with a principal amount of $1.5 million, if the debentures are not converted into equity.
We believe that our future growth is dependent on the degree of success of current operations in generating revenues, borrowings under our current credit facility, the ability to repay existing debts maturing in the short term which we may be unable to repay if we are unable to draw down on a substantial portion of the 4% million equity line of credit, and the ability to obtain additional credit facilities, although there can be no assurance that we will be able to obtain any additional financing that we may require.
The auditors’ report to our financial statements for the year ended December 31, 2000 cites factors that raise substantial doubt about our ability to continue as a going concern. The factors are that we have incurred substantial operating losses since inception of operations and as at December 31, 2000 reflect deficiencies in working capital and stockholders’ equity. The financial statements do not include any adjustments that might result from the outcome of these uncertainties.
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PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
On March 2001, we granted Jason Bauer, pursuant to an amended employment agreement, effective April 12, 2001, to serve as President and Chief Executive Officer, 5-year options to purchase up to 1,500,000 shares of our common stock, proportioned to vest only after we achieve certain corporate milestones. The options are exercisable at $.03025 per share. These options are cumulative and are subject to anti-dilution rights. If any milestones are achieved in the same year, all such options shall vest at the time such milestone is achieved.
ITEM 5. OTHER INFORMATION
Voting Agreement
Jason Bauer and Peter Zorich were parties to a certain voting agreement which provided that each of Bauer and Zorich was to vote his shares for the election of the other as a director of Famous Fixins among other provisions. In connection with Zorich's resignation as an officer and director in October 2000, Zorich agreed to waive the terms of the voting agreement that required Bauer to vote his shares to elect Zorich as a director and as Executive Vice President of Famous Fixins. They also agreed not to offer to sell, sell, transfer, assign, hypothecate, pledge or otherwise dispose of any beneficial interest in their voting shares except subject to the terms of the voting agreement, unless prior written consent was obtained from the other party that such shares shall not be subject to the voting agreement or unless the shares were sold to an independent third party in an arms'-length transaction for fair market value. The voting agreement was terminated in its entirety in March 2001.
Employment Agreement
In March 2001, we entered into an agreement with Jason Bauer amending his employment agreement, effective as of April 12, 2001, for a term of five years ending in April 2006. The agreement provides for, among other things, an annual salary of $175,000, with annual adjustments equal to the greater of $10,000 or cost-of-living adjustments tied to the Consumer Price Index.
Beginning in the second year of the employment term, his base annual salary is to increase by an amount equal to one percent of our earnings before interest, taxes, depreciation and amortization in the most recent fiscal year. He is also entitled to additional compensation equal to one percent of gross sales.
Under the March 2001 agreement, he was granted options to purchase 1,500,000 shares of our common stock. The exercise price for the options is $.03025 per share, based on 110% of the trading price of $0.0275 of the common stock on March 23, 2001. The options vest only after we achieve certain corporate milestones as follows:
| | | o | options to purchase 1,000,000 shares shall vest immediately upon the first to occur of Famous Fixins obtaining two or more new celebrity, entity, athlete or company licenses or new products, since January 1, 2001, or upon the occurrence of a fiscal year in which Famous Fixins’s revenues exceed $3,000,000; and |
| | | o | additional options to purchase 500,000 additional shares shall vest immediately upon the first to occur of Famous Fixins obtaining a further two or more new celebrity, entity, athlete or company licenses or new products or upon the occurrence of a fiscal year in which Famous Fixins’s revenues exceed $3,500,000. |
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These options are cumulative and are subject to anti-dilution rights. If any of these milestones are achieved in the same year, all of the options vest at the time the milestones are achieved.
He is also to receive an annual performance bonus equal to up to fifty percent of his base salary, or such other amount as the Board of Directors may determine. He is also entitled to:
| | | o | death benefits of $100,000; |
| | | o | medical and dental insurance; |
| | | o | six weeks vacation; |
| | | o | a fifteen year term life insurance policy with a face amount of benefit of $1,000,000 and a beneficiary as designated by him; |
| | | o | an automobile for his exclusive use; |
| | | o | reimbursement for reasonable travel and other business related expenses; and |
| | | o | other bonuses to be determined by the Board of Directors. |
If we undergo a change of control, he is to receive a golden parachute payment equal to 299% of his base salary, and he has the right to terminate his employment agreement. A change of control refers to any of the following situations:
| | | o | a change in our ownership or management that would be required to be reported in response to certain provisions of the Securities Exchange Act of 1934; |
| | | o | an acquisition by a person or entity of 25% or more of our common stock or our then outstanding voting securities; |
| | | o | a change in a majority of the current Board of Directors, other than in connection with an actual or threatened proxy contest; |
| | | o | completion of a reorganization, merger, consolidation or sale of a majority of our assets; or |
| | | o | the approval by our stockholders of our complete liquidation or dissolution. |
Licensing Agreement
We entered into a licensing agreement dated as of March 22, 2001 with Olympia Dukakis and T. Marzetti Company pursuant to which, as of April 1, 2001, Marzetti has the exclusive right to use the name, photograph, depiction, characterization, likeness, voice, image, and biographical data of Dukakis and the trademarks, logos, copyrights and all other authorized material owned or controlled by Ms. Dukakis in connection with the development, manufacture, distribution, promotion and sale of Greek specialty food products. The original license agreement between Famous Fixins and Olympia Dukakis, dated March 1, 1997, whereby we were the exclusive licensee of such rights, is terminated. As part of the March 2001 licensing agreement, we assigned rights related to Olympia Dukakis' Greek Salad Dressings under the original license agreement to Marzetti. Under the March 2001 licensing agreement, Marzetti was obligated to pay us an amount equal to our cost for inventory of the licensed products on April 1, 2001, plus a $6,000 deposit we had paid Marzetti to store such inventory. Under the March 2001 licensing agreement, Marzetti is to pay us an amount equal to two percent of all monies Marzetti receives as revenues from the sale of the licensed products. Either Dukakis or Marzetti may terminate the March 2001 licensing agreement upon forty-five days written notice under certain conditions. We have the ability to assign our interest to the March 2001 licensing agreement under certain circumstances.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
The following exhibits are filed with this report:
| Exhibit Number | Description of Exhibit |
| Exhibit 10.1 | Amended Employment Agreement of Jason Bauer (Incorporated by reference to Exhibit 10.19 of Form 10-KSB filed on March 30, 2001). |
| Exhibit 10.2 | Licensing Agreement between Famous Fixins, Inc., Olympia Dukakis and T. Marzetti Company |
| Exhibit 11 | Statement Concerning Computation of Per Share Earnings is hereby incorporated by reference to “Financial Statements” of Part I - Financial Information, Item 1 – Financial Statements, contained in this Form 10-QSB. |
(b) Reports on Form 8-K.
None.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Dated: May 14, 2001 | By: /s/ Jason Bauer
Jason Bauer
Chief Executive Officer and President |
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