<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 10, 1997.
REGISTRATION NO. 333-22997
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
AMENDMENT NO. 1 TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
AS AMENDED
------------------------
ORGANIC FOOD PRODUCTS, INC.
(Exact Name of Small Business Issuer As Specified In Its Charter)
<TABLE>
<S> <C> <C>
CALIFORNIA 2033 94-3076294
(State or other jurisdiction (Primary Standard Industrial (IRS Employer
of Classification Code No.) I.D. Number)
incorporation or organization)
</TABLE>
550 MONTEREY ROAD
MORGAN HILL, CA 95037
(408) 782-1133
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
FLOYD R. HILL, CHIEF EXECUTIVE OFFICER
ORGANIC FOOD PRODUCTS, INC.
550 MONTEREY ROAD
MORGAN HILL, CA 95037
(408) 782-1133
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------
COPIES OF ALL COMMUNICATIONS TO:
Gary A. Agron, Esq. Dennis J. Doucette, Esq.
5445 DTC Parkway, Suite 520 Luce, Forward, Hamilton & Scripps LLP
Englewood, CO 80111 600 West Broadway, Suite 2600
(303) 770-7254 San Diego, CA 92101
(303) 770-7257 (Fax) (619) 236-1414
(619) 232-8311 (Fax)
APPROXIMATE DATE OF COMMENCEMENT OF THE OFFERING: AS SOON AS PRACTICABLE
AFTER THE DATE OF THE OFFERING.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
check the following box: / /
------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
TITLE OF EACH CLASS AMOUNT TO PROPOSED AMOUNT OF
OF SECURITIES BE MAXIMUM PRICE OFFERING REGISTRATION
TO BE REGISTERED REGISTERED PER SECURITY PRICE FEE
<S> <C> <C> <C> <C>
Common Stock, no par value(1)............... 1,495,000 Shares $4.00 $5,980,000 $1,813
Representatives' Warrants(2)................ 130,000 Warrants $.0007 $100 $-0-
Common Stock, no par value, underlying
Representatives' Warrants(2).............. 130,000 Shares $4.80 $624,000 $189
Totals...................................... $6,604,000 $2,002(3)
</TABLE>
(1) Includes the overallotment option granted to the Representatives of 195,000
shares.
(2) Pursuant to Rule 416 of the Securities Act of 1933, as amended, the number
of shares issuable upon exercise of the Representatives' Warrants is subject
to adjustment in accordance with anti-dilution provisions of such Warrants.
(3) A fee of $2,309 was previously paid. Accordingly, no additional fee is
required.
------------------------------
THE REGISTRANT HEREBY AMENDS THE REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
(EXHIBIT INDEX LOCATED ON PAGE OF THIS FILING)
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<PAGE>
SUBJECT TO COMPLETION PRELIMINARY PROSPECTUS DATED JULY 10, 1997
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
1,300,000 SHARES OF COMMON STOCK
ORGANIC FOOD PRODUCTS, INC.
[LOGO]
Organic Food Products, Inc. (the "Company") is offering 1,300,000 shares of
its no par value common stock (the "Common Stock") at $4.00 per share (the
"Offering") through Sentra Securities Corporation, Spelman & Co., Inc. and
Paradise Valley Securities, Inc. as the representatives (the "Representatives")
of the underwriters named herein (the "Underwriters"). The initial offering
price of the Common Stock was determined by negotiations between the Company and
the Representatives, and such price is not necessarily related to the Company's
financial condition, net worth or other established criteria of value. See
"Underwriting."
There is no current trading market for the Company's Common Stock and no
assurance that a trading market will develop upon completion of the Offering.
The Company has applied to have the Common Stock listed on the NASDAQ SmallCap
Market (the "SmallCap Market").
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND SUBSTANTIAL
DILUTION AND SHOULD BE CONSIDERED ONLY BY PERSONS ABLE TO SUSTAIN A TOTAL LOSS
OF THEIR INVESTMENT. SEE "RISK FACTORS."
<TABLE>
<CAPTION>
UNDERWRITING DISCOUNTS PROCEEDS TO
PRICE TO PUBLIC AND COMMISSIONS(1) COMPANY(2)
<S> <C> <C> <C>
Per Share................................ $4.00 $.40 $3.60
Total(3)................................. $5,200,000 $520,000 $4,680,000
</TABLE>
(1) Excludes a nonaccountable expense allowance payable to Sentra Securities
Corporation and Spelman & Co., Inc. of $156,000 ($179,400 if the
Overallotment Option is exercised) and the issuance of warrants to the
Representatives (the "Representatives' Warrants") to purchase up to 130,000
shares of Common Stock at a price of $4.80 per share. The Company has
granted certain registration rights with respect to the Common Stock
underlying the Representatives' Warrants and has agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933 (the "1933 Act"). See "Underwriting."
(2) Before deducting costs of the Offering estimated to be $456,000, including
the nonaccountable expense allowance. See "Underwriting."
(3) Assumes no exercise of the Representatives' option (the "Overallotment
Option"), exercisable within 30 days from the date of this Prospectus, to
purchase from the Company up to 195,000 additional shares of Common Stock on
the same terms as the Common Stock offered hereby solely to cover
overallotments, if any. If the Overallotment Option is exercised in full,
the total Price to Public, Underwriting Discounts and Proceeds to Company
will be $5,980,000, $598,000 and $5,382,000, respectively. See
"Underwriting."
