<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): December 2, 1999
LANDEC CORPORATION
(Exact name of registrant as specified in its charter)
CALIFORNIA
(State or other jurisdiction of incorporation or organization)
0-27446 94-3025618
(Commission file number) (IRS Employer Identification No.)
3603 HAVEN AVENUE, MENLO PARK, CALIFORNIA 94025
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (650) 306-1650
N/A
Former name or former address, if changed from last report)
-1-
<PAGE>
The undersigned Registrant hereby amends the following items from the
Current Report on Form 8-K filed on December 17, 1999. The Registrant is
amending Item 7 to include certain required historical financial statements and
pro forma financial information and exhibits associated therewith.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
(a) Financial Statements of Businesses Acquired
Filed as exhibit 99.1
(b) Pro Forma Financial Information
The following pages 3 through 9 contain (1) the unaudited pro
forma condensed combined balance sheets of Landec Corporation and
Apio, Inc. as of October 31, 1999 and the notes thereto and (2)
the unaudited pro forma combined statement of operations of Landec
Corporation and Apio, Inc. for the year ended October 31, 1999 and
the notes thereto.
(c) Exhibits
2.1* Form of Agreement and Plan Merger and Purchase Agreement
by and among the Registrant, Apio, Inc. and related
companies and each of the respective shareholders dated as
of November 29, 1999.
4.1* Series A Preferred Stock Purchase Agreement between the
Registrant and Frederick Frank, dated as of November 19,
1999.
10.27 Loan agreement between Apio, Inc. and the Bank of America
dated as of November 29, 1999 (incorporated by reference
to identically numbered exhibit filed with the
Registrant's Form 10-K for the year ended October 31,
1999).
23.1 Consent of McGladrey & Pullen, LLP, Independent
Accountants.
99.1 Financial Statements of Apio, Inc. and related entities as
of September 30, 1999 and December 31, 1998, 1997 and 1996
and for the nine months ended September 30, 1999 and 1998
and the three years ended December 31, 1998 with the
Report of McGladrey & Pullen, LLP, Independent Auditors.
- ----------------------------
* Previously filed.
The Registrant hereby agrees to file with the Securities and Exchange
Commission any schedules or exhibits to such agreement which are not filed
herewith, upon the request of the Securities and Exchange Commission.
-2-
<PAGE>
LANDEC CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL INFORMATION
The unaudited pro forma condensed combined financial statements
(collectively, "the Pro Forma Financial Statements") were prepared to give
effect to the acquisition by Landec Corporation ("Landec" or the "Company")
of all the outstanding capital stock of Apio, Inc. and certain related
entities ("Apio"). In addition, the Pro Forma Financial Statements include a
refinancing of certain debt instruments of Apio and a separate preferred
stock offering effected by Landec to raise proceeds used to purchase Apio.
The acquisition has been accounted for using the purchase method. The pro
forma condensed combined balance sheet as of October 31, 1999 assumes the
acquisition and related transactions occurred on the balance sheet date and
the pro forma combined statement of operations for the fiscal year ended
October 31,1999 assumes that the acquisition occurred on November 1, 1998. In
addition, Landec did not acquire certain non-core operations of Apio. The
balances related to these non-core operations, as well as the reversal of
certain eliminating entries included in the historical combined results are
specifically identified in a separate column in the Pro Forma Financial
Statements. The Pro Forma Financial Statements do not purport to represent
what Landec's financial position or results of operations would have been if
the acquisition in fact had occurred on the date or at the beginning of the
periods indicated or to project Landec's financial position or results of
operations for any future date or period.
The pro forma adjustments are based upon available information and upon
certain assumptions, as described in Note (a) to the Pro Forma Financial
Statements, that Landec believes are reasonable under the circumstances. The
purchase price has been allocated to the acquired assets and liabilities
based on their respective fair market values. The Pro Forma Financial
Statements and accompanying notes should be read in conjunction with the
historical consolidated financial statements and notes thereto of Landec and
the historical financial statements and notes thereto of Apio, which are
included as Exhibit 99.1 to this Form 8-K/A.
-3-
<PAGE>
LANDEC CORPORATION
UNAUDITED PRO FORMA CONDENSED
COMBINED BALANCE SHEET
OCTOBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
Landec Apio, Non-Acquired Pro Forma Pro Forma
Corporation Inc. Entities (g) Adjustments Combined
-------------- ----------- --------------- --------------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 3,203 $ 862 $ (6) 2,198 (b)
9,100 (d)
(9,100) (c)
300 (f) $ 6,557
Accounts receivable, net 2,952 18,797 -- (3,510) (b)
(526) (e) 17,713
Accounts receivable, related parties -- 105 5 (110) (b) --
Advances to growers, net -- 1,678 -- 711 (b) 2,389
Inventory 7,641 4,651 (67) (111) (b)
(111) (e) 12,003
Investment in farming activities -- 1,319 -- 711 (b) 2,030
Current maturities of notes
receivable -- 4,393 -- (2,227) (b) 2,166
Current maturities of notes
receivable, related parties 138 3,052 2,243 (5,295) (b) 138
Deferred advertising 522 -- -- -- 522
Prepaid expenses and other current
assets 1,711 478 (7) (725) (a)
589 (b)
(24) (e) 2,022
Deferred taxes -- 47 -- 886 (a&h)
(47) (b) 886
-------------- ----------- --------------- --------------- ------------
Total Current Assets 16,167 35,382 2,168 (7,291) 46,426
Property and equipment, net 11,002 13,544 -- 1,398 (b) 25,944
Notes receivable, less current maturities -- 1,044 540 (670) (b) 914
Investment in affiliates -- 97 -- 23 (b) 120
Property held for sale -- 1,635 (1,635) -- --
Intangible assets, net 13,506 288 -- 25,083 (a)
(14) (b) 38,863
Other assets 33 300 (7) 81 (b)
408 (f)
(181) (f) 634
-------------- ----------- --------------- --------------- ------------
$ 40,708 $ 52,290 $ 1,066 18,837 $ 112,901
============== =========== =============== =============== ============
</TABLE>
-4-
<PAGE>
LANDEC CORPORATION
UNAUDITED PRO FORMA CONDENSED
COMBINED BALANCE SHEET
OCTOBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
Landec Apio, Non-Acquired Pro Forma Pro Forma
Corporation Inc. Entities (g) Adjustments Combined
-------------- ----------- --------------- --------------- ------------
<S> <C> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Outstanding checks in excess of bank
balance $ -- $ 3,516 $ -- (3,516) (b) $ --
Accounts payable 1,687 10,762 -- 3,390 (b)
(414) (e) 15,425
Accounts payable, related parties -- 482 (312) (170) (b) --
Accrued compensation 1,036 -- -- -- 1,036
Accrued expenses 1,327 4,378 (3) 767 (a)
3,680 (b)
(367) (e)
182 (f) 9,964
Accrued expenses, related parties -- 142 -- (142) (b) --
Deferred revenue 2,135 -- -- -- 2,135
Grower payables -- 8,559 -- (2,170) (b) 6,389
Grower payables, related parties -- 861 -- (529) (b) 332
Line of credit -- 9,158 -- (1,293) (b)
(7,865) (f) --
Current maturities of long term debt 125 1,763 (267) (648) (b)
1,739 (f) 2,712
Notes payable, related parties -- 2,813 -- (2,813) (b) --
-------------- ----------- --------------- --------------- ------------
Total Current Liabilities 6,310 42,434 (582) (10,169) 37,993
Long-term debt, less current maturities 2,637 5,296 (828) 1,437 (b)
4,092 (c)
6,471 (f) 19,105
Deferred taxes -- 27 -- 980 (a&h) 1,007
-------------- ----------- --------------- --------------- ------------
Total Liabiliaties 8,947 47,757 (1,410) 2,811 58,105
Minority interest -- 851 -- (63) (b)
614 (a&i) 1,402
Stockholders' Equity:
Preferred stock - Landec -- -- -- 9,100 (d) 9,100
Common stock - Landec 77,289 -- -- 342 (a)
12,071 (c) 89,702
Accumulated deficit - Landec (45,528) -- -- 120 (e) (45,408)
Equity - Apio -- 3,682 2,476 (6,158) (a) --
-------------- ----------- --------------- --------------- ------------
Total Stockholders' Equity 31,761 3,682 2,476 15,475 53,394
-------------- ----------- --------------- --------------- ------------
$ 40,708 52,290 $ 1,066 18,837 $ 112,901
============== =========== =============== =============== ============
</TABLE>
SEE ACCOMPANYING NOTES.
-5-
<PAGE>
LANDEC CORPORATION
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED BALANCE SHEET
OCTOBER 31, 1999
1. BASIS OF PRESENTATION
The unaudited pro forma condensed combined balance sheet has been prepared by
combining the historical consolidated balance sheet of Landec at October 31,
1999 with the historical balance sheet of Apio at September 30, 1999, and
gives effect to the pro forma adjustments as described in the notes below.
(a) The acquisition of Apio, which was accounted for as a purchase, has been
recorded based upon available information and upon certain assumptions that
Landec believes are reasonable under the circumstances. Estimated
acquisition expenses of $1,834,000 include legal, accounting, consulting,
fairness opinion and miscellaneous costs. Included in these costs are
$342,000 paid in Landec Common Stock rather than cash and $725,000 paid
prior to the close of the acquisition which was recorded as a prepaid asset
by Landec. The purchase price has been allocated to the acquired assets and
liabilities based on their relative fair market values, subject to final
adjustments. These allocations are based on independent valuations and
other studies. The final values may differ from those set forth below.
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
Estimated purchase price (Note c) $ 25,263
Estimated acquisition expenses 1,834
------------
Total estimated acquisition cost $ 27,097
============
Historical net book value of the assets at September 30, 1999 $ 6,158
Decrease in net book value of assets acquired (Note b) (3,436)
Change in Minority Interest (Note i) (614)
Net deferred tax liability (94)
Customer base 1,821
Work force in place 1,395
Trademark 9,100
Goodwill 12,767
------------
$ 27,097
============
</TABLE>
The fair market value of property, plant and equipment at the date of
purchase approximated net book value and therefore an allocation of the
purchase price to adjust these assets was not required.
(b) The decrease in the net book value of the assets from September 30, 1999
to the close date of December 2, 1999 is a result of a decrease in the
net book value of assets acquired due to operating activities,
shareholder draws of approximately $2.1 million and accrued transaction
costs of approximately $330,000 incurred by Apio from September 30, 1999
to December 2, 1999.
(c) The acquisition by Landec for all the outstanding capital stock of Apio
and certain related entities was exchanged for the following:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
Landec common stock $ 12,071
Contractual deferred obligations 4,092
Cash paid at closing 9,100
----------------
Purchase price $ 25,263
=================
</TABLE>
Landec issued 2.5 million shares of Landec Common Stock to the former
shareholders of Apio. The stock was valued at the average closing price,
as quoted by the Nasdaq National Market, for three days before and after
the date of the close. The resulting value was discounted due to
registration restrictions on the stock. The discount factors used were
based on independent valuations.
-6-
<PAGE>
Landec has agreed to pay a total of $5.3 million to certain former
shareholders of Apio. The obligations are due in five equal annual
payments beginning January 2, 2001. These obligations do not bear
interest and accordingly have been discounted at 9% over five years.
Furthermore, $750,000 of the cash consideration and 401,667 shares of the
equity consideration has been set aside in escrow to cover costs
associated with outstanding obligations of Apio as well as any potential
breach of representations and warranties made by Apio in connection with
the acquisition. In addition, up to $200,000 of the cash consideration
may be paid out in the future upon collection of certain receivables.
A former principal shareholder of Apio is also entitled to receive
additional cash consideration from Landec depending on the future
performance of the business acquired.
(d) On November 19, 1999 the Company completed a financing that raised $9.1
million, net of issuance costs, through a private placement of 166,667
shares of non-dividend paying convertible Preferred Stock (representing
1,666,670 shares of Common Stock on a converted basis).
(e) Historical accounts receivable and accounts payable balances resulting
from the sale of packaging materials from Landec to Apio and the gross
margin included in Apio's packaging materials inventory have been
eliminated.
(f) In connection with the acquisition, Apio refinanced several of it's
existing debt instruments. The borrowings prior to the refinancing
totaled $10.9 million at interest rates ranging from 8.2% to 9.75%. As a
result of the refinancing, Apio entered into a term loan for $11.25
million and a revolving line of credit, subject to borrowing base
limitations.
