FORM 10-QSB
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended September 30, 2000
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ________ to ___________.
Commission file number 0-27219
FAMOUS FIXINS, INC.
(Exact name of registrant as specified in its charter)
New York 133865655
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
250 West 57th Street, Suite 1112, New York, New York 10107
(Address of principal executive offices)
(212) 245-7773
(Issuer's telephone number)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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 [ ]
As of October 19, 2000, the issuer had 13,866,264 shares of common stock, par
value $.001 per share, outstanding.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
1
FAMOUS FIXINS, INC.
FORM 10-QSB
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
TABLE OF CONTENTS
Page No.
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS FOR THE QUARTER ENDED SEPTEMBER 30, 2000 3
BALANCE SHEETS AS OF SEPTEMBER 30, 2000 AND DECEMBER 31, 1999 3
INTERIM STATEMENTS OF OPERATIONS FOR THE THREE MONTHS AND 5
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
INTERIM STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS 6
ENDED SEPTEMBER 30, 2000 AND 1999
INTERIM STATEMENT OF STOCKHOLDERS' EQUITY FOR THE NINE 8
MONTHS ENDED SEPTEMBER 30, 2000
NOTES TO INTERIM FINANCIAL STATEMENTS FOR THE NINE MONTHS 9
ENDED SEPTEMBER 30, 2000
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 14
AND RESULTS OF OPERATIONS
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 20
ITEM 2. CHANGES IN SECURITIES 20
ITEM 5. OTHER INFORMATION 31
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 31
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS FOR THE QUARTER ENDED SEPTEMBER 30, 2000
FORM 10-QSB
FINANCIAL STATEMENTS
FAMOUS FIXINS, INC.
BALANCE SHEETS
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2000 1999
---------- ----------
A S S E T S
-----------
CURRENT ASSETS
- --------------
Cash and cash equivalents $ 87,641 $ 475,325
Investments in marketable equity trading securities, net 47,459 101,961
Accounts receivable, net 197,217 176,475
Merchandise inventory 487,382 69,542
Unused barter credits - current portion 136,112 -
Prepaid expenses 78,935 59,081
Stock subscriptions receivable (all collected by April, 2000) - 47,500
---------- ----------
TOTAL CURRENT ASSETS $1,034,746 929,884
---------- ----------
PLANT AND EQUIPMENT
- -------------------
Furniture and fixtures 15,804 15,804
Machinery and equipment 34,077 25,576
---------- ----------
49,881 41,380
Less: Accumulated depreciation 14,605 8,089
---------- ----------
NET PLANT AND EQUIPMENT 35,276 33,291
---------- ----------
OTHER ASSETS
- ------------
Deferred debenture issuance costs, net 89,755 42,500
Unused barter credits - noncurrent portion 136,112
Security deposits 6,460 6,482
---------- ----------
TOTAL OTHER ASSETS 232,327 48,982
---------- ----------
$1,302,349 $1,012,157
========== ==========
See accompanying notes to financial statements.
3
FAMOUS FIXINS, INC.
BALANCE SHEETS (CONTINUED)
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2000 1999
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
CURRENT LIABILITIES
- -------------------
Accounts payable and accrued expenses $ 289,370 $ 508,341
Due to customers 63,482 190,038
Taxes payable - other than on income 8,707 9,544
Income taxes payable 625 625
----------- -----------
TOTAL CURRENT LIABILITIES 362,184 708,548
----------- -----------
LONG-TERM LIABILITIES
- ---------------------
5% convertible debentures, due October, 2002 (principal
amount: 2000 - $38,975; 1999 - $450,000) 37,223 389,586
0% convertible debentures, due March, 2005 (principal
amount - $1,000,000) 403,750 -
Deferred rent 8,199 -
----------- -----------
TOTAL LONG-TERM LIABILITIES 449,172 389,586
----------- -----------
STOCKHOLDERS' EQUITY (DEFICIT)
- ------------------------------
Common stock, $.001 par value per share:
Authorized 25,000,000 shares
Issued and outstanding
13,866,264 shares in 2000; 10,462,624 shares in 1999 13,865 10,462
Additional paid-in capital 3,629,910 1,557,337
Accumulated deficit (3,102,782) (1,603,776)
----------- -----------
540,993 (35,977)
Less: Unused advertising barter credits issued in exchange
for common stock (50,000) (50,000)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) 490,993 (85,977)
----------- -----------
$ 1,302,349 $ 1,012,157
=========== ===========
See accompanying notes to financial statements.
4
FAMOUS FIXINS, INC.
INTERIM STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
NET SALES $ 337,687 $ 981,673 $ 1,724,617 $ 2,178,859
------------ ------------ ------------ ------------
COST OF GOODS SOLD
- ------------------
Merchandise inventory at beginning of period 417,714 71,545 69,542 27,420
Purchases 248,326 530,874 1,268,962 1,194,682
Other direct costs 43,770 26,107 169,374 95,241
------------ ------------ ------------ ------------
709,810 628,526 1,507,878 1,317,343
Less: Merchandise inventory at end of period 487,382 79,868 487,382 79,868
------------ ------------ ------------ ------------
TOTAL COST OF GOODS SOLD 222,428 548,658 1,020,496 1,237,475
------------ ------------ ------------ ------------
GROSS PROFIT 115,259 433,015 704,121 941,384
------------ ------------ ------------ ------------
OPERATING EXPENSES
- ------------------
Selling expenses 126,897 234,566 951,859 663,764
General and administrative expenses 233,184 157,386 792,179 380,489
Interest expense, net 55,559 1,815 458,634 5,217
------------ ------------ ------------ ------------
TOTAL OPERATING EXPENSES 415,640 393,767 2,202,672 1,049,470
------------ ------------ ------------ ------------
OPERATING INCOME (LOSS) BEFORE
PROVISION FOR INCOME TAXES (300,381) 39,248 (1,498,551) (108,086)
PROVISION FOR INCOME TAXES - - 455 1,334
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ (300,381) $ 39,248 $ (1,499,006) $ (109,420)
============ ============ ============ ============
Net income (loss) per common share, basic $ (0.022) $ 0.004 $ (0.117) $ (0.011)
Net income (loss) per common share,
assuming full dilution $ (0.022) $ 0.003 $ (0.117) $ (0.011)
Weighted average number of common
shares outstanding,
basic 13,458,194 10,462,624 12,750,024 10,042,183
assuming full dilution 13,458,194 11,477,963 12,750,024 10,042,183
See accompanying notes to financial statements.
5
FAMOUS FIXINS, INC.