Apio also entered into an interest rate swap agreement which converted
the borrowing rate on the term loan to a fixed rate of 7.02% plus a
spread, based on certain debt to equity ratios, resulting in an initial
borrowing rate of 9.52%. The interest rate on the revolving line of
credit is prime plus 0.5%.
The company incurred fees of $408,000 to effect the refinancing which
will be recognized as interest expense over the term of the debt.
(g) Landec did not acquire certain non-core operations of Apio. The balances
related to these non-core operations, as well as the reversal of certain
eliminating entries included in the historical combined results, are
reflected in this column.
(h) See note (d) to the pro forma statement of operations.
(i) The addition to minority interest is due to an increase in the minority
shareholder position as a result of the acquisition.
-7-
<PAGE>
LANDEC CORPORATION
UNAUDITED PRO FORMA
COMBINED STATEMENT OF OPERATIONS
FISCAL YEAR ENDED OCTOBER 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Landec Apio, Non-Acquired Pro Forma Pro Forma
Corporation Inc. Entities (i) Adjustments Combined
--------------- ------------ ---------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Revenues:
Product sales $ 33,927 83,883 $ (7) $ (3,079) (e) $ 114,724
Services -- 62,828 -- 8,763 (h) 71,591
Services, related parties -- 10,887 (10) (8,763) (h) 2,114
Research and development revenues 770 -- -- -- 770
License fees 750 -- -- -- 750
--------------- ------------ ---------------- ------------ --------------
Total revenues 35,447 157,598 (17) (3,079) 189,949
--------------- ------------ ---------------- ------------ --------------
Cost of revenue
Product sales 21,476 72,684 (285) (3,079) (e)
1,586 (h) 92,382
Product sales, related parties -- 1,735 7 (1,586) (h) 156
Services -- 61,825 (256) (92) (h) 61,477
Services, related parties -- 467 -- 92 (h) 559
--------------- ------------ ---------------- ------------ --------------
Total revenues 21,476 136,711 (534) (3,079) 154,574
--------------- ------------ ---------------- ------------ --------------
Gross profit 13,971 20,887 517 -- 35,375
Farming revenue (loss) -- (1,982) -- (179) (h) (2,161)
Farming revenue (loss,) related party -- (179) -- 179 (h) --
Operating costs and expenses
Research and development 5,758 -- -- -- 5,758
Selling, general and administrative 11,192 18,865 (60) 1,554 (a)
131 (f) 31,682
--------------- ------------ ---------------- ------------ --------------
Total operating costs and
expenses 16,950 18,865 (60) 1,685 37,440
--------------- ------------ ---------------- ------------ --------------
Operating income (loss) (2,979) (139) 577 (1,685) (4,226)
Interest income 363 743 25 343 (h) 1,474
Interest income, related parties -- 279 205 (343) (h) 141
Interest expense (99) (1,458) 413 (368) (c)
(214) (g)
(338) (h) (2,064)
Interest expense, related party -- (133) (205) 338 (h) --
Other income -- -- 17 -- 17
Equity in net income (loss) of
unconsolidated subsidiaries -- (25) -- -- (25)
--------------- ------------ ---------------- ------------ --------------
Income (loss) before income taxes
and minority interest (2,715) (733) 1,032 (2,267) (4,683)
Provision for income taxes (54) (18) 1 17 (d) (54)
Minority interest in consolidated
subsidiaries -- (196) -- (115) (j) (311)
--------------- ------------ ---------------- ------------ --------------
Net income (loss) $ (2,769) $ (947) $ 1,033 $ (2,365) $ (5,048)
=============== ============ ================ ============ ==============
Basic and diluted net income (loss) per $ (.21) $ (.32)
share =============== ==============
Shares used in calculating basic and
diluted per share information 13,273 2,563 (b) 15,836
=============== ============ ================ ============ ==============
</TABLE>
SEE ACCOMPANYING NOTES.
-8-
<PAGE>
LANDEC CORPORATION
NOTES TO UNAUDITED PRO FORMA
COMBINED STATEMENT OF OPERATIONS
OCTOBER 31, 1999
The unaudited pro forma condensed combined statement of operations has been
prepared by combining the historical consolidated statement of operations of
Landec for the fiscal year ended October 31, 1999 with the historical statement
of operations of Apio for the twelve months ended September 30, 1999, and gives
effect to the pro forma adjustments as described in the notes below.
(a) Amortization expense of intangible assets arising from the acquisition of
Apio, as shown below, is reflected in the pro forma adjustments and
detailed as follows (dollars in thousands):
<TABLE>
<CAPTION>
PERIOD OF TWELVE MONTH
AMOUNT AMORTIZATION AMORTIZATION
------ ------------ ------------
<S> <C> <C>
Intangible assets:
Work force in place 1,395 5 years 279
Customer base 1,821 10 years 182
Trademark 9,100 20 years 455
Goodwill 12,767 20 years 638
-------------- --------------
$ 25,083 $ 1,554
============== ==============
</TABLE>
(b) The pro forma adjustment reflects the issuance of 2,562,500 shares of
Landec common stock in connection with the acquisition of Apio. These
shares were assumed to have been issued on November 1, 1998, for purposes
of calculating the pro forma loss per share.
(c) Imputed interest expense on the deferred obligations issued in the
purchase of Apio (see note (c) to the pro forma balance sheet).
(d) Income tax expense associated with Apio on an historical basis
reflects "S" Corporation status, therefore, any taxable income was
credited directly to the shareholders of Apio and Apio did not pay
state or federal income tax, other than certain minimum taxes.
Subsequent to the acquisition, Apio's taxable earnings and losses will
be included in Landec's consolidated tax return. Landec is a "C"
Corporation with a history of operating losses. Since the pro forma
statement of operations indicates a loss on a combined basis, no combined
tax benefit has been recorded. In addition, the balance sheet includes a
pro forma adjustment to recognize the difference between the book and
tax bases of Apio's assets and liabilities, in accordance with SFAS
No. 109.
(e) Historical sales and cost of product sales relating to the sale of
packaging materials from Landec to Apio have been eliminated.
(f) Compensation expense related to an increase in officer salaries as a
result of the acquisition.
(g) Interest expense is due to the refinancing of debt at an overall
increased interest rate and the amortization of refinancing fees (see
note (f) to the pro forma balance sheet). The effect of a 1/8% change in
the interest rate on the revolving line of credit is approximately
$1,500.
(h) Pro forma adjustment to reclassify related party transactions. The
caption historically reflected business activity with principle
shareholders of Apio. Subsequent to the acquisition these individuals are
not principle shareholders.
(i) Landec did not acquire certain non-core operations of Apio. The balances
related to these non-core operations, as well as the reversal of certain
eliminating entries included in the historical combined results, are
reflected in this column.
(j) The addition to minority interest is due to an increase in the minority
shareholder position as a result of the acquisition.
-9-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this Report to be signed on its behalf
by the undersigned, thereunto duly authorized.
LANDEC CORPORATION
Registrant
Date: February 15, 2000 By: /s/ Gregory S. Skinner
---------------------------------------
Gregory S. Skinner
Vice President of Finance and Chief
Financial Officer
-10-
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation of our report, dated June 9, 1999,
except for Note 5 as to which the date is June 30, 1999, and Note 15 as to
which the date is July 2, 1999, with respect to the historical financial
statements of Apio, Inc. included in this Current Report on Form 8-K/A dated
December 2, 1999 in the previously filed registration statements of Landec
Corporation on Form S-8 (Nos. 333-80313, 333-52339, 333-29103 and 333-06163)
and Form S-3 (No. 333-95531).
MCGLADREY & PULLEN, LLP
San Bernardino, California
February 14, 2000
<PAGE>
INDEPENDENT AUDITOR'S REPORT ON THE
FINANCIAL STATEMENTS
To the Board of Directors
Apio, Inc. and its Combined Affiliates
Guadalupe, California
We have audited the accompanying combined balance sheets of Apio, Inc. and
its combined affiliates (collectively, the Company) as of December 31, 1998
and 1997, and the related combined statements of operations, equity and cash
flows for each of the three years in the period ended December 31, 1998.
These combined financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these combined
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the combined financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the combined
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Apio, Inc. and
its combined affiliates as of December 31, 1998 and 1997, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
MCGLADREY & PULLEN, LLP
San Bernardino, California
June 9, 1999
except for Note 5 as to which the date
is June 30, 1999, and Note 15 as to which
the date is July 2, 1999
<PAGE>
APIO, INC. AND ITS COMBINED AFFILIATES
COMBINED BALANCE SHEETS
SEPTEMBER 30, 1999 AND DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
September 30, December 31,
1999 ----------------------------
ASSETS (unaudited) 1998 1997
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current Assets
Cash $ 862,000 $ 845,000 $ 560,000
Accounts receivable, net of allowance for doubtful
accounts of $734,000 1999; $496,000 1998 and
$525,000 1997 (Notes 4 and 9) 18,797,000 14,321,000 15,132,000
Accounts receivable, related parties (Notes 4 and 8) 105,000 133,000 -
Advances to growers, net of allowance for doubtful
accounts of $0 1999; $100,000 1998 and $0 1997 1,678,000 775,000 569,000
Inventory (Note 4) 4,651,000 4,475,000 3,892,000
Investments in farming activities 1,319,000 2,278,000 1,593,000
Current maturities of notes receivable (Notes 2 and 4) 4,393,000 4,008,000 3,775,000
Current maturities of notes receivable, related parties
(Notes 4 and 8) 3,052,000 - 722,000
Prepaid expenses 478,000 855,000 852,000
Deferred taxes (Note 6) 47,000 47,000 12,000
-------------------------------------------
TOTAL CURRENT ASSETS 35,382,000 27,737,000 27,107,000
Property and Equipment, net (Notes 3, 4 and 5) 13,544,000 12,348,000 12,846,000
Notes receivable, less current maturities (Notes 2 and 4) 1,044,000 1,128,000 986,000
Notes receivable, related parties, less current maturities
(Notes 4 and 8) - 2,477,000 1,751,000
Investments in affiliates 97,000 216,000 187,000
Property held for sale (Notes 3, 4 and 5) 1,635,000 1,349,000 660,000
Intangible assets, net of accumulated amortization of
$256,000 1999; $194,000 1998 and $49,000 1997 288,000 775,000 195,000
Other assets 300,000 325,000 309,000
-------------------------------------------
TOTAL ASSETS $ 52,290,000 $46,355,000 $44,041,000
-------------------------------------------
-------------------------------------------
</TABLE>
See Notes to Combined Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
September 30, December 31,
1999 ----------------------------
LIABILITIES AND EQUITY (unaudited) 1998 1997
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current Liabilities
Outstanding checks in excess of bank balance $ 3,516,000 $ 1,500,000 $ 2,926,000
Line of credit (Note 4) 9,158,000 8,995,000 6,934,000
Current maturities of long-term debt (Note 5) 1,763,000 1,760,000 1,616,000
Notes payable, related parties (Notes 8 and 15) 2,813,000 733,000 1,998,000
Grower payables (Note 10) 8,559,000 5,573,000 8,159,000
Grower payables, related parties (Notes 8 and 10) 861,000 1,690,000 1,298,000
Accounts payable 10,762,000 11,522,000 8,483,000
Accounts payable, related parties (Note 8) 482,000 348,000 476,000
Accrued expenses 4,378,000 3,865,000 3,075,000
Accrued expenses, related parties (Note 8) 142,000 620,000 578,000
-------------------------------------------
TOTAL CURRENT LIABILITIES 42,434,000 36,606,000 35,543,000
Long-term debt, less current maturities (Note 5) 5,296,000 6,087,000 7,467,000
Deferred taxes (Note 6) 27,000 27,000 12,000
-------------------------------------------
TOTAL LIABILITIES 47,757,000 42,720,000 43,022,000
-------------------------------------------
Commitments and Contingencies (Notes 2, 5, 7, 13 and 15)
Minority Interest 851,000 745,000 727,000
-------------------------------------------
Equity (Notes 11, 12 and 14) 3,682,000 2,890,000 292,000