INTERIM STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
2000 1999
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,499,006) $ (109,420)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Noncash items:
Depreciation 6,516 2,362
Amortization 102,885 -
Deferred rent expense 8,199 -
Interest expense paid by issuance of common stock 9,638 -
Component of interest expense attributable to beneficial
conversion feature of debentures issued 325,000 -
Value of common stock issued for services received by
the Company 212,924 121,826
Value of warrants issued for services received by the Company 439,661 222,131
Unrealized loss on investments in marketable equity
trading securities 7,502 -
Unused barter credits (272,224) -
(Increase) decrease in assets:
Accounts receivable (20,742) (627,387)
Merchandise inventory (417,840) (52,448)
Prepaid expenses (19,854) (24,307)
Security deposits 22
Increase (decrease) in liabilities:
Accounts payable and accrued expenses (218,971) 637,983
Due to customers (126,556) -
Taxes payable - other than on income (837) 1,522
----------- -----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (1,463,683) 172,262
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from borrowing against investment in marketable
equity trading securities 47,000 -
Payments for plant and equipment additions (8,501) -
----------- -----------
NET CASH PROVIDED BY INVESTING ACTIVITIES 38,499 -
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of convertible debentures, net 990,000 -
Proceeds from issuance of common stock, net - 287,734
Proceeds of long-term debt from bank - 35,000
Repayments of long-term debt to bank - (36,545)
Proceeds of stock subscriptions receivable 47,500
Repayments of notes payable to related party - (134,303)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,037,500 151,886
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (387,684) 324,148
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 475,325 19,500
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 87,641 $ 343,648
=========== ===========
(CONTINUED)
See accompanying notes to financial statements.
6
FAMOUS FIXINS, INC.
INTERIM STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
2000 1999
----------- -----------
Supplemental information about cash payments is as follows:
Cash payments for interest $ - $ 12,230
Cash payments for income taxes $ 455 $ 625
Supplemental disclosure of noncash financing activities:
Issuance of warrants in connection with convertible debentures
issued by the Company $ 675,000 $ -
Conversion of debentures to common stock $ 423,391 $ -
Common stock subscriptions received for common shares issued $ - $ 53,750
See accompanying notes to financial statements.
7
FAMOUS FIXINS, INC.
INTERIM STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2000
COMMON STOCK ADDITIONAL UNUSED
--------------------- PAID-IN ACCUMULATED ADVERTISING
TOTAL SHARES AMOUNT CAPITAL DEFICIT BARTER CREDITS
----------- ---------- -------- ----------- ----------- --------------
BALANCE (DEFICIT) - JANUARY 1, 2000 $ (85,977) 10,462,624 $ 10,462 $ 1,557,337 $(1,603,776) $ (50,000)
Issuance of common shares on conversion of
convertible debentures, net 423,391 2,903,640 2,903 420,488 - -
Issuance of common shares for services received 212,924 500,000 500 212,424 - -
Issuance of warrants for services received 439,661 - - 439,661 - -
Issuance of warrants and beneficial conversion
feature in connection with
convertible debentures issued 1,000,000 - - 1,000,000 - -
Net loss - Nine months ended September 30, 2000 (1,499,006) - - - (1,499,006) -
----------- ---------- -------- ----------- ----------- --------------
BALANCE (DEFICIT) - SEPTEMBER 30, 2000 $ 490,993 13,866,264 $ 13,865 $ 3,629,910 $(3,102,782) $ (50,000)
=========== ========== ======== =========== =========== ==============
See accompanying notes to financial statements.
8
FAMOUS FIXINS, INC.
NOTES TO INTERIM FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2000
NOTE 1. STATEMENT OF INFORMATION FURNISHED
----------------------------------
The accompanying unaudited interim financial statements have been
prepared in accordance with Form 10-QSB instructions and in the
opinion of management contains all adjustments (consisting of only
normal recurring adjustments) necessary to present fairly the
financial position of Famous Fixins, Inc. as of September 30, 2000,
and the results of operations for the three months and nine months
ended September 30, 2000 and 1999, and the statements of cash flows
for the nine months ended September 30, 2000 and 1999, and the
statement of stockholders' equity for the nine months ended September
30, 2000. These results have been determined on the basis of generally
accepted accounting principles and practices and applied consistently
with those used in the preparation of the Company's 1999 financial
statements.
Certain information and footnote disclosures normally included in
the financial statements presented in accordance with generally
accepted accounting principles have been condensed or omitted. It is
suggested that the accompanying financial statements be read in
conjunction with the financial statements and notes thereto
incorporated by reference in the Company's 1999 financial statements.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
BUSINESS ACTIVITIES OF THE COMPANY
----------------------------------
The Company is a promoter and marketer of celebrity and
athlete licensed consumer products for sale in supermarkets,
other retailers and over the Internet. The Company develops,
markets and sells licensed consumer products based on the diverse
professional, cultural and ethnic backgrounds of various
celebrities. The Company enters into licensing agreements with
high profile athletes and other celebrities and creates consumer
products which include various product lines consisting of
breakfast cereals, salad dressings, candy products and adhesive
bandages endorsed by the licensors. The Company utilizes a
network of consumer brokers to distribute its products throughout
the United States. Third party manufacturers produce the
Company's various consumer products.
In February 2000, the Company received the remaining balance
of $100,000 of an aggregate of $550,000 pursuant to 5%
Convertible Debenture and Warrants Purchase Agreements.
Subsequently, the Company issued 2,903,640 shares of its common
stock upon conversion of $511,025 principal amount of such
debentures (and unpaid interest of $9,638), resulting in $38,975
principal amount outstanding at September 30, 2000.
9
FAMOUS FIXINS, INC.
NOTES TO INTERIM FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2000
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
------------------------------------------
BUSINESS ACTIVITIES OF THE COMPANY (CONTINUED)
----------------------------------
In February 2000, the Company received $1,000,000 proceeds
under a 0% Convertible Debenture and Warrant Purchase Agreement.
Pursuant to the Agreement, the investors agreed to purchase, for
$1,000,000, an aggregate of $1,000,000 principal amount of
debentures due March 2005, currently convertible into common
stock at a conversion price of $.40 per share (market value of
the Company's common stock was $.74 on the date of purchase), and
warrants to purchase 2,500,000 shares of the Company's common
stock exercisable between March 2000 and March 2005 at an
exercise price of $.75 per share.
The beneficial conversion feature of the $1,000,000
debentures and the fair market value of the warrants (both of
which are accounted for as additional paid-in capital) is limited
to the $1,000,000 proceeds received. The Company allocated
$325,000 to the beneficial conversion feature, all of which is
accounted for as a component of current interest expense. The
remaining $675,000 is accounted for as a bond discount and is
reflected as a reduction of the carrying amount of the
debentures. The discount is amortized as a component of interest
expense over the term of the debentures.
In February and March 2000, the Company issued an aggregate
of 500,000 shares of its common stock and 500,000 warrants to
purchase common stock to two consultants in connection with
services rendered to the Company in the amount of $327,000. Of
such amount, $212,924 is attributable to the common stock issued
and $114,076 is attributable to the warrants.