-------------------------------------------
TOTAL LIABILITIES AND EQUITY $ 52,290,000 $46,355,000 $44,041,000
-------------------------------------------
-------------------------------------------
</TABLE>
2
<PAGE>
APIO, INC. AND ITS COMBINED AFFILIATES
COMBINED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 AND YEARS ENDED DECEMBER 31, 1998,
1997 AND 1996
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
(unaudited) Years Ended December 31,
----------------------------------------------------------------------------
1996
1999 1998 1998 1997 (Note 14)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue
Services (Note 9) $ 29,764,000 $ 30,121,000 $ 43,119,000 $ 42,314,000 $ 38,491,000
Services, related parties (Note 8) 8,820,000 8,269,000 10,336,000 11,979,000 13,934,000
Commission income (Note 9) 4,050,000 3,274,000 4,156,000 7,082,000 5,046,000
Produce sales (Note 9) 60,866,000 62,196,000 85,213,000 59,532,000 39,728,000
Freight income 11,751,000 13,274,000 16,657,000 15,749,000 14,040,000
----------------------------------------------------------------------------
115,251,000 117,134,000 159,481,000 136,656,000 111,239,000
----------------------------------------------------------------------------
Cost of Revenue
Services (Notes 7 and 10) 31,712,000 32,546,000 47,194,000 47,208,000 41,925,000
Services, related parties (Note 8) 236,000 289,000 520,000 1,815,000 336,000
Cost of produce sales 54,059,000 56,321,000 74,946,000 56,339,000 39,097,000
Cost of produce sales, related parties (Note 8) 805,000 838,000 1,768,000 982,000 277,000
Freight expense 11,778,000 13,070,000 16,757,000 15,314,000 13,901,000
Freight expense, related parties (Note 8) - - - 940,000 -
----------------------------------------------------------------------------
98,590,000 103,064,000 141,185,000 122,598,000 95,536,000
----------------------------------------------------------------------------
GROSS PROFIT 16,661,000 14,070,000 18,296,000 14,058,000 15,703,000
Other Operating Revenue (Loss)
Farming revenue (loss) (1,502,000) 520,000 40,000 (596,000) (1,206,000)
Farming revenue (loss), related parties (Note 8) (263,000) - 84,000 305,000 (187,000)
Selling, General and Administrative Expenses 14,884,000 11,548,000 15,458,000 12,321,000 10,800,000
Provision for Doubtful Accounts and Notes Receivable 69,000 964,000 966,000 813,000 882,000
----------------------------------------------------------------------------
OPERATING PROFIT (LOSS) (57,000) 2,078,000 1,996,000 633,000 2,628,000
----------------------------------------------------------------------------
Financial Income (Expense)
Interest expense (1,095,000) (1,356,000) (1,719,000) (1,594,000) (994,000)
Interest expense, related parties (Note 8) (45,000) (56,000) (144,000) (131,000) -
Interest income 594,000 515,000 664,000 705,000 504,000
Interest income, related parties (Note 8) 153,000 193,000 319,000 207,000 -
Other income - - - 66,000 171,000
----------------------------------------------------------------------------
(393,000) (704,000) (880,000) (747,000) (319,000)
----------------------------------------------------------------------------
Equity in Net Income (Loss) of Affiliates (18,000) - (7,000) 40,000 (5,000)
----------------------------------------------------------------------------
INCOME (LOSS) BEFORE PROVISION (BENEFIT) FOR
INCOME TAXES AND MINORITY INTEREST (468,000) 1,374,000 1,109,000 (74,000) 2,304,000
Provision (Benefit) for Income Taxes (Note 6) 14,000 22,000 26,000 27,000 (406,000)
----------------------------------------------------------------------------
(482,000) 1,352,000 1,083,000 (101,000) 2,710,000
Minority Interest in Combined Affiliates and
Consolidated Subsidiaries (106,000) (70,000) (160,000) (282,000) (173,000)
----------------------------------------------------------------------------
NET INCOME (LOSS) $ (588,000) $ 1,282,000 $ 923,000 $ (383,000) $ 2,537,000
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Pro Forma Net Income (Loss)
Historical income (loss) before income taxes and
minority interest $ (468,000) $ 1,374,000 $ 1,109,000 $ (74,000) $ 2,304,000
Pro forma (provision) benefit for income taxes 187,000 (550,000) (448,000) 11,000 (947,000)
Minority interest (106,000) (70,000) (160,000) (282,000) (173,000)
----------------------------------------------------------------------------
PRO FORMA NET INCOME (LOSS) $ (387,000) $ 754,000 $ 501,000 $ (345,000) $ 1,184,000
----------------------------------------------------------------------------
----------------------------------------------------------------------------
</TABLE>
See Notes to Combined Financial Statements.
3
<PAGE>
APIO, INC. AND ITS COMBINED AFFILIATES
COMBINED STATEMENTS OF EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND YEARS ENDED DECEMBER 31, 1998, 1997 AND
1996
<TABLE>
<CAPTION>
Common Stock
--------------------------------------------
Retained
Earnings
South Pacific (Deficit)
Coast West and
Paper Produce Additional Partners'
Cal-Ex Company, Marketing, Paid-in Equity Notes
Apio, Inc. Trading Inc. Inc. Capital (Deficit) Receivable Combined
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1995 (Note 14) $ 150,000 $ 1,000 $ 2,000 $ - $ 89,000 $ 2,243,000 $ - $ 2,485,000
Distribution of 100,00 shares
of Pacific West Produce
Marketing, Inc. common stock
(Note 11) - - - 130,000 - (130,000) - -
Acquisition of 20,300 shares of
Richland Sales Company common
stock (Note 11) - - - 969,000 453,000 - - 1,422,000
Repurchase and retirement of
4,920 shares of Richland Sales
Company common stock (Note 11) - - - (235,000) (165,000) - - (400,000)
Net income - - - - - 2,537,000 - 2,537,000
Distributions to partners - - - - - (1,373,000) - (1,373,000)
Apio, Inc. dividend ($328) per
share - - - - - (984,000) - (984,000)
Cal-Ex Trading dividend ($38
per share) - - - - - (135,000) - (135,000)
Pacific West Produce Marketing,
Inc. dividend ($16 per share) - - - - - (39,000) - (39,000)
South Coast Paper Company, Inc.
dividend ($133 per share) - - - - - (320,000) - (320,000)
-------------------------------------------------------------------------------------------------
Balance, December 31, 1996 150,000 1,000 2,000 864,000 377,000 1,799,000 - 3,193,000
Issuance of 7,690 shares of
Richland Sales Company
common stock (Note 11) - - - 625,000 - - (639,000) (14,000)
Net (loss) - - - - - (383,000) - (383,000)
Distributions to partners - - - - - (1,424,000) - (1,424,000)
Conversion of 100,000 shares
of Pacific West Produce
Marketing, Inc. into 3,568
shares of common stock of
Richland Sales Company
(Note 11) - - - - - - - -
Apio, Inc. dividend ($189
per share) - - - - - (568,000) - (568,000)
Cal-Ex Trading dividend
($40 per share) - - - - - (144,000) - (144,000)
Pacific West Produce Marketing,
Inc. dividend ($45 per share) - - - - - (108,000) - (108,000)
South Coast Paper Company, Inc.
dividend ($108 per share) - - - - - (260,000) - (260,000)
-------------------------------------------------------------------------------------------------
Balance, December 31, 1997 150,000 1,000 2,000 1,489,000 377,000 (1,088,000) (639,000) 292,000
Contribution of capital to Apio
Produce Sales (Note 11) - - - - - 1,299,000 (421,000) 878,000
Contribution of capital to
Central Coast Fresh-Cut, LP
through the forgiveness of debt
(Note 11) - - - - - 1,300,000 - 1,300,000
Net income - - - - - 923,000 - 923,000
Distributions to partners - - - - - (270,000) - (270,000)
Cal-Ex Trading dividend
($75 per share) - - - - - (150,000) - (150,000)
South Coast Paper Company,
Inc. dividend ($63 per share) - - - - - (83,000) - (83,000)
-------------------------------------------------------------------------------------------------
Balance, December 31, 1998 150,000 1,000 2,000 1,489,000 $ 377,000 $ 1,931,000 $(1,060,000) $ 2,890,000
Net (loss) (unaudited) - - - - - (588,000) - (588,000)
Payment received on notes
receivables - - - - - - 460,000 460,000
Contribution of capital to
Central Coast Frest-Cut, LP - - - - - 920,000 - 920,000
-------------------------------------------------------------------------------------------------
Balance, September 30,
1999 (unaudited) $ 150,000 $ 1,000 $ 2,000 $ 1,489,000 $ 377,000 $ 2,263,000 $ (600,000) $ 3,682,000
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Combined Financial Statements.
4
<PAGE>
APIO, INC. AND ITS COMBINED AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 AND YEARS ENDED DECEMBER 31,
1998, 1997 AND 1996
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
(unaudited) Years Ended December 31,
----------------------------------------------------------------------
1999 1998 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (588,000) $ 1,282,000 $ 923,000 $ (383,000) $ 2,537,000
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities
Depreciation and amortization 1,469,000 1,676,000 2,201,000 1,728,000 879,000
Deferred taxes - (30,000) (20,000) 4,000 (457,000)
Provision for doubtful accounts and notes receivable 69,000 964,000 967,000 813,000 882,000
(Gain) loss on disposal of property and equipment 38,000 (26,000) (17,000) (311,000) 15,000
Interest income added to notes receivable (625,000) (599,000) (957,000) (722,000) (306,000)
Minority interest in combined affiliates and
consolidated subsidiaries 106,000 70,000 160,000 282,000 173,000
Impairment reserve on long-lived assets 120,000 - - 450,000
Undistributed equity in income loss of affiliates 18,000 - 7,000 (40,000) 5,000
Changes in working capital components
(Increase) decrease in accounts receivable (4,777,000) (3,379,000) (251,000) (4,615,000) 3,918,000
(Increase) in advances to growers (903,000) (1,223,000) (931,000) (226,000) (58,000)
(Increase) decrease in inventory (176,000) (425,000) (583,000) (1,399,000) 145,000
(Increase) decrease in investment in
farming activities 959,000 (579,000) (685,000) (659,000) (222,000)
(Increase) decrease in prepaid expenses and other
assets 377,000 (196,000) (14,000) 190,000 (306,000)
Increase (decrease) in grower payables 2,157,000 (183,000) (2,194,000) (157,000) (4,502,000)
Increase (decrease) in accounts payable (626,000) 2,277,000 2,911,000 2,138,000 (1,141,000)
Increase in accrued expenses 35,000 1,133,000 832,000 (613,000) 862,000
----------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (2,347,000) 762,000 2,349,000 (3,520,000) 2,424,000
----------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property and equipment (3,166,000) (1,353,000) (2,180,000) (2,510,000) (1,789,000)
Proceeds from sale of property and equipment 119,000 82,000 78,000 446,000 15,000
Proceeds from notes receivable 6,878,000 9,154,000 11,294,000 9,865,000 10,467,000
Advances made on notes receivable (6,444,000) (9,345,000) (11,175,000) (9,539,000) (14,701,000)
(Increase) decrease in investments 101,000 (51,000) (36,000) (53,000) (95,000)
Other 25,000 (5,000) (16,000) (244,000)
----------------------------------------------------------------------
NET CASH (USED IN) INVESTING ACTIVITIES (2,487,000) (1,518,000) (2,035,000) (2,035,000) (6,103,000)
----------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in outstanding checks in excess of
bank balance 2,016,000 (1,702,000) (1,426,000) 2,926,000 (1,513,000)
Net proceeds from borrowings on line-of-credit agreement 163,000 2,438,000 2,061,000 1,604,000 4,930,000
Proceeds from borrowings on long-term debt 2,242,000 661,000 681,000 3,008,000 3,415,000
Principal payments on long-term debt (950,000) (1,636,000) (1,999,000) (957,000) (835,000)
Proceeds from partnership contributions 920,000 1,299,000 1,299,000
Purchase and retirement of treasury stock - - - (400,000)
Dividends and distributions to stockholders and partners - - (503,000) (2,504,000) (2,851,000)
Dividends and distributions to minority interests - - (142,000) (207,000) (277,000)
Proceeds from notes receivable 460,000 -
----------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 4,851,000 1,060,000 (29,000) 3,870,000 2,469,000
----------------------------------------------------------------------
NET INCREASE IN CASH 17,000 304,000 285,000 (1,685,000) (1,210,000)
CASH
Beginning 845,000 560,000 560,000 2,245,000 3,455,000
----------------------------------------------------------------------
Ending $ 862,000 $ 864,000 $ 845,000 $ 560,000 $ 2,245,000
----------------------------------------------------------------------
----------------------------------------------------------------------
</TABLE>
See Notes to Combined Financial Statements.
5
<PAGE>
APIO, INC. AND ITS COMBINED AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS, CONTINUED
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 AND YEARS ENDED DECEMBER 31,
1998, 1997 AND 1996
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
(unaudited) Years Ended December 31,
----------------------------------------------------------------------
1999 1998 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash payments for:
Interest $ 1,106,000 $ 1,525,000 $ 1,961,000 $ 1,600,000 $ 986,000
----------------------------------------------------------------------
----------------------------------------------------------------------
Income taxes $ 18,000 $ 7,000 $ 12,000 $ 18,000 $ 62,000
----------------------------------------------------------------------
----------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Capital lease obligations incurred for use of equipment $ - $ 117,000 $ 117,000 $ 388,000 $ 404,000
----------------------------------------------------------------------
----------------------------------------------------------------------
Injection of capital from assumption of receivable $ - $ - $ - $ - $ 453,000
----------------------------------------------------------------------
----------------------------------------------------------------------
Acquisition of net assets and liabilities of
Richland Sales Company:
Accounts receivable $ - $ - $ - $ - $ 4,916,000
Prepaid expenses - - - - 29,000
Property and equipment - - - - 2,813,000
Accounts payable - - - - (700,000)
Grower payable - - - - (5,622,000)
Deferred taxes - - - - (467,000)
Common stock - - - - (969,000)
----------------------------------------------------------------------
$ - $ - $ - $ - $ -
----------------------------------------------------------------------
----------------------------------------------------------------------
Contribution of capital through forgiveness of debt $ - $ 1,300,000 $ 1,300,000 $ - $ -
----------------------------------------------------------------------
----------------------------------------------------------------------
Acquisition of land lease rights with an offset to
grower advance $ - $ 725,000 $ 725,000 $ - $ -
----------------------------------------------------------------------
----------------------------------------------------------------------
Capital contribution through issuance of note receivable $ - $ 421,000 $ 421,000 $ - $ -
----------------------------------------------------------------------
----------------------------------------------------------------------
Common stock issued with issuance of notes receivable $ - $ - $ - $ 639,000 $ -
----------------------------------------------------------------------
----------------------------------------------------------------------
Sale of lease rights in exchange for notes receivable $ 425,000 $ -
----------------------------------------------------------------------
----------------------------------------------------------------------
</TABLE>
6
<PAGE>
APIO, INC. AND ITS COMBINED AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
INFORMATION RELATING TO SEPTEMBER 30, 1999 AND 1998 IS UNAUDITED
- -------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS: Apio, Inc. and its combined affiliates (collectively,
Apio or the Company) are engaged in the harvesting, packing, cooling,
processing, transportation, distribution and marketing of fresh fruits and
vegetables grown in California, Arizona and Mexico. The Company contracts
with independent and related party growers to provide the above services
relating to the growers' products. The Company also purchases products for
processing and sale. The Company's and growers' products are processed and
packed by the Company and are sold to retail and other food product companies
throughout the United States, Canada and Pacific Rim Countries.
MANAGEMENT PLANS: In order to improve operations in 1999, management plans to
increase sales of processed produce, improve gross profit on produce sales,
increase volume relating to stonefruit by obtaining additional farmers or
through other means, and liquidate certain property from nonessential
operating entities. The Company has projected an increase in its processed
produce sales from approximately $35,000,000 in 1998 to approximately
$48,000,000 in 1999, a 37% increase (unaudited). Processed produce has grown
in excess of this percentage when comparing 1996 to 1997 and 1997 to 1998.
The gross profit for processed produce is significantly greater than other
produce sales. The Company is currently analyzing various alternatives to
increase the volume of stonefruit and other fruits packaged and sold by
Pacific West Produce Marketing, Inc. (PWPM). These alternatives include
potentially partnering with farmers or combining operations with other
packagers/shippers. No agreements are currently in place relating to these
matters. The 1999 projections of operations for PWPM reflect essentially a
break-even position (unaudited) as compared to a net loss of approximately
($1,617,000) in 1998. This will be achieved by cost reductions and
anticipated volume increases due to better weather conditions anticipated in
1999 vs. 1998. As disclosed in Note 3, the Company is holding certain
property for sale. The proceeds from the sale will be used to reduce the
obligations of the Company with any excess being used for working capital.
Management is also reviewing all operating entities for cost reduction
opportunities to improve cash flows and operating results. In addition, if
required to maintain liquidity, the stockholders/partners of the combined
group will make capital contributions. Management believes the aforementioned
plans will enable the Company to continue profitable operations and improve
cash flows.
Significant Accounting Policies
BASIS OF COMBINATION: The combined financial statements include the accounts
of Apio, Inc. and its 60%-owned subsidiary, Apio Cooling (A Limited
Partnership); Apio Produce Sales (A General Partnership) and its 95%-owned
subsidiary, Pacific West Cold Storage (A California Limited Partnership);
South Coast Paper Company, Inc.; Cal Ex Trading (A California Corporation);
Pacific West Produce Marketing, Inc. and its 99%-owned subsidiary, Pacific
West Citrus (A General Partnership); and Central Coast Fresh-Cut, LP and its
99%-owned subsidiary, Fresh-King, LLC, all of which are under common
ownership. The amounts combined also include amounts owned directly in Apio
Cooling and Central Coast Fresh-Cut, LP by common owners. All significant
intercompany accounts have been eliminated in combination.
CHANGE IN REPORTING ENTITY: As explained further in Note 14 to the combined
financial statements, in 1994 the Company adopted the policy of including
Apio Cooling, a subsidiary company, on a consolidated basis, including
amounts owned directly by the common owners. This subsidiary had previously
been reported on the equity method. Additionally, in 1995 the Company adopted
the policy of including Central Coast Fresh-Cut, LP, an affiliate, on a
combined basis, including amounts owned directly by its common owners.
USE OF ESTIMATES: The preparation of combined financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the amounts reported in the
combined financial statements and accompanying notes. Actual results could
differ from those estimates.
7
<PAGE>
APIO, INC. AND ITS COMBINED AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
INFORMATION RELATING TO SEPTEMBER 30, 1999 AND 1998 IS UNAUDITED
- -------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS: For purposes of reporting cash flows, the Company
considers all highly liquid debt instruments purchased with a maturity of
three months or less to be cash equivalents.
INVENTORY: Inventory principally consists of packaging material and fresh
produce. Inventory is valued at the lower of cost or market and cost is
determined on the first-in first-out method.
INVESTMENTS IN AFFILIATES: Investments in affiliates are recorded on the
equity method.
REVENUE RECOGNITION: The Company recognizes revenue generated from produce
sales, commissions, cooling (service revenue), freight and processing of
fruits and vegetables when the produce is shipped and ownership transfers.
Packing revenue (service revenue) is recognized when the services are
completed.
INVESTMENTS IN FARMING ACTIVITIES: The Company invests in certain farming
activities. The investments consist of cash advances to growers for expenses
to be incurred during the growing season, in exchange for a percentage
ownership in the crops. Net farming revenue or loss is generally recognized
on these investments based on the Company's percentage ownership of the net
sales proceeds of the crops as fields are closed. Additionally, certain
farming agreements contain provisions wherein the Company bears the risk of
loss if the net sales proceeds from the crops are not sufficient to cover the
expenses incurred from the farming activities.
ADVANCES TO GROWERS: Advances are provided to growers for crop financing.
Advances are generally collected by withholding a percentage of the proceeds
from the sale of the grower's crop. The Company provides an allowance for
doubtful accounts based on the anticipated collectibility of each specific
advance.
PROPERTY AND EQUIPMENT: Property and equipment is recorded at cost.
Depreciation and amortization are provided using the straight-line method
over the following useful lives:
<TABLE>
<CAPTION>
Years
-------------------------------
<S> <C>
Land improvements 15 - 31
Building and improvements 25 - 31
Furniture and equipment 5 - 7
Machinery and equipment 5 - 15
Transportation equipment 5
Leasehold improvements Lesser of the life of the lease
or economic life of the asset
</TABLE>
The amortization expense on assets acquired under capital leases is included
with depreciation expense on owned assets.
PROPERTY HELD FOR SALE: Property held for sale is carried at the lower of
depreciated cost or fair value, less estimated cost of disposition. No
allowance for loss was required at December 31, 1998.
INTANGIBLE ASSETS: Intangible assets consist of goodwill and land lease
rights. The intangible assets are amortized from 5 to 15 years.
8
<PAGE>
APIO, INC. AND ITS COMBINED AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
INFORMATION RELATING TO SEPTEMBER 30, 1999 AND 1998 IS UNAUDITED
- -------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
IMPAIRMENT OF LONG-LIVED ASSETS: The Company reviews its long-lived assets
and intangibles related to those assets periodically to determine potential
impairment by comparing the carrying value of the long-lived assets and
intangible assets with the estimated future net undiscounted cash flows
expected to result from the use of the assets, including cash flows from
disposition. Should the sum of the expected future net cash flows be less
than the carrying value, the Company would recognize an impairment loss at
that date. An impairment loss would be measured by comparing the amount by
which the carrying value exceeds the fair value (estimated discounted future
cash flows) of the long-lived assets and intangible assets.
CONCENTRATIONS OF CREDIT RISK: The Company's financial instruments that are
exposed to concentrations of credit risk consist primarily of cash and cash
equivalents, trade accounts receivable, grower advances and notes receivable.
The Company, from time to time, may have bank deposits in excess of insured
limits. The Company has not experienced any losses in such accounts and
believes it is not exposed to any significant credit risk on cash and cash
equivalents.
The Company routinely assesses the financial strength of customers and
growers and, as a consequence, believes that trade receivables, grower
advances and notes receivable credit risk exposure is limited. Credit losses
for bad debts are provided for in the combined financial statements through a
charge to operations. A valuation allowance is provided for known and
anticipated credit losses.
FAIR VALUE OF FINANCIAL INSTRUMENTS: The Company has adopted Financial
Accounting Standards Board (FASB) Statement No. 107, DISCLOSURES ABOUT FAIR
VALUE OF FINANCIAL INSTRUMENTS, which requires disclosure of fair value
information about financial instruments, whether or not recognized in the
combined financial statements, for which it is practical to estimate that
value. Statement No. 107 excludes certain financial instruments and all
nonfinancial instruments from its disclosure. Accordingly, the aggregate fair
value amounts presented do not represent the underlying value of the Company.
The following methods and assumptions were used by the Company in estimating
the fair value of each class of financial instruments for which it is
practical to estimate the value:
CASH: The carrying amounts reported in the balance sheets for cash
approximate the fair value.
ACCOUNTS RECEIVABLE, GROWER ADVANCES, GROWER PAYABLES AND ACCOUNTS PAYABLE:
The carrying value reported in the balance sheets approximates the fair
value.
NOTES RECEIVABLE: The carrying amounts of fixed rate arrangements
approximate the fair value at December 31, 1998 and 1997. The carrying
amounts for variable rate notes receivable approximate fair value since the
interest rates change as changes are made to market interest rates.
NOTES PAYABLE AND LONG-TERM DEBT: The carrying amounts of the
line-of-credit agreement and variable rate notes payable approximate fair
value since the interest rates change as changes are made to market
interest rates. The carrying amounts of fixed rate arrangements approximate
the fair value at December 31, 1998 and 1997.
INCOME TAXES: Apio, Inc., Calo Ex Trading, South Coast Paper Company, Inc.
and Pacific West Produce Marketing, Inc. have elected to be taxed under
sections of federal and state income tax laws which provide that, in lieu of
corporation income taxes, the stockholders separately account for their pro
rata share of the companies' items of income, deductions, losses and credits,
and the companies will pay state taxes at a reduced rate. Each of the
companies file separate federal and state tax returns.
9
<PAGE>
APIO, INC. AND ITS COMBINED AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
INFORMATION RELATING TO SEPTEMBER 30, 1999 AND 1998 IS UNAUDITED
- -------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In 1996, Pacific West Produce Marketing, Inc. was a C corporation and subject
to federal and state income and franchise taxes. In March 1997, Pacific West
Produce Marketing, Inc. was merged into Richland Sales Company and its tax
status changed at that time. See Note 11 for discussion of the merger.
Apio Produce Sales and Central Coast Fresh-Cut, LP are partnerships and, as
such, the partnerships' operations are taxed at the partner level.