In March, 2000, the Company entered into an agreement to
sell certain merchandise products in exchange for a $457,104
trade credit to purchase future television, radio, other
advertising mediums and various services such as warehousing,
hotel rooms, airline tickets and office equipment on a barter
basis over a maximum period of four years. In April 2000,
pursuant to the agreement, the Company delivered merchandise with
an estimated fair value of $302,472 to the barter company in
connection with the aforementioned trade credit commitment. The
Company has commenced a lawsuit in October 2000 against the
barter company in which, among other claims, it asserts that the
barter company failed to establish the $457,104 trade credit in
favor of the Company. The Company is awaiting an answer to its
complaint. The amount due from the barter company as at September
30, 2000 is carried on the Company's accounts at the estimated
fair value of the transferred merchandise ($302,472) less an
allowance ($30,248) for estimated unrecoverable amounts,
resulting in a net balance due of $272,224. The balance sheet as
at September 30, 2000 reflects $136,112 of the fair value of the
barter credit as a current asset (which is intended to be used
within one year of the balance sheet date) and the remaining
balance is reported under the category, "other assets".
The Company accounts for warrants issued to purchase common
stock in connection with services rendered to the Company using
the fair value method prescribed in SFAS No. 123 "Accounting for
Stock-Based Compensation". Stock-based compensation cost charged
to operations for the nine months ended September 30, 2000 was
$439,661, including the $114,076 of services described above.
10
FAMOUS FIXINS, INC.
NOTES TO INTERIM FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2000
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
------------------------------------------
USE OF ESTIMATES IN PREPARING FINANCIAL STATEMENTS
--------------------------------------------------
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make certain 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.
MERCHANDISE INVENTORY
---------------------
Merchandise inventory is stated at the lower of cost or
market value on a first-in, first-out basis.
PLANT AND EQUIPMENT
-------------------
Plant and equipment are stated at cost, less accumulated
depreciation. The cost of major improvements and betterments to
existing plant and equipment are capitalized, while maintenance
and repairs are charged to expense when incurred. Upon retirement
or other disposal of plant and equipment, the profit realized or
loss sustained on such transaction is reflected in income.
Depreciation is computed on the cost of plant and equipment on
the straight-line method, based upon the estimated useful lives
of the assets.
EARNINGS PER SHARE
------------------
In accordance with the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share",
basic earnings per share is computed by dividing net income or
loss by the number of weighted-average common shares outstanding
during the period. Earnings per share, assuming dilution, is
computed by dividing net income or loss by the number of
weighted-average common shares and common stock equivalents
outstanding during the period.
No effect has been given to the conversion of warrants and
debentures to common stock for the nine months ended September
30, 2000 and 1999 inasmuch as such conversion would be
anti-dilutive.
11
FAMOUS FIXINS, INC.
NOTES TO INTERIM FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2000
NOTE 3. GOING CONCERN
-------------
The accompanying financial statements have been prepared assuming
that the Company will continue as a going concern. The Company is
dependent upon obtaining financing and/or raising capital to continue
operations. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty. It is
management's plan to raise additional funds to continue operations.
NOTE 4. SUBSEQUENT EVENTS
-----------------
A. 4% CONVERTIBLE DEBENTURES
-------------------------
On October 27, 2000, the Company entered into an agreement
with three investors for the sale of 4% convertible debentures
and warrants for 250,000 shares of the Company's common stock.
Under the terms of the agreement, the principal amount of the 4%
debentures is $1,500,000, consisting of a new debenture of
$500,000 and an amendment of the outstanding 0% $1,000,000
principal amount of convertible debentures dated March 7, 2000.
The 4% $1,500,000 convertible debentures are due in July 2001,
with a 5% premium on principal plus accrued interest. Interest is
payable semi-annually, commencing December 1, 2000 and is
convertible into common stock at the investors option. The
250,000 warrants are exercisable before October 27, 2003.
On or after the July 2001 maturity date, the holders of the
4% convertible debentures may convert the debentures into common
shares under certain conditions, the maximum shares to be
received by any one debenture holder being no greater than 9.9%
of the then outstanding common stock, including other shares held
by the debenture holder. Among other provisions of the agreement,
including default, merger and common stock sale restrictions by
the Company, the investors may elect to cause the Company to
redeem the debentures including interest and a 30% redemption
premium, from up to 50% of the net proceeds received under an
equity drawdown facility (or other permitted financing) described
in item B, below.
The Company received net cash proceeds of $440,000 in
November, 2000, consisting of 90% of the proceeds of $500,000
less $10,000 for the investors legal, administrative and escrow
costs.
The Company also issued as part of the placement fee, 75,000
shares of restricted common stock and a warrant to purchase
100,000 shares of common stock.
12
FAMOUS FIXINS, INC.
NOTES TO INTERIM FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2000
NOTE 4. SUBSEQUENT EVENTS (CONTINUED)
-----------------
B. EQUITY DRAWDOWN FACILITY
------------------------
On October 31, 2000, the Company entered into an equity line
of credit type of agreement for the future issuance and sale of
shares of its common stock pursuant to which the investor has
committed to provide up to $5 million at the Company's request
over a 24 month period. The Company may request, at minimum
intervals of 29 trading days each, a minimum drawdown of $100,000
and a maximum amount based on 4.5% of the volume-weighted average
daily price of the Company's common stock for the 3 month period
prior to the drawdown request and the total trading volume for
the 3 months prior to the request. Such amounts as may be
received may be limited by a provision that prevents the Company
from issuing shares to the investor to the extent that the
investor would beneficially own more than 9.9% of the Company's
then outstanding common stock. The common stock issuable upon
each drawdown is to be included in a registration statement to be
filed for the resale of the common stock. Until the registration
statement is effective, the Company cannot use or receive any
funds from the equity line.
The per share amount to be received for the Company's common
stock for each drawdown shall include a 17.5% discount on the
market price of the shares (as defined) and the proceeds shall be
further reduced by certain charges and a 10% placement fee. In
connection with this agreement, the Company issued a stock
purchase warrant for up to 500,000 shares of common stock and the
Company has agreed to issue additional warrants for shares equal
to 50% of the shares purchased by the investor on each drawdown.
There are various other conditions to the agreement, including
the investor's right to terminate the agreement under specified
events. At the closing, the Company paid $10,000 for the
investor's legal and other expenses.
13
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
We did not engage in any substantive business activity from approximately
April 6, 1996 to May 28, 1998. On May 28, 1998, we acquired Famous Fixins, Inc.,
a New York corporation ("FFNY"), in a transaction viewed as a reverse
acquisition. FFNY was a promoter and marketer of celebrity endorsed food
products, which commenced business activities in 1995 and began sales operations
in March 25, 1997. Pursuant to the reorganization, the controlling FFNY
shareholders became the controlling shareholders, the officers and the directors
of our company.
The following table sets forth, for the period indicated, the relationship
between total sales and certain expenses and earnings items:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- ------------------------
2000 1999 2000 1999
--------- -------- ----------- ----------
NET SALES $ 337,687 $981,673 $ 1,724,617 $2,178,859
COST OF GOODS SOLD 222,428 548,658 1,020,496 1,237,475
GROSS PROFIT ON SALES 115,259 433,015 704,121 941,384
OPERATING EXPENSES 415,640 393,767 2,202,672 1,049,470
OPERATING INCOME (LOSS) BEFORE
PROVISION FOR INCOME TAXES (300,381) 39,248 (1,498,551) (108,086)
PROVISION FOR INCOME TAXES - - 455 1,334
NET INCOME (LOSS) $(300,381) $39,248 $(1,499,006) $ (109,420)
Sales for the three months and nine months ended September 30, 2000
decreased approximately 66% and 21%, respectively, as compared to the same
period in 1999. The decrease in sales during the three month and nine month
periods resulted from the expiration of several licenses with celebrities for
six cereal products and related merchandise.
14
Cost of goods sold for the three months ended September 30, 2000 was
approximately 66% of sales, as compared to approximately 56% of sales for the
comparable period in 1999. Cost of goods sold for the nine months ended
September 30, 2000 was approximately 59% of sales, as compared to approximately
57% of sales for the comparable period in 1999. We offered five more
products in the three months ended September 30, 2000 and ten more
products in the nine months ended September 30, 2000, than in the three and nine
months ended September 30, 1999. We experienced an increase in cost of goods
sold as a percentage of sales for the three months and nine months ended
September 30, 2000 in connection with the introduction of new products, and the
expiration of certain licenses and the discontinuation of six cereal
product lines during the nine months ended September 30, 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 September 30, 2000 was
$115,259, a decrease of 73% as compared to the three months ended September 30,
1999 of $433,015. Gross profit on sales for the nine months ended September 30,
2000 was $704,121, a decrease of 25% as compared to the nine months ended
September 30, 1999 of $941,384. The decrease in gross profit is attributable to
the expiration of certain licenses, the discontinuation of six cereal
product lines, and the introduction of ten new products beginning in
January 2000.
For the three months ended September 30, 2000, as compared to the three
months ended September 30, 1999, operating expenses increased to $415,640 from
$393,767, which represents a 6% increase in operation expenses, and which
represents, as compared to the three months ended September 30, 1999, an
increase to 123% of sales from 40% of sales. For the nine months ended September
30, 2000, as compared to the comparable period in 1999, operating expenses
increased to $2,202,672 from $1,049,470, which represents a 110% increase in
operating expenses, and which represents, as compared to the comparable period
in 1999, an increase to 128% of sales from 48% of sales. The increase in our
operating expenses in the three months and nine months ended September 30, 2000
is due mainly to an expansion of our operations, creation of new product lines,
and licensing fees, including the related costs of stock warrants issued, in
connection with new celebrity licenses obtained by us, and to a lesser extent,
an increase in personnel from one full-time employee to three full-time
employees. 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 the three months ended September 30, 2000, we operated at a net loss of
$300,381, or $.022 per share basic and diluted, as compared to net income of
$39,248, or $.004 per share basic and $.003 per share diluted, for the three
months ended September 30, 1999. For the nine months ended September 30, 2000,
we operated at a loss of $1,499,006, or $0.117 per share basic and diluted, as
compared to a net loss of $109,420, or $0.011 per share basic and diluted, for
the nine months ended September 30, 1999, largely due to the related costs of
stock and warrants issued and the issuance of convertible debentures. We
anticipate increases in revenues in the remainder of fiscal year 2000, depending
on the success of six new products launched since May 2000. We may not
experience profitability in fiscal year 2000 because we have discontinued
several products in connection with the expiration of several licenses and
because we expect our cost of goods sold and operating expenses to also
increase significantly in the 2000 fiscal year. While the addition of new
product lines may also create liquidity issues and demands on our limited
resources, it is anticipated that the decreased revenues generated this year,
due to the expiration of certain licenses and discontinuation of certain
products, may not have a favorable impact on income and liquidity.
15
Included in the net loss of $1,499,006 for the nine month period ended
September 30, 2000 are several substantial non-cash charges to income
aggregating approximately $978,000 relating to (a) the issuance of $1,000,000
principal amount of convertible debentures and (b) stock warrants and common
stock shares issued for services rendered. In February 2000, we issued
$1,000,000 principal amount of 0% convertible debentures, which may be converted
into common stock on a current basis, at a conversion price of $.40 per share,
the market value at the date of issuance of the debentures being $.74. The
beneficial conversion feature attributable to the debenture issuance is required
to be recognized in income, currently. We have allocated $325,000 to the
debenture's beneficial conversion feature and such amount is reflected as a
component of current interest expense. The accounts also reflect charges, in the
amount of approximately $653,000 for the nine month period ended September 30,
2000, representing the allocable service costs of outstanding stock and warrants
issued in connection with royalty, employment and other consulting agreements.
There is no assurance that additional warrants or other securities will not be
issued, or that additional charges will not be incurred for similar future
transactions. Our business is to license names of celebrities for consumer
products, and to issue warrants for our common stock to such celebrities as part
of the licensing fee arrangements. In October 2000, we entered into an agreement
which substantially amended several terms of the $1,000,000 principal amount of
convertible debentures issued in February 2000, including the interest rate,
exercise price and the expiration date. Accordingly, 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.
Our food sales business is not seasonal in nature. Inflation is not deemed
to be a factor in our operations.
16
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 operations and growth
from inception.
In October 1999, we entered into agreements pursuant to which certain
investors agreed to purchase an aggregate of $550,000 principal amount of 5%
convertible debentures due October 19, 2002 and 139,152 warrants to purchase
shares of Famous Fixins' common stock. At the initial closing date, we received
gross proceeds of $450,000, and in February 2000, we received the remaining
$100,000 when the registration statement in connection with the resale of the
underlying common stock became effective. The warrants are exercisable between
October 30, 1999 and October 30, 2004 at a purchase price of $.494 per share,
which was 125% of the market price on the closing date. At our option, the
convertible debentures may be exchanged into convertible preferred stock.
Debenture holders have converted debentures into shares of common stock as
summarized below:
- on February 23, 2000, $150,000 in principal into 1,000,000
shares;
- on February 24, 2000, $76,240 in principal and interest into
508,264 shares;
- on March 30, 2000, $127,691 in principal and interest into
302,299 shares;
- on May 25, 2000, $72,042 in principal and interest into 227,620
shares;
- on June 29, 2000, $25,844 in principal and interest into 166,519
shares;
- on July 19, 2000, principal amount of $1,025 and accrued interest
of $37 into 8,676 shares;
- on August 8, 2000, principal amount of $20,000 and accrued
interest of $758 into 156,313 shares; and
- on September 26, 2000, principal amount of $45,000 and accrued
interest of $1,998 into 533,949 shares.
17
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 are 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 pursuant to
which the terms of the 0% convertible debentures were amended.
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 in July 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 a new debenture in the amount of $500,000 and an
amendment of the terms of outstanding 0% convertible debentures with a principal
amount of $1,000,000 issued in March 2000. The 4% convertible debentures are due
in July 2001 with a 5% premium on the principal and the accrued unpaid interest.
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 October 27, 2003 at a purchase price equal to
the average of the closing bid prices for the common stock on the 5 trading days
immediately prior to the closing date. 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 (i) the
average of the 5 lowest closing bid prices of the common stock during the 22
trading days immediately prior to the closing date of this transaction or (ii)
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 October
27, 2003 at a purchase price per share equal to the average of the closing bid
prices for the common stock on the 5 trading days immediately prior to the
closing date. We believe that such sources of funds will be sufficient to fund
our operations for the next nine months.