Deferred taxes are provided on a liability method whereby deferred tax assets
are recognized for deductible temporary differences and operating loss and
tax credit carryforwards and deferred tax liabilities are recognized for
taxable temporary differences. Temporary differences are the differences
between the reported amounts of assets and liabilities and their tax bases.
The Company's temporary differences relate primarily to property and
equipment and allowance for doubtful accounts. Deferred tax assets are
reduced by a valuation allowance when, in the opinion of management, it is
more likely than not that some portion or all of the deferred tax assets will
not be realized. Deferred tax assets and liabilities are adjusted for the
effects of changes in tax laws and rates on the date of enactment.
PRO FORMA STATEMENT OF OPERATIONS ADJUSTMENTS: The pro forma statement of
operations information included in these combined financial statements is to
show what the significant effects might have been on the historical
statements of operations had the Companies not been treated as S corporations
and partnerships for income tax purposes.
ADVERTISING COSTS: Advertising costs are expensed as incurred. Advertising
expense totaled approximately $98,000, $127,000 and $315,000 for the years
ended December 31, 1998, 1997 and 1996, respectively.
RECLASSIFICATIONS: Certain items in the combined balance sheet and the
combined statements of operations, equity and cash flows as of and for the
year ended December 31, 1996 have been reclassified to conform to the
December 31, 1998 presentation. These reclassifications had no effect on net
income or equity.
SEGMENT INFORMATION: Effective January 1, 1998, the Company adopted FASB
Statement No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION. Statement No. 131 superseded FASB Statement No. 14, FINANCIAL
REPORTING FOR SEGMENTS OF A BUSINESS ENTERPRISE. Statement No. 131
establishes standards for the way the public business enterprises report
information about operating segments in annual financial statements and
requires that those enterprises report selected financial information about
operating segments in interim financial reports. Statement No. 131 also
establishes standards for related disclosures about products and services,
geographic areas and major customers. The adoption of Statement No. 131 did
not affect results of operations or financial position.
NEW PRONOUNCEMENTS: In 1998, the American Institute of Certified Public
Accountants issued Statement of Position (SOP) 98-5, REPORTING ON THE COSTS
OF START-UP ACTIVITIES. SOP 98-5 provides guidance on the financial reporting
of start-up costs and organization costs. It requires that costs of start-up
activities and organization costs be expensed as incurred. SOP 98-5 will
first be required for the Company's year ending December 31, 1999. Based on a
preliminary analysis, management does not anticipate that the adoption of SOP
98-5 will have a material impact on the combined financial statements as of
the date of adoption.
10
<PAGE>
APIO, INC. AND ITS COMBINED AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
INFORMATION RELATING TO SEPTEMBER 30, 1999 AND 1998 IS UNAUDITED
- -------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTERIM FINANCIAL INFORMATION (UNAUDITED): The financial statements and notes
related thereto as of September 30, 1999 and for the nine-month periods ended
September 30, 1999 and 1998 are unaudited. In the opinion of management, the
interim financial statements are prepared on a basis consistent with the
Company's annual financial statements and include all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation of
the financial position and results of operations. The operating results for
the interim periods are not indicative of the operating results to be
expected for a full year or for other interim periods. Not all disclosures
required by generally accepted accounting principles necessary for a complete
presentation have been included.
NOTE 2. NOTES RECEIVABLE
Notes receivable at December 31 consist of the following:
<TABLE>
<CAPTION>
1998 1997
-------------------------------
<S> <C> <C>
Unsecured note receivable, grower and grower's affiliate, with interest at
a certain bank's prime rate (7.75% at December 31, 1998) plus 2%, due in
full October 2000 $ 907,000 $ 752,000
Various unsecured notes receivable from growers, due on demand with
interest at fixed rates ranging from 10% to 16% 1,244,000 620,000
Various notes receivable from growers, with principal and interest ranging
from the prime rate plus .5% to the prime rate plus 3%, payments to be
withheld from proceeds derived from crops, due through December 1999,
secured by crops 3,311,000 3,777,000
Note receivable, grower, payable in annual installments of $10,000 plus
interest at the prime rate (7.75% at December 31, 1998) plus 1%, with
final payment due June 2001 - 140,000
Note receivable due from grower in annual installments of $97,500 plus
interest at 8%, with final payment due December 1999, secured by crops 97,000 195,000
Various unsecured notes receivable due from individuals and companies,
bearing interest from 8.5% through 10%, due December 1999 102,000 103,000
Note receivable due from grower in annual installments of $20,000 plus
interest at prime rate plus 1%, with final payment due February 2005,
secured by crops 285,000 -
Other 125,000 218,000
-------------------------------
6,071,000 5,805,000
Less allowance for doubtful notes (935,000) (1,044,000)
-------------------------------
5,136,000 4,761,000
Less current portion 4,008,000 3,775,000
-------------------------------
Long-term portion $ 1,128,000 $ 986,000
-------------------------------
-------------------------------
</TABLE>
11
<PAGE>
APIO, INC. AND ITS COMBINED AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
INFORMATION RELATING TO SEPTEMBER 30, 1999 AND 1998 IS UNAUDITED
- -------------------------------------------------------------------------------
NOTE 2. NOTES RECEIVABLE (CONTINUED)
The Company is obligated to make additional loans to growers under certain of
these note receivable agreements. At December 31, 1998, the Company had
outstanding commitments to fund up to an additional $1,638,000 to growers
under these existing note receivable agreements.
IMPAIRED NOTES RECEIVABLE: Information about impaired notes receivable as of
and for the years ended December 31, is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------------------
<S> <C> <C> <C>
Impaired notes receivable for which there is a related
allowance $ 573,000 $ 641,000 $ 113,000
------------------------------------------
------------------------------------------
Related allowance $ 323,000 $ 362,000 $ -
------------------------------------------
------------------------------------------
Average balance (based on quarter-end balances) $ 744,000 $ 553,000 $ 623,000
------------------------------------------
------------------------------------------
Interest income recognized $ 13,000 $ 65,000 $ 3,000
------------------------------------------
------------------------------------------
</TABLE>
A note receivable is impaired when it is probable the Company will be unable
to collect all contractual principal and interest payments due in accordance
with the terms of the note agreement. Impaired notes receivable are measured
based on the present value of expected future cash flows discounted at the
note's effective interest rate or, as a practical expedient, at the note's
observable market price or the fair value of the collateral if the note is
collateral dependent. The amount of impairment, if any, and any subsequent
changes are included in the allowance account.
NOTE 3. PROPERTY AND EQUIPMENT
Property and equipment at December 31 consist of:
<TABLE>
<CAPTION>
1998 1997
-----------------------------
<S> <C> <C>
Land and improvements $ 1,233,000 $ 1,221,000
Building and improvements 6,058,000 5,635,000
Office furniture and equipment, including assets acquired under capital
leases of $144,000 1998; $144,000 1997
1,391,000 1,168,000
Machinery and equipment, including assets acquired under capital leases
of $1,099,000 1998; $1,170,000 1997
8,172,000 7,434,000
Transportation equipment, including assets acquired under capital leases
of $102,000 1998; $102,000 1997
1,368,000 1,401,000
Leasehold improvements 154,000 315,000
Construction in progress 31,000 247,000
-----------------------------
18,407,000 17,421,000
Less accumulated depreciation and amortization, including amounts
applicable to assets acquired under capital leases of $503,000 1998;
$309,000 1997 6,059,000 4,575,000
-----------------------------
$ 12,348,000 $ 12,846,000
-----------------------------
-----------------------------
</TABLE>
12
<PAGE>
APIO, INC. AND ITS COMBINED AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
INFORMATION RELATING TO SEPTEMBER 30, 1999 AND 1998 IS UNAUDITED
- -------------------------------------------------------------------------------
NOTE 3. PROPERTY AND EQUIPMENT (CONTINUED)
The Company has entered into a commitment of approximately $1,300,000 for the
purchase of equipment and expansion of a certain facility.
Property held for sale consists of property and equipment held by Pacific
West Cold Storage (1998 and 1997) and Fresh King, LLC (1998 only). The
property and equipment has a depreciated-cost basis of $1,349,000 and
$660,000 as of December 31, 1998 and 1997, respectively. The depreciated-cost
basis approximates its fair market value. At December 31, 1997, management
determined a reserve of $450,000 was required relating to certain long-lived
assets of Fresh-King, LLC. No additional reserves were recorded at December
31, 1998.
NOTE 4. LINE OF CREDIT AND SUBSEQUENT EVENTS
Apio, Inc. and Apio Produce Sales had a credit facility with Central Coast
Production Credit Association in the amount of $7,347,000, which bore
interest at the prime rate (7.75% at December 31, 1998) and expired on
December 6, 1998. The line was subsequently renewed, as discussed below. The
Company had borrowings in excess of the credit facility limit at December 31,
1998. The covenants attributable to this facility were still effective as of
December 31, 1998 and related to working capital levels and debt-to-net worth
ratios with which the Company was not in compliance. This facility also
contained restrictions on the incurrence of additional debt and the payment
of dividends and bonuses to stockholders.
On February 17, 1999, the Company's borrowings on this facility had
accumulated to $8,995,000. At that date, the credit facility was restructured
whereby a line of credit of $6,517,000 was created along with new term loans
created and funded. The revolving line of credit bears interest at prime rate
(7.75% at February 17, 1999) plus .5% and requires weekly interest payments
with the outstanding principal due July 1, 1999. The term loans are also
covered by the terms and conditions of the credit facility. One of the term
loans was issued for $4,067,000, bears interest at prime rate plus .5% and
requires monthly installments of $37,000 plus interest, with the outstanding
balance due February 1, 2009. The other term loan was issued for $1,534,000,
bears interest at prime rate plus .5% and requires two annual installments of
$585,000 beginning on February 1, 2000, with the outstanding balance due
February 1, 2002. The credit facility is secured by the Company's accounts
receivable, inventory and farm products and is guaranteed by the stockholders
of Apio, Inc. Borrowings under the facility are limited to eligible accounts
receivable of Apio, Inc., less certain adjustments, as provided for in the
agreement.
The credit facility contains certain financial covenants relating to working
capital and debt-to-net worth ratios. The credit facility also contains
restrictions on the incurrence of additional debt and payment of dividends
and bonuses to stockholders. Although measurement has not been performed, it
appears that the Company is not in compliance with covenants for this credit
facility at June 9, 1999. The Company is currently renegotiating a new
agreement so as to bring the Company into compliance.