18
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 common stock purchase warrant gives the
investor an opportunity to purchase shares of our common stock even though we
draw little or no amount of funds under the common stock purchase agreement. The
warrants to purchase 500,000 shares of common stock has an exercise price equal
to 110% of the volume-weighted average share price for the trading day prior to
the date the warrant was issued, and expires October 27, 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. Until an effective registration statement is in
place, we cannot use and will not receive any funds from the equity line.
We believe that our future growth is dependent on the degree of success of
current operations in generating revenues, and borrowings under our current
credit facility, 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, 1999 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, 1999 reflect a deficiency in stockholders' equity. The auditors' report
states that although our management believes that it can achieve profitable
operations in the future and that we can raise adequate capital and financing as
may be required, there can be no assurance that future capital contributions or
financing will be sufficient for Famous Fixins to continue as a going concern or
that we can achieve profitable operations in the future. The financial
statements do not include any adjustments that might result from the outcome of
these uncertainties.
19
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In October 2000, we commenced an action before the New York Supreme Court,
County of New York, against SKR Resources, Inc. alleging breach of contract and
conversion. On or about March 13, 2000, we entered into a contract with SKR
Resources in which we agreed to sell, indemnify, and transfer title to SKR
$457,104 worth of our products, and SKR agreed to establish a trade credit for
our benefit in the amount of $457,104. Additionally, SKR Resources promised to
place advertisements in several specific magazines, key to the launches of
several of our products. In the complaint, we alleged that SKR Resources failed
and neglected to perform the conditions of the contract by failing to establish
the trade credit for $457,104, and that SKR Resources also breached the contract
by not placing ads in several specific magazines. In the complaint, we also
alleged that SKR Resources converted the property by failing to establish a
trade credit in the amount of $457,104. In the proceeding, we seek a judgment
against SKR Resources in the sum of $457,104, together with interest from May
22, 2000, the costs and disbursements of the action, and for such other and
further relief. The complaint has only recently been served and we are awaiting
an answer to the complaint. The lawsuit may or may not be resolved in the near
future. We believe that the allegations we made against SKR Resources have
merit, we presently do not know of any meritious defense to our allegation, and
we expect that we may prevail in the proceeding in whole or in part; however, we
cannot be sure that we will prevail, or that we will recover the relief sought,
in whole or in part, the failure of which may have a material adverse affect on
our future business and operations.
ITEM 2. CHANGES IN SECURITIES
Stock Options to Employee
In October 2000, we granted Rich Seery, an employee of Famous Fixins,
warrants to purchase 160,000 shares of our common stock in a transaction deemed
to be exempted under Section 4(2) of the Securities Act of 1933. The warrants
expire on June 30, 2005 and are exercisable as follows:
- after October 3, 2000, to purchase 10,000 shares at $.10 per share;
- after June 30, 2000, to purchase up to 30,000 shares at $.10 per
share;
- after June 30, 2001, to purchase up to an additional 30,000
shares at a 50% discount to the average closing bid price of
the Company's common stock for the five consecutive business
days ending on and including June 30, 2001;
- after June 30, 2002, to purchase up to an additional 30,000
shares at a 50% discount to the average closing bid price of
the Company's common stock for the five consecutive business
days ending on and including June 30, 2002;
- after June 30, 2003, to purchase up to an additional 30,000
shares at a 50% discount to the average closing bid price of
the Company's common stock for the five consecutive business
days ending on and including June 30, 2003; and
- after June 30, 2004, to purchase up to an additional 30,000
shares at a 50% discount to the average closing bid price of
the Company's common stock for the five consecutive business
days ending on and including June 30, 2004.
If Seery's employment with Famous Fixins is terminated, at any time, for
whatever reason, all unexercised warrants and all rights to such warrants, as of
the date of termination, shall be immediately forfeited. We made a determination
that Seery was a sophisticated investor with enough knowledge and experience in
business to evaluate the risks and merits of the investment.
20
4% Convertible Debentures and Warrants
We entered into agreements, dated as of October 27, 2000, for the sale of
4% convertible debentures and warrants to purchase 250,000 shares of common
stock with Roseworth Group Ltd., Austost Anstalt Schaan and Balmore S.A., in
transactions deemed to be exempt under Section 4(2) of the Securities Act of
1933. We made a determination that the three investors were sophisticated
investors with enough knowledge and experience in business to evaluate the risks
and merits of the investment. We have agreed to file a registration statement
for the resale of the common stock underlying the securities issued under this
transaction.
The principal amount of the 4% convertible debentures is $1,500,000,
consisting of a new debenture in the amount of $500,000 provided by Roseworth
Group, Ltd. and an amendment of the terms of outstanding 0% convertible
debentures with a principal amount of $1,000,000 issued pursuant to the
Convertible Debenture and Warrants Purchase Agreement, dated March 7, 2000, the
same three investors, Roseworth Group Ltd., Austost Anstalt Schaan and Balmore
S.A. The 4% convertible debentures are due in July 2001 with a 5% premium on the
principal and the accrued unpaid interest. We may not pay the principal before
the maturity date without the express written consent of the investors.
Semi-annual interest payments are due and payable on December 1 and June 1 of
each year, commencing with December 1, 2000. 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 October 27, 2003 at a purchase price of
per share equal to the average of the closing bid prices for the common stock on
the 5 trading days immediately prior to the closing date.
We agreed to enter into an equity line of credit type of transaction
arranged by Union Atlantic, L.C. within 10 days of this transaction, which
failure shall constitute an event of default of the convertible debentures. We
entered into a equity line of credit transaction on October 31, 2000, the terms
of which are summarized separately in this report on Form 10-QSB.
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 (i) the average of the 5 lowest closing bid
prices of the common stock during the 22 trading days immediately prior to the
closing date of this transaction or (ii) 85% of the average of the 5 lowest
closing bid prices during the 22 trading days preceding the applicable
conversion date.
The maximum number of shares of common stock that may be received upon the
conversion of the debentures by any one holder is 9.9% of our then-outstanding
common stock after the conversion, including any other shares of common stock
held by the holder.
21
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.
We agreed not to enter any sale of our securities at a discount to the
then-current bid price, other than the equity line of credit, until the earlier
of such date when a registration statement for the debentures is effective for
180 days after the maturity date, or when all of the 4% convertible debentures
have been redeemed. However, we are permitted to sell securities under the
following circumstances:
- pursuant to the exercise of options under an employee benefit
plan approved by our stockholders,
- pursuant to any compensatory plan for a full-time employee or key
consultant,
- in connection with a strategic partnership or other business
transaction, the principal purpose of which is not simply to
raise money,
- in a registered public offering which is underwritten by one or
more established investment banks, except an equity line type
financing, or
- with the prior written approval of a majority in interest of the
investors.
If we seek to enter into such a permitted sale of our securities, the
investors are entitled to match the terms of any such permitted sale. In
addition, each investor has the right to exchange its 4% convertible debentures,
plus accrued and unpaid interest, for the securities issued in any such
permitted sale, based on the terms of such permitted sale.
If we sell common stock or securities exchangeable into common stock,
excluding sales of our securities under the first three permitted circumstances
described above when any principal and interest on the debentures is
outstanding, for less than the per share price equal to the average of the 5
lowest closing bid prices of the common stock during the 22 trading days
immediately prior to the closing date of this transaction, then the conversion
price of the 4% debentures shall be adjusted downward to equal such lower per
share price. Such lower per share price shall be:
- the lowest conversion or exercise price at which such securities
are converted or exercised if, in such transaction, we issue or
sell any securities that are convertible into, exchangeable or
exercisable for, or include the right to receive additional
shares of common stock, (x) at a price or rate that varies with
the trading prices of our common stock or (y) with a fixed price
that can be reset;
- the lowest conversion or exercise price at which such securities
are converted or exercised if, in such transaction, we issue or
sell any securities pursuant to an equity line structure which
provides for the resale of registered securities;
- the lowest adjustment price if the capital raising transaction
grants the investor in that transaction the right to receive
additional shares based upon future transactions of the company
on terms more favorable than those granted to that investor in
the capital raising transaction.; or
- if the consideration in such sale is not cash, the Board of
Directors' good faith determination of such consideration.
We have undertaken to cause within 150 days of the closing date to have
reserved, and shall continue to reserve and keep available at all times,
sufficient shares of common stock for the purpose of issuing shares of common
stock upon the conversion of the debentures and exercise of the warrants.
22
The following circumstances constitute a default of the transaction:
- we default in the payment of principal or interest on the
debentures for 3 trading days;
- we made, with respect to the time made, any material false or
misleading material representations or warranties;
- for 5 business days, we fail to cause the issuance shares of
common stock to the investors upon proper exercise;
- for 5 business days, we fail to cause the lawful transfer of any
of the investor's common stock certificates;
- for 5 business days, we fail to cause the lawful removal of any
restrictive legend or to cause the transfer agent to transfer a
common stock certificate or any shares;
- we fail to materially perform or observe any other covenant,
term, provision, condition, agreement or obligation under the
transaction and fail to cure within 30 days from written notice;
- we admit in writing our inability to pay our debts generally as
they mature;
- we make an assignment for the benefit of creditors or commence
proceedings for our dissolution;
- we apply for or consent to the appointment of a trustee,
liquidator or receiver for a substantial part of our property or
business;
- a trustee, liquidator or receiver is appointed for the company or
for a substantial part of our property or business without our
consent and is not be discharged within 60 days;
- any governmental agency or any court of competent jurisdiction at
the instance of any governmental agency assumes custody or
control of the whole or any substantial portion of our properties
or assets and is not dismissed within 60 days;
- any money judgment, writ or warrant of attachment, or similar
process in excess of $100,000 in the aggregate is entered or
filed against us or our properties or other assets and remains
unpaid, unvacated, unbonded or unstayed for 60 days or later than
5 days prior to the date of any proposed sale thereunder;
- bankruptcy, reorganization, insolvency or liquidation proceedings
or other proceedings for relief under any bankruptcy law or any
law for the relief of debtors is instituted by or against us and,
if instituted against us, is not dismissed 60 days or we by any
action or answer approve of, consent to, or acquiesce in any such
proceedings or admit the material allegations of, or default in
answering a petition filed in any such proceeding;
- the registration statement for the resale of the common stock
underlying the securities issued in this transaction is not
declared effective by the SEC within 180 days from the closing
date;
- upon a properly noticed conversion request, we fail to deliver
the appropriate securities, free of a legend when lawful to do
so, within 10 trading days; or
- we have our common stock suspended or delisted from trading for
more than 5 trading days.
23
In case of our merger or consolidation with or into another entity, or our
sale of more than one-half of our assets, the investors have the right to:
- deem such occurrence a default of the transaction and exercise
their rights of prepayment;
- convert their aggregate outstanding principal amount of the
debenture into shares of our common stock or into shares of stock
and other securities, cash and property receivable upon or deemed
to be held by holders of common stock following such merger,
consolidation or sale, and the investors shall be entitled upon
such event to receive such amount of securities, cash and
property as the shares of common stock into which such aggregate
principal amount of the debenture could have been converted
immediately prior to such merger, consolidation or sales would
have been entitled; or
- in the case of a merger or consolidation, (x) require the
surviving entity to issue a convertible debenture containing all
of the terms and rights held by the investors that replaces this
debenture and (y) simultaneously with the issuance of such
convertible debentures, shall have the right to convert such
instrument only into shares of stock and other securities, cash
and property receivable upon or deemed to be held by holders of
common stock following such merger or consolidation. In such
case, the conversion price applicable for the newly issued
convertible debentures shall be based upon the amount of
securities, cash and property that each share of common stock
would receive in such transaction and the conversion price in
effect immediately prior to the effectiveness or closing date for
such transaction. The terms of any such merger, sale or
consolidation shall include such terms so as to continue to give
the investors the right to receive the securities, cash and
property set forth above upon any conversion or redemption
following such event.
The investors are entitled to customary indemnification from us for any
losses or liabilities suffered by it based upon material misstatements or
omissions from the registration statement and the prospectus, except as they
relate to information supplied by Folkinburg to us for inclusion in the
registration statement and prospectus.
Under the agreements, we were obligated to prepare and file a registration
statement under the Securities Act for shares of common stock issuable upon the
conversion of the convertible debentures and the warrants within 45 days of the
closing date of the transaction. We agreed to use our best efforts to cause the
registration statement to become effective within 90 days of the closing date or
5 days of SEC clearance to request acceleration of effectiveness. If enough
shares are not registered to permit the resale of all of the securities then
held by the investors, then we are obligated to file another registration
statement for additional shares within 15 days of the date a determination is
made that enough shares have not been registered, and we agreed to use diligent
best efforts to prosecute such additional registration statement within 60 days.
24
We agreed to maintain the registration statement or post-effective
amendment effective until the earlier of (i) the date that none of the
securities covered by such Registration Statement are or may become issued and
outstanding, (ii) the date that all of the securities have been sold pursuant to
such registration statement, (iii) the date the investors receive an opinion of
our counsel that the securities may be sold under the provisions of Rule 144
without limitation as to volume, (iv) all securities have been otherwise
transferred to persons who may trade such shares without restriction under the
Securities Act, and we have delivered a new certificate or other evidence of
ownership for such securities not bearing a restrictive legend, (v) all
securities may be sold without any time, volume or manner limitations pursuant
to Rule 144(k) or any similar provision then in effect under the Securities Act
in the opinion of our counsel, or (vi) 3 years from the effective date of the
registration statement.
We will incur all fees, disbursements and out-of-pocket expenses and costs
in connection with the preparation and filing of the registration statement and
in complying with applicable securities and blue sky laws. The investors bear
the cost of underwriting or brokerage discounts, fees and commissions, if any,
and the fees and expenses of their counsel.