13
<PAGE>
APIO, INC. AND ITS COMBINED AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
INFORMATION RELATING TO SEPTEMBER 30, 1999 AND 1998 IS UNAUDITED
- -------------------------------------------------------------------------------
NOTE 5. LONG-TERM DEBT
Notes payable at December 31 are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
-----------------------------
<S> <C> <C>
Various notes payable to bank, due in monthly installments aggregating $5,000,
plus interest at variable rates ranging from the federal funds rate (5.22%
at December 31, 1998) plus 3.45% and three-year Treasury bill rate (5.30% at
December 31, 1998) plus 3.6%, and monthly installments aggregating $13,000,
including interest at fixed rates ranging from 8.9% to 10.3%, with final
payments due from June 1999 to April 2002, secured by equipment $ 411,000 $ 619,000
Various notes payable to a commercial finance company, due in monthly
installments aggregating $13,000, including interest ranging from 7.3% to
13.1%, with final payments due from April 2000 to October 2002, secured by
equipment 89,000 132,000
Notes payable to bank, due in monthly installments aggregating $11,000,
including interest ranging from 7.8% to 9.5%, with final payments due from
August to December 2015, secured by deed of trust on real property 1,091,000 1,119,000
Various notes payable to bank, due in quarterly installments aggregating
$25,000, including interest at the variable three-year Treasury bill rate
plus 2.45% (5.3% at December 31, 1998) and a fixed rate of 8.4%, with final
payments due from July 2001 to July 2018, secured by deed of trust on real
property 433,000 495,000
Note payable, commercial finance company, due in monthly installments of
$8,000, including interest at 10.25%, with final payment due November 2001,
secured by equipment 252,000 323,000
Note payable to individual with interest paid quarterly at 8%, payable in annual
installments of $18,000, with final payment due September 2001, secured by a
deed of trust on real property 212,000 230,000
Note payable to vendor with interest paid monthly at the prime rate (7.75% at
December 31, 1998) plus 1%, due April 1998, secured by second deed of trust on
real property - 259,000
Note payable to insurance company, due in monthly installments of $8,000,
including interest at the 30-day commercial paper rate (5.35% at December 31,
1998) plus 2.45%, with final payment due November 2004, secured by a deed of
trust on real property (1) 437,000 494,000
Note payable, bank, due in monthly installments of $23,000, including interest
at the bank's base rate (7.75% at December 31, 1998) plus .5%, with a final
payment of $1,791,000 due December 2006, secured by a first deed of trust on
real property and guaranteed by Apio and certain stockholders (2) 2,401,000 2,452,000
-----------------------------
Subtotals $ 5,326,000 $ 6,123,000
-----------------------------
</TABLE>
14
<PAGE>
APIO, INC. AND ITS COMBINED AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
INFORMATION RELATING TO SEPTEMBER 30, 1999 AND 1998 IS UNAUDITED
- -------------------------------------------------------------------------------
NOTE 5. LONG-TERM DEBT (CONTINUED)
<TABLE>
<CAPTION>
1998 1997
-----------------------------
<S> <C> <C>
Subtotals carried forward $ 5,326,000 $ 6,123,000
Note payable, bank, with interest paid monthly at the bank's base rate (7.75%
at December 31, 1998) plus 1.25%, due March 1999, secured by a first deed of
trust on real property and guaranteed by Apio and certain stockholders (2) (3) 425,000 425,000
Note payable to former partners, discounted at 10%, payable in annual
installments of $63,000 plus interest if not paid when due in 2001 154,000 197,000
Capitalized leases due in monthly installments aggregating $33,000, including
interest ranging from 4% to 12.5%, with final payments due from 1999 through
2002, secured by equipment with a depreciated cost of $842,000 at December 31,
1998 and guaranteed by certain stock-
holders of the Company 800,000 959,000
Notes payable, insurance company, due in monthly installments aggregating
$21,000, including interest ranging from 8.3% to 8.5%, due
December 2002, secured by equipment and guaranteed by Apio 842,000 1,013,000
Unsecured note payable to former employee with interest at prime rate
(7.75% at December 31, 1998) plus 5%, due December 1999 289,000 348,000
Other 11,000 18,000
-----------------------------
7,847,000 9,083,000
Less current maturities 1,760,000 1,616,000
-----------------------------
$ 6,087,000 $ 7,467,000
-----------------------------
-----------------------------
</TABLE>
(1) This note payable contains a financial covenant relating to minimum
tangible net worth, with which the Company was not in compliance at
December 31, 1998.
(2) These notes payable, bank, contain certain financial and reporting
covenants including debt-to-net worth ratios. The Company was not in
compliance with certain of these covenants at December 31, 1998. The
Company received a waiver of these violations dated June 30, 1999.
(3) Subsequent to year end, the due date on this note has been extended to
September 1999.
Aggregate maturities of long-term debt as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Years Ending December 31, Amount
- ------------------------- --------------
<S> <C>
1999 $ 1,760,000
2000 1,011,000
2001 1,045,000
2002 553,000
2003 221,000
Thereafter 3,257,000
--------------
$ 7,847,000
--------------
--------------
</TABLE>
15
<PAGE>
APIO, INC. AND ITS COMBINED AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
INFORMATION RELATING TO SEPTEMBER 30, 1999 AND 1998 IS UNAUDITED
- -------------------------------------------------------------------------------
NOTE 5. LONG-TERM DEBT (CONTINUED)
The following is a schedule by year of the future minimum lease payments
required under the capital leases together with the present value of the net
minimum lease payments at December 31, 1998:
<TABLE>
<CAPTION>
Present Value
Total Less of Net
Minimum Amount Minimum
Lease Representing Lease
Years Ending December 31, Payments Interest Payments
- ------------------------- ----------------------------------------------
<S> <C> <C> <C>
1999 $ 367,000 $ 63,000 $ 304,000
2000 287,000 32,000 255,000
2001 165,000 1,000 164,000
2002 80,000 3,000 77,000
----------------------------------------------
$ 899,000 $ 99,000 $ 800,000
----------------------------------------------
----------------------------------------------
</TABLE>
NOTE 6. INCOME TAXES
The provision (benefit) for income taxes for the years ended December 31 is
as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------------------
<S> <C> <C> <C>
Current:
State $ 46,000 $ 23,000 $ 51,000
Deferred (20,000) 4,000 10,000
Effect of change in tax status - - (467,000)
------------------------------------------
$ 26,000 $ 27,000 $ (406,000)
------------------------------------------
------------------------------------------
</TABLE>
The income tax provision differs from the amount of income tax determined by
applying the federal statutory tax rate to pretax income due to the following:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------------------
<S> <C> <C> <C>
Computed "expected" federal statutory tax expense $ 388,000 $ (26,000) $ 806,000
State income taxes, net of federal income tax benefit 60,000 15,000 141,000
Nontaxable earnings (losses) of nontaxable entities (422,000) 38,000 (886,000)
Effect of change in tax status - - (467,000)
------------------------------------------
$ 26,000 $ 27,000 $ (406,000)
------------------------------------------
------------------------------------------
</TABLE>
The components of the deferred tax assets and liabilities at December 31
consist of the following:
<TABLE>
<CAPTION>
1998 1997
----------------------------
<S> <C> <C>
Deferred tax assets, principally allowance for doubtful accounts and notes,
intangibles and state net operating loss carryforwards $ 47,000 $ 12,000
Deferred tax liabilities, principally property and equipment (27,000) (12,000)
----------------------------
$ 20,000 $ -
----------------------------
----------------------------
</TABLE>
16
<PAGE>
APIO, INC. AND ITS COMBINED AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
INFORMATION RELATING TO SEPTEMBER 30, 1999 AND 1998 IS UNAUDITED
- -------------------------------------------------------------------------------
NOTE 7. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES: The Company leases facilities and equipment under operating
lease agreements with various terms and conditions, which expire at various
dates through December 2002. The approximate future minimum lease payments
under these operating leases, excluding farmland leases, at December 31, 1998
are as follows:
<TABLE>
<CAPTION>
Years ending December 31, Amount
- ------------------------- ----------------
<S> <C>
1999 $ 471,000
2000 395,000
2001 270,000
2002 199,000
----------------
$ 1,335,000
----------------
----------------
</TABLE>
Total rent expense under these operating leases, including rent under
month-to-month arrangements, was approximately $730,000, $822,000 and
$648,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
The Company also leases farmland under various noncancelable leases expiring
through October 2000. Apio, Inc. and Pacific West Produce Marketing, Inc.
sublease substantially all of the farmland to growers who, in turn, agree to
market their crops through the Company. The subleases are generally
noncancelable and expire through 2003. As discussed in Note 8, some of these
leases and subleases are from related parties. The approximate future minimum
lease and sublease amounts receivable under farmland leases at December 31,
1998 are as follows:
<TABLE>
<CAPTION>
Minimum Sublease
Lease Rents
Years ending December 31, Payments Receivable Net
- ------------------------- --------------------------------------------
<S> <C> <C> <C>
1999 $ 2,633,000 $ (1,954,000) $ 679,000
2000 1,711,000 (1,184,000) 527,000
2001 300,000 (64,000) 236,000
2002 210,000 - 210,000
2003 181,000 - 181,000
Thereafter 494,000 - 494,000
---------------------------------------------
$ 5,529,000 $ (3,202,000) $ 2,327,000
---------------------------------------------
---------------------------------------------
</TABLE>
The net lease expense incurred for farmland leases for the years ended
December 31, 1998, 1997 and 1996 aggregated approximately $450,000, $374,000
and $291,000, respectively, and is included in the accompanying statements of
operations as a cost of service revenue. The net lease expense includes lease
payments and sublease amounts from related parties (Note 8).
GUARANTEES: The Company is affiliated with two entities through common
ownership which have not been included in the combined financial statements.
These entities are in the business of real estate investment and rental
activities. The affiliates are indebted to a bank under several notes payable
in the amount of approximately $2,850,000 as of December 31, 1998. The
indebtedness is secured by a deed of trust on the real property of the
affiliates and the guarantee of its stockholders, as well as the effective
guarantee of Apio, Inc. and Apio Produce Sales.
17
<PAGE>
APIO, INC. AND ITS COMBINED AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
INFORMATION RELATING TO SEPTEMBER 30, 1999 AND 1998 IS UNAUDITED
- -------------------------------------------------------------------------------
NOTE 7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
EMPLOYMENT AGREEMENTS: The Company has entered into employment agreements
with certain key employees and owners. These employment agreements provide
for these employees and owners to earn incentive bonuses based on the
financial performance of certain companies within the combined group, in
addition to their annual base salary. Certain key employees also have minimum
bonuses for their second year assuming continued employment. The incentive
bonuses amounted to $462,000, $0 and $600,000 for the years ended December
31, 1998, 1997 and 1996, respectively.
STOCK BUY-SELL AGREEMENT: The stockholders of Apio and Apio, Inc. and
partners of Apio Produce Sales and Apio Produce Sales have entered into a
stock buy-sell agreement (the Agreement). The Agreement contains various
provisions that restrict transfers. In addition, the Agreement requires the
Company to acquire all of the stock it can legally acquire of an individual
stockholder or partner's interest from an individual partner in the event of
the stockholder's or partner's death or total incapacitation as defined in
the Agreement. The computation to determine the purchase price for stock to
be acquired is also defined in the Agreement.
CONTINGENCIES: In the ordinary course of business, the Company is exposed to
claims asserted or unasserted that may arise from its performance under
contractual agreements or from regulatory matters. In the opinion of
management, settlement of such claims, if any, will not have a materially
adverse effect on the Company's financial position.
NOTE 8. RELATED PARTY TRANSACTIONS AND BALANCES
NOTES PAYABLE, STOCKHOLDERS AND PARTNERS: Notes payable to stockholders at
September 30 and December 31 consist of the following:
<TABLE>
<CAPTION>
December 31,
September 30, -------------------------------------
1999 1998 1997
-------------------------------------------------------
<S> <C> <C> <C>
Unsecured notes payable, stockholders,
with interest payable monthly at the
prime rate (7.75 December 31, 1998),
plus .5%, due December 1999 $ 2,813,000 $ 733,000 $ 698,000
Unsecured notes payable, stockholders and
partners, interest payable annually at
8.75%, due December 1999 (see Note 15) - - 1,300,000
-------------------------------------------------------
$ 2,813,000 $ 733,000 $ 1,998,000
-------------------------------------------------------
-------------------------------------------------------
</TABLE>
The interest expense for notes payable to related parties for the nine months
ended September 30, 1999 and 1998 and the years ended December 31, 1998 and
1997 aggregated approximately $153,000, $56,000, $144,000 and $131,000,
respectively. No interest expense was accrued or paid on notes payable to
related parties for the year ended December 31, 1996.
18
<PAGE>
APIO, INC. AND ITS COMBINED AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
INFORMATION RELATING TO SEPTEMBER 30, 1999 AND 1998 IS UNAUDITED
- -------------------------------------------------------------------------------
NOTE 8. RELATED PARTY TRANSACTIONS AND BALANCES (CONTINUED)
NOTES RECEIVABLE, RELATED PARTIES: Notes receivable from related parties at
September 30 and December 31 consist of the following:
<TABLE>
<CAPTION>
December 31,
September 30, --------------------------------
1999 1998 1997
-------------------------------------------------
<S> <C> <C> <C>
Unsecured notes receivable from stockholders with
interest paid annually at rates of 8.75%, 9.5%
and prime rate (7.75% at December 31, 1998) plus
.5% with final payments due December 1999 $ 2,847,000 $ 2,200,000 $ 2,029,000
Unsecured note receivable from an affiliate under
common control with interest paid annually at the
prime rate plus .5%, due December 31, 1999 205,000 239,000 286,000
Other related party notes - 38,000 203,000
-------------------------------------------------
3,052,000 2,477,000 2,518,000
Less current portion 3,052,000 - 722,000
-------------------------------------------------
- 2,477,000 1,796,000
Less allowance for doubtful notes - - (45,000)
-------------------------------------------------
Long-term portion $ - $ 2,477,000 $ 1,751,000
-------------------------------------------------
-------------------------------------------------
</TABLE>
Interest income earned on related party notes receivable for the nine months
ended September 30, 1999 and 1998 and the years ended December 31, 1998 and
1997 was approximately $153,000, $193,000, $319,000 and $207,000,
respectively. No interest income from related parties was earned for the year
ended December 31, 1996.