If the registration statement is not timely filed with the SEC by the
required filing date, the registration statement is not declared effective by
the SEC within require filing period, the registration statement is not
maintained as effective by us for the requisite period, or the additional
registration statement to register additional securities is not filed within the
required filing period, then we are to pay the investors, as liquidated damages,
each month 2% of the aggregate market value of shares of common stock held by
the investors in cash or in common stock, at the investors' election, until such
registration statement is effective. However, if we fail to maintain the
effectiveness of a filed registration statement or the investors are unable to
use an use effective registration statement to effect resales during the period
after 45 days and within 90 days from the end of our fiscal year resulting
solely from the need to update our financial statements contained, such shall
does not constitute a default of the registration rights agreement and does not
trigger the accrual of liquidated damages.
If after the effectiveness of the registration statement, we notify the
investors in writing of a potential material event, the investors shall not,
during such suspension period, offer or sell any securities or engage in any
other transaction involving or relating to securities, until the investors
receive written notice from us that such potential material event has been
disclosed to the public or no longer constitutes a potential material event. If
such suspended period exceeds 20 days, then we are subject to liquidated damages
of 2% of market value per month. If a potential material event occurs prior to
the date the registration statement is filed, then our obligation to file the
registration statement is delayed without penalty for not more than 20 calendar
days.
25
At the closing of the transaction, we delivered the requisite opinion of
counsel to the investors and we received gross proceeds of $500,000, less
payment to the escrow agent, Epstein Becker & Green P.C., of $10,000 for the
investors' legal, administrative and escrow costs, and less payment of a 10%
placement agent fee to Union Atlantic, L.C., which placement agent fee is net of
payment to the escrow agent, Epstein Becker & Green P.C., of $5,000 for the
investors' legal, administrative and escrow costs. We also issued to Union
Atlantic, L.C. 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 October 27, 2003 at a purchase price per share
equal to the average of the closing bid prices for the common stock on the 5
trading days immediately prior to the closing date. We agreed to include such
securities to the placement agent in the registration statement for the resale
of the common stock underlying the 4% convertible debentures and warrants.
Equity Drawdown Facility
We signed a common stock purchase agreement with Folkinburg Investments
Limited, dated as of October 31, 2000, for the future issuance and purchase of
shares of our common stock in a transaction deemed to be exempt under Section
4(2) of the Securities Act of 1933. We made a determination that Folkinburg was
a sophisticated investor with enough knowledge and experience in business to
evaluate the risks and merits of the investment. The transaction closed on or
about October 31, 2000. The common stock purchase agreement establishes what is
sometimes termed an equity line of credit or an equity drawdown facility. The
common stock issuable upon each drawdown under the equity line of credit and
upon the exercise of the warrants issued, including to the placement agent, is
to be included in the registration statement we have agreed to file for the
resale of the common stock.
In general, the drawdown facility operates as follows: the investor,
Folkinburg, 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
Folkinburg. 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 Folkinburg to the extent Folkinburg would
beneficially own more than 9.9% of our then outstanding common stock.
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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 Folkinburg in return for that money.
The per share dollar amount Folkinburg 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 payable to the
placement agent, Union Atlantic, L.C., which introduced Folkinburg to us.
We did not make a commitment to Folkinburg to draw a minimum amount of
funds under the common stock purchase agreement. In lieu of making a commitment
to Folkinburg to draw a minimum aggregate amount, on October 31, 2000, we issued
to Folkinburg 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 Folkinburg on the
settlement date of each drawdown. The common stock purchase warrant gives
Folkinburg an opportunity to purchase shares of our common stock even though we
draw little or no amount of funds under the common stock purchase agreement. The
warrants to purchase 500,000 shares of common stock has an exercise price per
share equal to 110% of the volume-weighted average share price for the trading
day prior to the date the warrant was issued, and expires 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.
Folkinburg agreed not to exercise any of the warrants if the number of shares of
common stock it owns, plus the number of shares of common stock issuable upon
exercise of the warrant, would equal or exceed 9.9% of our outstanding shares of
common stock then issued and outstanding. Folkinburg has the right to waive such
9.9% limit restriction upon 61 days notice.
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We may request a drawdown by faxing a drawdown notice to Folkinburg,
stating the amount of the drawdown we wish to exercise and the minimum threshold
price, if any, at which we are willing to sell the shares. We will set the
threshold price by determining the price below which we are unwilling to sell
shares of our common stock. No draw may exceed the lesser of $5 million and the
capped amount that is derived from the following formula: the weighted average
price for the common stock for the 3 month period immediately prior to the date
we give notice of the drawdown, multiplied by 4.5%, and further multiplied by
the total trading volume for the 3 month period trading days immediately prior
to the date we give notice of the drawdown. The lesser of our draw request and
the capped amount is reduced by 1/22 for every day in the 22 trading days after
our drawdown request that the volume-weighted average daily price for a trading
day is below the threshold price set by us in the request. If the daily price
for a day is below the threshold price we will not issue any shares and
Folkinburg will not purchase any shares for that day. Thus, if we set a
threshold price too high and our stock price does not consistently meet that
level during the 22 trading days after our drawdown request, the amount we can
draw and the number of shares we can sell to Folkinburg will be reduced.
However, if we set a threshold price too low and our stock price falls
significantly but stays above the threshold price, we will be able to draw the
lesser of our draw request and the capped amount, but we will have to issue a
greater number of shares to Folkinburg at a reduced price. We cannot make
another drawdown request until expiration of the 22 trading days that follow a
drawdown request we have already made and until at least 7 trading days pass
after each drawdown period.
The 22 trading days immediately following the drawdown notice are also used
to determine the number of shares we will issue in return for the money provided
by Folkinburg, and thus the price per share Folkinburg will pay for our shares.
To determine the number of shares of common stock we must issue in connection
with a drawdown, take 1/22 of the drawdown amount determined by the formulas
above, and for each of the 22 trading days immediately following the date we
give notice of the drawdown, divide it by 82.5% of the volume-weighted average
daily trading price of our common stock for that day. The 82.5% accounts for
Folkinburg's 17.5% discount. The sum of these 22 daily calculations produces the
number of common shares we will issue, unless the volume-weighted average daily
price for any given trading day is below the threshold amount, in which case
that day is ignored in the calculation. The price per share Folkinburg
ultimately pays is determined by dividing the final drawdown amount by the
number of shares we issue Folkinburg.
The following conditions must be satisfied before Folkinburg is obligated
to purchase the common shares that we wish to sell from time to time:
- a registration statement for the shares must be declared
effective by the Securities and Exchange Commission and must
remain effective and available as of the draw down settlement
date for making resales of the common shares purchased by
Folkinburg;
- there can be no material adverse change in our business,
operations, properties, prospects or financial condition that
would prohibit or materially interfere with our ability to
perform our obligations under this transaction;
- we must not have merged or consolidated with or into another
company or transferred all or substantially all of our assets to
another company, unless the acquiring company has agreed to honor
the common stock purchase agreement;
- no statute, rule, regulation, executive order, decree, ruling or
injunction may be in effect which prohibits consummation of the
transactions contemplated by the common stock purchase agreement;
- no litigation or proceeding nor any investigation by any
governmental authority can be pending or threatened against us or
Folkinburg seeking to restrain, prevent or change the
transactions contemplated by the stock purchase agreement or
seeking damages in connection with such transactions;
- trading in our common shares must not have been suspended by the
Securities and Exchange Commission or The OTC Bulletin Board, nor
shall minimum prices have been established on securities whose
trades are reported by The OTC Bulletin Board; and
- on each drawdown settlement date for the sale of common shares,
we must deliver an opinion from our counsel about these matters.