The Company has various unsecured notes receivable from stockholders
amounting to $600,000, $1,060,000 and $639,000 at September 30, 1999,
December 31, 1998 and 1997, respectively. These notes bear interest at rates
ranging from prime rate plus .5% to 8.75% and are due in December 1999. The
notes have been recorded as a reduction of equity as the notes were issued to
certain stockholders in exchange for common stock in one of the combined
companies and as a capital contribution in one of the combined companies
(Note 11).
FARMLAND LEASES AND SUBLEASES WITH RELATED PARTIES: The Company leases
farmland under a noncancelable operating lease from a company under common
control and a stockholder and/or partner of the combined companies, which
expires September 30, 1999. Rental expense for this ground lease for the nine
months ended September 30, 1999 and 1998 and for the years ended December 31,
1998, 1997 and 1996 was approximately $266,000, $211,000, $309,000, $251,000
and $224,000, respectively. This amount is included in the cost of service
revenue in the accompanying statements of operations for the nine months
ended September 30, 1999 and 1998 and for each of the three years ended
December 31, 1998, net of sublease revenue discussed in the following
paragraph.
The Company subleases farmland to stockholders of the combined group under a
month-to-month agreement and sublease agreement, which expire October 31,
1999. Rental income relating to this ground sublease for the nine months
ended September 30, 1999 and 1998 and for the years ended December 31, 1998,
1997 and 1996 amounted to approximately $95,000, $78,000, $113,000, $124,000
and $219,000, respectively.
19
<PAGE>
APIO, INC. AND ITS COMBINED AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
INFORMATION RELATING TO SEPTEMBER 30, 1999 AND 1998 IS UNAUDITED
- -------------------------------------------------------------------------------
NOTE 8. RELATED PARTY TRANSACTIONS AND BALANCES (CONTINUED)
RELATED PARTY GROWERS: The Company has both oral and written contracts with
related party growers who are stockholders and/or partners of the combined
group. The Company also purchases produce from these growers. Balances
outstanding with these growers as of September 30, 1999 and December 31, 1998
and 1997 are as follows. Transactions with these growers for the nine months
ended September 30, 1999 and 1998 and the years ended December 31, 1998, 1997
and 1996, are as follows:
<TABLE>
<CAPTION>
Statements of Operations Balance Sheets
---------------------------------------------------------
Nine Months Ended September 30,
---------------------------------------------------------
1999 1998 1999
---------------------------------------------------------
<S> <C> <C> <C>
Service revenue $ 8,820,000 $ 8,269,000 $ -
Cost of produce sales 775,000 748,000 -
Farming revenue (loss) (263,000) - -
Accounts receivable - - 105,000
Grower payables - - 861,000
Accounts payable - - 162,000
Accrued expenses - - 142,000
</TABLE>
<TABLE>
<CAPTION>
Statements of Operations Balance Sheets
-----------------------------------------------------------------------------
Years Ended December 31,
-----------------------------------------------------------------------------
1998 1997 1996 1998 1997
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Service revenue $ 10,336,000 $ 11,979,000 $ 13,934,000 $ - $ -
Cost of produce sales 1,648,000 422,000 187,000 - -
Farming revenue (loss) 84,000 305,000 (187,000) - -
Accounts receivable - - - 133,000 -
Grower payables - - - 1,690,000 1,298,000
Accounts payable - - - 62,000 26,000
Accrued expenses - - - 620,000 578,000
</TABLE>
Included in accrued expenses are funds advanced to the Company from these
related parties for the prepayment of packing supplies and services amounting
to approximately $70,000, $528,000 and $547,000 at September 30, 1999,
December 31, 1998 and 1997, respectively.
FACILITY LEASES WITH RELATED PARTIES: The Company leases a facility from a
company under common control on a month-to-month basis. Rental expense, which
is included in cost of produce sales, amounted to $30,000, $90,000, $120,000,
$130,000 and $90,000 for the nine months ended September 30, 1999 and 1998
and for the years ended December 31, 1998, 1997 and 1996, respectively. The
rent expense is included in the accompanying statement of operations as a
cost of produce sales. Included in accounts payable at September 30, 1999,
December 31, 1998 and 1997 relating to the rent expense is $320,000, $280,000
and $170,000, respectively.
20
<PAGE>
APIO, INC. AND ITS COMBINED AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
INFORMATION RELATING TO SEPTEMBER 30, 1999 AND 1998 IS UNAUDITED
- -------------------------------------------------------------------------------
NOTE 8. RELATED PARTY TRANSACTIONS AND BALANCES (CONTINUED)
OTHER TRANSACTIONS WITH AFFILIATES: The Company purchases services from
affiliates in which it has an equity interest. The services principally
relate to packing, repackaging and delivery expenses. Transactions and
balances outstanding with these affiliates for the nine months ended
September 30, 1999 and 1998 and the years ended December 31 are as follows:
<TABLE>
<CAPTION>
September 30, December 31,
---------------------------------------------------------------------
1999 1998 1998 1997 1996
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Service expense $ 65,000 $ 156,000 $ 324,000 $ 1,688,000 $ 331,000
Freight expense - - - 940,000 -
Cost of produce sales - - - 430,000 -
Accounts payable - - 6,000 280,000 -
</TABLE>
NOTE 9. MAJOR CUSTOMERS AND GEOGRAPHIC INFORMATION
The Company distributes growers' products and its purchased/processed
products to customers throughout the United States, Canada and Pacific Rim
countries. The following customers of the Company for the years ended
December 31, 1998, 1997 and 1996 comprised approximately 51%, 24% and 30%
(unaudited) of total units distributed or sold in each of the years,
respectively. Revenue relating to produce sales to these customers for the
years ended December 31, 1998, 1997 and 1996, and the customers' respective
accounts receivable balance at December 31, 1998 and 1997, are as follows:
<TABLE>
<CAPTION>
Revenue Accounts Receivable
--------------------------------------------------------------------------
1998 1997 1996 1998 1997
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Customer A $ 13,467,000 $ 10,246,000 $ 8,871,000 $ 1,114,000 $ 1,417,000
Customer B 12,334,000 - - 1,078,000 -
Customer C 11,157,000 15,547,000 14,728,000 1,341,000 1,491,000
</TABLE>
In the last quarter of 1998, the Company lost a division of Customer C;
however, management does not believe it did or will have an adverse effect on
the Company's operations.
During years ended 1998, 1997 and 1996, the Company had produce sales to
customers located outside the United States. Foreign sales by country for the
years ended 1998, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------------------------------------------
<S> <C> <C> <C>
Australia $ - $ 47,000 $ -
England 113,000 26,000 -
Hong Kong 1,144,000 700,000 966,000
Japan 18,515,000 11,088,000 8,194,000
Taiwan 718,000 718,000 599,000
</TABLE>
In addition, the Company contracts with independent growers in Mexico to
distribute their product. The Company's service and commission revenue from
these growers for the years ended December 31, 1998, 1997 and 1996 was
$3,219,000, $2,855,000 and $1,419,000, respectively. The grower payable
balances at December 31, 1998 and 1997, were $602,000 and $740,000,
respectively.
21
<PAGE>
APIO, INC. AND ITS COMBINED AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
INFORMATION RELATING TO SEPTEMBER 30, 1999 AND 1998 IS UNAUDITED
- -------------------------------------------------------------------------------
NOTE 10. SIGNIFICANT GROWER
The Company has contracted with an independent grower to harvest, pack, cool
and distribute their product. Approximately 16%, 14% and 17% (unaudited) of
product processed, packed and distributed to customers of the Company was
supplied by this grower for the years ended December 31, 1998, 1997 and 1996,
respectively. In addition, service revenue related to this grower amounted to
approximately $10,869,000, $12,237,000 and $13,772,000 for the years ended
December 31, 1998, 1997 and 1996, respectively. The grower payable to this
grower at December 31, 1998 and 1997 is $196,000 and $856,000, respectively.
The Company relies on its growers to provide fresh fruits and vegetables
(produce) to fulfill the requirements of its customers and to generate
service revenue. Management believes that the disruption in the supply of
product to be distributed to its customers from this grower, if it ceased to
provide produce to the Company, could be replaced through other growers. A
change in growers, however, could cause a delay in availability of product,
reduce service income of the Company and significantly impact the supply to
its customers, which would affect operating results adversely.
NOTE 11. EQUITY
The capital structure of each of the companies in the combined financial
statements is as follows:
<TABLE>
<CAPTION>
APIO, INC. 1998 1997 1996
- ----------------------------------------------------- ----------------------------------------------
<S> <C> <C> <C>
Common stock, no par value, 10,000 shares
authorized, 3,000 shares issued and outstanding $ 150,000 $ 150,000 $ 150,000
Retained earnings 4,897,000 3,993,000 3,574,000
----------------------------------------------
5,047,000 4,143,000 3,724,000
Less notes receivable, stockholders (Note 8) 1,060,000 639,000 -
Less minority interest 723,000 706,000 656,000
----------------------------------------------
$ 3,264,000 $ 2,798,000 $ 3,068,000
----------------------------------------------
----------------------------------------------
</TABLE>
The above equity balance is prior to an elimination entry relating to its
investment and accumulated losses from its subsidiary of $669,000, $1,097,000
and $758,000 at December 31, 1998, 1997 and 1996, respectively.
<TABLE>
<CAPTION>
APIO PRODUCE SALES 1998 1997 1996
- ----------------------------------------------------- ----------------------------------------------
<S> <C> <C> <C>
Partners' capital (deficit) $ 1,736,000 $ (1,414,000) $ 197,000
----------------------------------------------
----------------------------------------------
</TABLE>
In May 1998, the partners of Apio Produce Sales contributed $1,299,000 in
capital to the partnership. Approximately $421,000 of these contributions
were from funds advanced to a partner from Apio, Inc.
<TABLE>
<CAPTION>
CAL-EX TRADING 1998 1997 1996
- ----------------------------------------------------- ----------------------------------------------
<S> <C> <C> <C>
Common stock, $.01 par value, 100,000 shares
authorized, 4,000 shares issued and
outstanding $ 1,000 $ 1,000 $ 1,000
Additional paid-in capital 99,000 99,000 99,000
Retained earnings 93,000 79,000 20,000
----------------------------------------------
193,000 179,000 120,000
Less minority interest 19,000 18,000 12,000
----------------------------------------------
$ 174,000 $ 161,000 $ 108,000
----------------------------------------------
----------------------------------------------
</TABLE>
22
<PAGE>
APIO, INC. AND ITS COMBINED AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
INFORMATION RELATING TO SEPTEMBER 30, 1999 AND 1998 IS UNAUDITED
- -------------------------------------------------------------------------------
NOTE 11. EQUITY (CONTINUED)
<TABLE>
<CAPTION>
SOUTH COAST PAPER COMPANY, INC.
- --------------------------------
<S> <C> <C> <C>
Common stock, no par value, 15,000 shares
authorized, 2,400 shares issued and outstanding $ 2,000 $ 2,000 $ 2,000
Retained earnings 232,000 128,000 132,000
----------------------------------------------
$ 234,000 $ 130,000 $ 134,000
----------------------------------------------
----------------------------------------------
<CAPTION>
CENTRAL COAST FRESH-CUT, LP
- ---------------------------
<S> <C> <C> <C>
Partners' (deficit) $ (2,929,000) $ (3,839,000) $ (2,254,000)
----------------------------------------------
----------------------------------------------
</TABLE>
In 1998 the general partners, common owners, of Central Coast Fresh-Cut, LP
contributed $1,300,000 through the forgiveness of debt.
<TABLE>
<CAPTION>
PACIFIC WEST PRODUCE MARKETING, INC. 1998 1997 1996
- ------------------------------------ ----------------------------------------------
<S> <C> <C> <C>
Common stock, no par value, 275,000 shares
authorized, shares issued and outstanding
26,638 in 1998 and 1997; 18,948 in 1996 $ 1,489,000 $ 1,489,000 $ 864,000
Contributed capital 288,000 288,000 288,000
Retained earnings (deficit) (2,032,000) (415,000) 32,000
----------------------------------------------
(255,000) 1,362,000 1,184,000
Less minority interest 3,000 3,000 2,000
----------------------------------------------
$ (258,000) $ 1,359,000 $ 1,182,000
----------------------------------------------
----------------------------------------------
</TABLE>
In December 1996, Apio Produce Sales, which previously owned 100% of the
outstanding stock (100,000 shares) of PWPM, distributed all of the PWPM
common stock to its partners. The aggregate (deficit) value of the PWPM
common stock distribution to the Apio Produce Sales partners was ($405,000).