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The common stock purchase agreement provides that we must pay
Folkinburg a $100,000 fee before we may raise money by selling our securities
for cash at a discount to the market price until the earlier of 24 months from
the effective date of the registration statement for the resale of the shares of
common stock or the date which is 60 days after Folkinburg has purchased the
maximum of $5 million worth of common stock from us under the common stock
purchase agreement. We may sell securities without triggering the liquidated
damages payment under the following circumstances:
- in a registered public offering which is underwritten by one or
more established investment banks, and Folkinburg has the right
of first refusal to participate in such transaction;
- in one or more private placements where the purchasers do not
have registration rights, and Folkinburg has the right of first
refusal to participate in such transaction;
- a transaction to which Folkinburg gives it written approval, and
Folkinburg has the right of first refusal to participate in such
transaction;
- pursuant to any presently existing or future employee benefit
plan which plan has been or is approved by the our stockholders;
- pursuant to any compensatory plan for a full-time employee or key
consultant; and
- in connection with a strategic partnership or other business
transaction, the principal purpose of which is not simply to
raise money.en approval.
Folkinburg may terminate the equity draw down facility under the common
stock purchase agreement upon notice of 1 trading day if any of the following
events occur: a material adverse effect in our business, operations, properties,
prospects or financial condition that would prohibit or materially interfere
with our ability to perform our obligations under this transaction occurs; our
common shares are delisted from The OTC Bulletin Board unless such delisting is
in connection with the listing of such shares on another stock exchange in the
United States; or we file for protection from creditors.
We may terminate the common stock purchase agreement if Folkinburg fails to
fund more than one drawdown within three trading days of the date payment for
such drawdown is due.
Folkinburg is entitled to customary indemnification from us for any losses
or liabilities suffered by it based upon material misstatements or omissions
from the registration statement and the prospectus, except as they relate to
information supplied by Folkinburg to us for inclusion in the registration
statement and prospectus.
Under the transaction, we were obligated to prepare and file a registration
statement under the Securities Act for shares of common stock issuable upon each
draw down within 45 days of the closing date of the transaction. We agreed to
use our best efforts to cause the registration statement to become effective
within 90 days of the closing date or 5 days of SEC clearance to request
acceleration of effectiveness. We agreed to maintain the registration statement
or post-effective amendment effective until the earliest of (i) the date that
all the securities have been disposed of pursuant to the registration statement,
(ii) the date that all of the securities have been sold pursuant to the
registration statement, (iii) the date Folkinburg receives an opinion of our
counsel that the securities may be sold under the provisions of Rule 144 without
limitation as to volume, (iv) all securities have been otherwise transferred to
persons who may trade such shares without restriction under the Securities Act,
and we have delivered a new certificate or other evidence of ownership for such
securities not bearing a restrictive legend, or (v) all securities may be sold
without any time, volume or manner limitations pursuant to Rule 144(k) or any
similar provision then in effect under the Securities Act in the opinion of our
counsel.
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We will incur all fees, disbursements and out-of-pocket expenses and costs
in connection with the preparation and filing of the registration statement and
in complying with applicable securities and blue sky laws. Folkinburg bears the
cost of underwriting or brokerage discounts, fees and commissions, if any, and
the fees and expenses of their counsel.
If after the effectiveness of the registration statement, we notify
Folkinburg in writing of a potential material event, the investors shall not,
during such suspension period, offer or sell any securities or engage in any
other transaction involving or relating to securities, until the investors
receive written notice from us that such potential material event has been
disclosed to the public or no longer constitutes a potential material event. In
such event, we must compensate the investors for any net decline in the market
value of any securities held by the investors at the beginning of any suspended
period, or committed to be purchased by the investors during such suspension
period, through the end of such suspension period. If a potential material event
occurs prior to the date the registration statement is filed, then our
obligation to file the registration statement is delayed without penalty for not
more than 30 calendar days.
At the closing of the transaction, we delivered the requisite opinion of
counsel to Folkinburg and paid the escrow agent, Epstein Becker & Green P.C.,
$10,000 for Folkinburg's legal, administrative and escrow costs.
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ITEM 5. OTHER INFORMATION
Effective October 18, 2000, Michael Simon resigned as an executive officer
and as a director of Famous Fixins. Simon continues to serve as an employee of
Famous Fixins performing duties substantially similar to those required of him
when he held the title of Vice President.
On October 18, 2000, the Board of Directors elected Alex Wiederhorn to
serve on our Board of Directors to fill the vacancy created by the resignation
of Michael Simon until the next annual meeting of shareholders and until his
successor is elected and qualified. Wiederhorn, 30, became a director on October
18, 2000. From 1997 to the present, Wiederhorn has been an account manager for
El Camino Resources International, Inc., in its Falls Curch, Virginia office, an
information technology equipment leasing company. From 1995 to 1997, he was the
principal of Iver Financial Corp., a computer leasing consulting company located
in Washington, D.C. He is the holder of 25,000 shares of Famous Fixins' common
stock which he acquired in 1998 from a nonaffiliate. Wiederhorn received a
Bachelor of Arts degree in political science from Boston University in 1992 and
a Masters of Business Administration degree in finance from George Mason
University in 1997.
On October 18, 2000, Peter Zorich resigned as an executive officer and
as a director of Famous Fixins.
Jason Bauer and Peter Zorich have been parties to a certain voting
agreement that provides which each of Bauer and Zorich shall vote his shares for
the election of the other as a director of Famous Fixins. For the election of
any additional director, Bauer and Peter Zorich shall vote his shares for the
election of each other's designee, provided that at least two directorships
shall need to be filled. The agreement also provided that they will vote for the
election of Jason Bauer as President and Chief Executive Officer and Peter
Zorich as Executive Vice President of Famous Fixins. The agreement expires on
June 30, 2001, unless earlier terminated by written agreement signed by both
parties. In connection with Zorich's resignation in October 2000, Zorich has
agreed to waive the terms of the voting agreement that require Bauer to vote his
shares to elect Zorich as a director and as Executive Vice President of Famous
Fixins.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The following exhibits are filed with this report:
Exhibit Number Description of Exhibit
- -------------- ----------------------
Exhibit 10.1 Form of Convertible Debenture and Warrants Purchase
Agreement, dated as of October 27, 2000, between Famous
Fixins, Inc. and Roseworth Group Ltd., Austost Anstalt
Schaan and Balmore Funds, S.A.
Exhibit 10.2 Form of Common Stock Purchase Agreement, dated as of October
31, 2000, between Famous Fixins, Inc. and Folkinburg
Investments Limited
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.
Exhibit 27 Financial Data Schedule
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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.
FAMOUS FIXINS, INC.
Dated: November 14, 2000 By: /s/ Jason Bauer
---------------
Jason Bauer
Chief Executive Officer and President
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