On October 11, 1996, the common stockholders of the Company acquired for cash
all of the outstanding shares of Richland Sales Company from Cargill,
Incorporated. The total acquisition cost was $1,422,000. The acquisition has
been accounted for using the push-down method of accounting, and results of
operations of Richland Sales Company since the date of acquisition are
included in the combined financial statements.
Subsequent to the acquisition, the Company received a purchase price
adjustment in the amount of $453,000. This amount has been recorded as
contributed capital.
In December 1996, Richland Sales Company repurchased 4,920 shares of common
stock. The consideration was $400,000 and was paid in cash.
On January 1, 1997, Richland Sales Company issued 7,690 shares of stock to
new stockholders for an aggregate amount of $625,000.
On March 28, 1997, PWPM was merged into Richland Sales Company (Richland).
Each outstanding share of PWPM was converted into .0357 shares of Richland
common stock. Simultaneously with the merger, Richland changed its name to
Pacific West Produce Marketing, Inc. The merger has been accounted for as a
combination of entities under common control in a manner similar to a pooling
of interest and, accordingly, all prior combined financial statements have
been restated to include the results of the combined entity.
23
<PAGE>
APIO, INC. AND ITS COMBINED AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
INFORMATION RELATING TO SEPTEMBER 30, 1999 AND 1998 IS UNAUDITED
- -------------------------------------------------------------------------------
NOTE 12. LIMITED PARTNERSHIP INFORMATION
Included in the combined financial statements are various limited
partnerships. Information relative to each partnership's equity in total is
as disclosed in Note 11. Information relative to the partnership equity
accounts, by general and limited partners, is as follows for the three years
ended December 31, 1998. All information is presented after consideration of
any prior period adjustments or restatements. (See Note 14.)
<TABLE>
<CAPTION>
General Limited
APIO COOLING (AC) Partners Partners Total
- -------------------------------- -------------------------------------------
<S> <C> <C> <C>
Balance, December 31, 1995 $ 710,000 $ 923,000 $ 1,633,000
Net income 343,000 696,000 1,039,000
Distributions and withdrawals (236,000) (464,000) (700,000)
-------------------------------------------
Balance, December 31, 1996 817,000 1,155,000 1,972,000
Net income 408,000 457,000 865,000
Distributions and withdrawals (326,000) (374,000) (700,000)
-------------------------------------------
Balance, December 31, 1997 899,000 1,238,000 2,137,000
Net income 240,000 236,000 476,000
Distributions and withdrawals (230,000) (195,000) (425,000)
-------------------------------------------
Balance, December 31, 1998 $ 909,000 $ 1,279,000 $ 2,188,000
-------------------------------------------
-------------------------------------------
</TABLE>
The partnership agreement of Apio Cooling has special allocation rules
relating to the allocation of net income between the general partner and
limited partners. The first calculation allocates 25% of the net income based
on ownership percentage of each partner, both general and limited. The
remaining 75% of net income is allocated based on the total number of units
processed by the partnership of each of its partners, both general and
limited, divided by the total of sold units. The result of this calculation
is multiplied by the remaining 75% of the net income. Apio Cooling is
consolidated with Apio, Inc. in the combined financial statements.
<TABLE>
<CAPTION>
General Limited
PACIFIC WEST COLD STORAGE (PWCS) Partners Partners Total
- -------------------------------- -------------------------------------------
<S> <C> <C> <C>
Balance, December 31, 1995 $ 3,000 $ 54,000 $ 57,000
Net (loss) (5,000) (88,000) (93,000)
-------------------------------------------
Balance (deficit), December 31, 1996 (2,000) (34,000) (36,000)
Net (loss) (8,000) (151,000) (159,000)
-------------------------------------------
Balance (deficit), December 31, 1997 (10,000) (185,000) (195,000)
Net (loss) (10,000) (192,000) (202,000)
-------------------------------------------
Balance (deficit), December 31, 1998 $ (20,000) $ (377,000) $ (397,000)
-------------------------------------------
-------------------------------------------
</TABLE>
The partnership agreement of Pacific West Cold Storage allocates net income
and loss based on the ownership percentages of the general and limited
partners. Pacific West Cold Storage is consolidated with Apio Produce Sales
in the combined financial statements.
24
<PAGE>
APIO, INC. AND ITS COMBINED AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
INFORMATION RELATING TO SEPTEMBER 30, 1999 AND 1998 IS UNAUDITED
- -------------------------------------------------------------------------------
NOTE 12. LIMITED PARTNERSHIP INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
General Limited
CENTRAL COAST FRESH-CUT, LP (CCFC) Partners Partners Total
- ----------------------------------- -------------------------------------------
<S> <C> <C> <C>
Balance, December 31, 1995 $ (157,000) $ 248,000 $ 91,000
Net (loss) (1,506,000) (838,000) (2,344,000)
-------------------------------------------
Balance (deficit), December 31, 1996 (1,663,000) (590,000) (2,253,000)
Net (loss) (1,020,000) (566,000) (1,586,000)
-------------------------------------------
Balance (deficit), December 31, 1997 (2,683,000) (1,156,000) (3,839,000)
Net (loss) (674,000) (369,000) (1,043,000)
Contributions 1,953,000 - 1,953,000
Withdrawal of limited partners (1,220,000) 1,220,000 -
-------------------------------------------
Balance (deficit), December 31, 1998 (2,624,000) (305,000) (2,929,000)
-------------------------------------------
-------------------------------------------
</TABLE>
The partnership agreement of Central Coast Fresh-Cut, LP allocates net income
and loss based on the ownership percentages of the general and limited
partners. The term of the agreement is for 45 years and CCFC owns 99% of
Fresh-King, LLC. On January 1, 1996, two of the limited partners who are
common owners of Apio, Inc. were elected general partners along with Apio,
Inc. who, preceding that date, was the sole general partner. On December 31,
1998, nine of the limited partners entered into a withdrawal agreement and
transferred their accumulated deficit to the general partners in
consideration for the release from additional capital contributions by the
general partners.
NOTE 13. RETIREMENT PLANS
The Company sponsors a 401(k) plan in which all employees of the Company over
the age of 21 are eligible to participate. The eligible employees may
contribute up to 15% of their annual compensation. The Company matches the
employees' contributions in an amount equal to a percentage of each
participant's salary reduction as specified annually by resolution of the
Board of Directors.
The Company's contributions to the plan totaled $215,000, $178,000 and
$140,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
25
<PAGE>
APIO, INC. AND ITS COMBINED AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
INFORMATION RELATING TO SEPTEMBER 30, 1999 AND 1998 IS UNAUDITED
- -------------------------------------------------------------------------------
NOTE 14. PRIOR PERIOD ADJUSTMENTS, RESTATEMENTS AND CHANGE IN REPORTING
ENTITY
PRIOR PERIOD ADJUSTMENTS: Retained earnings and partners' equity at December
31, 1995 have been restated for the correction of errors in the combined
financial statements under generally accepted accounting principles (GAAP) as
follows:
<TABLE>
<S> <C>
Retained earnings and partners' equity December 31, 1995, as previously stated $ 3,981,000
-----------------
PRIOR PERIOD ADJUSTMENTS
To adjust allowance for doubtful accounts (530,000)
To record accounts receivable for sales not recorded in proper period (144,000)
To adjust property and equipment for depreciation expense and write-off of assets (286,000)
To record accounts payable not recorded in proper period (213,000)
To record grower payables not recorded in proper period (779,000)
To adjust prepaid expenses 87,000
To adjust for gains in investments in farming activities 70,000
To record accrued expenses payable not recorded in proper period (527,000)
Other (6,000)
-----------------
(2,328,000)
-----------------
CHANGE IN REPORTING ENTITY
Central Coast Fresh-Cut, LP (151,000)
Apio Cooling 741,000
-----------------
Retained earnings and partners' equity December 31, 1995, as restated $ 2,243,000
-----------------
-----------------
</TABLE>
The effect of these adjustments on net income for the year ended December 31,
1995 was a reduction in net income of $1,185,000.
RESTATEMENTS AND CHANGE IN REPORTING ENTITY: The combined financial
statements as of and for the year ended December 31, 1996 have been restated
for the correction of errors and change in reporting entity in the combined
financial statements under GAAP as follows:
<TABLE>
<S> <C>
Net income December 31, 1996, as previously reported $ 4,950,000
-----------------
RESTATEMENTS
Effect of 1995 adjustments on 1996 net income 2,005,000
To adjust allowance for doubtful accounts (1,061,000)
To record additional accounts payable not recorded in proper period (929,000)
To record additional accrued expenses not recorded in proper period (515,000)
To adjust grower payables for amounts not recorded in proper period (1,174,000)
To adjust accounts receivable for amounts not recorded in prior period 728,000
To adjust losses on investments in farming activities (125,000)
To adjust for in-transit inventory (127,000)
To adjust for prepaid expenses 54,000
To adjust income tax expense 32,000
Other, including adjustment for accrued bonus 49,000
-----------------
(1,063,000)
-----------------
CHANGE IN REPORTING ENTITY
Central Coast Fresh-Cut, LP (1,645,000)
Apio Cooling 295,000
-----------------
(1,350,000)
-----------------
Net income December 31, 1996, as restated $ 2,537,000
-----------------
-----------------
</TABLE>
APIO, INC. AND ITS COMBINED AFFILIATES
26
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS
INFORMATION RELATING TO SEPTEMBER 30, 1999 AND 1998 IS UNAUDITED
- -------------------------------------------------------------------------------
NOTE 14. PRIOR PERIOD ADJUSTMENTS, RESTATEMENTS AND CHANGE IN REPORTING
ENTITY (Continued)
In 1994 the Company adopted the policy of including Apio Cooling, a
subsidiary company, on a consolidated basis, including amounts owned directly
by the common owners. This subsidiary had previously been reported on the
equity method. Additionally, in 1995 the Company adopted the policy of
including Central Coast Fresh-Cut, LP, an affiliate, on a combined basis,
including amounts owned directly by its common owners.
NOTE 15. SUBSEQUENT EVENTs
In addition to the renewal of a credit facility and the waiver of certain
debt covenants discussed in Notes 4 and 5, on July 2, 1999, the Company
received $1,900,000 from a stockholder. The advance is evidenced by an
unsecured note payable which bears interest at prime plus .5% and is due
December 31, 1999.
SALE OF PROPERTY HELD FOR SALE (UNAUDITED): In November 1999, the Company
sold property and equipment which was identified as held for sale at December
31, 1998. The property and equipment was sold for $750,000 of which
approximately $96,000 was recorded as a gain on the sale of assets.
ACQUISITION (UNAUDITED): On December 2, 1999, Apio, Inc. and certain related
entities were acquired by Landec Corporation. The purchase price was $23.9
million in cash and stock, before expenses. Additional terms of the agreement
include up to $16.75 million in future payments over five years, with $10.0
million of that amount based on the Company achieving certain performance
milestones. The transaction was accounted for as a purchase.
LOAN AGREEMENT (UNAUDITED): On December 2, 1999, Apio replaced a portion of
its existing bank debt with an $11,250,000 term note and entered into a new
$12,000,000 line-of-credit agreement paying off the existing line of credit
of approximately $10,750,000. The term loan requires three quarterly
installments of $500,000 the first year beginning April 30, 2000, quarterly
installments of $4,563,000 the second year and quarterly installments of
$625,000 through October 31, 2004. The credit facility is secured by
substantially all of the assets of the acquired entities and certain assets
of the acquirer. The new credit facility requires annual loan fees based on
the Company's leverage and borrowings accrue interest either on a base-rate
margin or Eurodollar margin based on the Company's leverage, as described in
the agreement. Line-of-credit borrowings under the new agreement are limited
to eligible accounts and notes receivable and inventory of Apio, Inc., less
certain adjustments, as provided for in the agreement.
The credit facility contains certain financial covenants relating to working
capital and debt-to-net-worth ratios. The credit facility also contains
restrictions on the incurrence of additional debt, payment of distributions
and capital expenditures.
COMMITMENTS (unaudited): Subsequent to September 30, 1999, the Company
expended approximately $2,000,000 for the expansion of a certain facility and
equipment.
DIVIDENDS (unaudited): On December 2, 1999 the Company distributed dividends
of approximately $2.1 million to its common shareholders/partners.
27