--------------------------
The shares of Common Stock are offered by the several Underwriters named
herein on a firm commitment basis, subject to prior sale, when, as and if
delivered to and accepted by the Underwriters and subject to certain conditions,
including the right of the Underwriters to reject orders in whole or in part.
The Underwriters are committed to purchase and pay for all shares of Common
Stock if any shares of Common Stock are taken. It is expected that delivery of
the certificates representing the Common Stock will be made against payment
therefor in San Diego, California, on or about three business days from the date
of this Prospectus.
<TABLE>
<S> <C> <C>
SENTRA PARADISE VALLEY
SECURITIES CORPORATION SPELMAN & CO., INC. SECURITIES, INC.
</TABLE>
The date of this Prospectus is 1997.
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN SUCH
SECURITIES, AND THE IMPOSITION OF A PENALTY BID, IN CONNECTION WITH THE
OFFERING. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED IN THIS
PROSPECTUS AND IS QUALIFIED IN ITS ENTIRETY BY THE DETAILED INFORMATION AND
FINANCIAL STATEMENTS THAT APPEAR ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE
INDICATED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES THAT THE OVERALLOTMENT
OPTION AND THE REPRESENTATIVES' WARRANTS HAVE NOT BEEN EXERCISED.
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE MATTERS SET
FORTH IN THIS PROSPECTUS INCLUDE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING
OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO RISKS AND UNCERTAINTIES
THAT MAY CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY. THESE RISKS AND
UNCERTAINTIES ARE DETAILED THROUGHOUT THE PROSPECTUS AND WILL BE FURTHER
DISCUSSED FROM TIME TO TIME IN THE COMPANY'S PERIODIC REPORTS FILED WITH THE
COMMISSION. THE FORWARD-LOOKING STATEMENTS INCLUDED IN THE PROSPECTUS SPEAK ONLY
AS OF THE DATE HEREOF.
THE COMPANY
The Company was incorporated in California in July 1987 as S&D Foods, Inc.
In November 1995, it changed its name to Garden Valley Naturals, Inc. and
following its June 1996 merger with Organic Food Products, Inc. ("OFP"), changed
its name to Organic Food Products, Inc. The term "Company" used throughout this
Prospectus refers to the merged operations of Garden Valley Naturals, Inc. and
OFP.
Since 1987, the Company has manufactured and marketed pesticide-free
("organic") and preservative-free ("all natural") pasta sauces, salsas and
condiments under the brand names "Garden Valley Naturals" and "Parrot." The
Company began marketing its Parrot line of salsas in 1987, its Garden Valley
Naturals line of condiments in 1991 and its Garden Valley Naturals line of
pastas and salsas in 1994. In June 1996, the Company merged with OFP, which also
marketed a line of organic food products (including pasta sauces and salsas,
together with dry cut pastas and organic children's meals) under the "Millina's
Finest" brand name. See "Certain Transactions."
In June 1996, the Company restructured its Garden Valley Naturals, Parrot
and Millina's Finest product lines by (i) eliminating all nonorganic products,
(ii) eliminating salsas and ketchups sold under the Millina's Finest brand name,
and (iii) adding pasteurized organic fruit juices and organic frozen entrees to
its product offerings. In addition to its current products, the Company will
introduce a line of organic grill sauces and organic salad dressings in
September 1997. See "Business--Products."
All of the Company's products (with the exception of its organic mustards)
are manufactured at the Company's 24,000 square foot processing and warehouse
facility in Morgan Hill, California. See "Business--Manufacturing Facilities and
Suppliers."
The Company sells its products either directly or through distributors or
independent commissioned food brokers and specialty food brokers to (i) health
food and specialty food stores, (ii) club stores (including Price/Costco and
BJ's), and (iii) retail chain and independent grocery stores (including Safeway,
A&P, Waldbaum's, Trader Joe's, Stop N' Shop, Edward's, Lucky's and Big Y). See
"Business--Distribution and Marketing."
The Company's business strategy is to (i) increase revenues by offering
additional organic food products through the Company's existing distribution
network, (ii) reduce costs and improve operating efficiencies by using the
Company's excess manufacturing capabilities to increase the volume of products
it manufactures for itself as well as for others, (iii) expand the Company's
current geographic and retail store distribution by offering the Company's
products in new markets and increasing distribution in existing markets, and
(iv) specialize exclusively in the marketing of organic food products. Proceeds
of the Offering will be used for these and other purposes. See
"Business--Strategy" and "Use of Proceeds."
The Company's executive offices are located at 550 Monterey Road, Morgan
Hill, CA 95037, telephone (408) 782-1133.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Offering Price.................... $4.00 per share of Common Stock
Common Stock Outstanding(1)....... 5,297,913 shares
Common Stock Offered.............. 1,300,000 shares
Common Stock Outstanding after the
Offering(1)..................... 6,597,913 shares
Use of Proceeds................... The net proceeds of the Offering will be primarily used
to purchase raw materials and equipment, for repayment
of debt, for marketing expenses and working capital. See
"Use of Proceeds."
NASDAQ SmallCap Symbol............ OFPI
Transfer and Warrant Agent........ Corporate Stock Transfer, Inc.
</TABLE>
- ------------------------
(1) Excludes exercise of: (i) the Overallotment Option, (ii) the
Representatives' Warrants, (iii) outstanding stock options to purchase up to
625,000 shares of Common Stock issued under the Company's 1995 Stock Option
Plan, and (iv) common stock purchase warrants to purchase up to 550,000
shares of Common Stock. See "Dilution," "Capitalization," "Description of
Securities" and "Underwriting."
4
<PAGE>
SUMMARY FINANCIAL INFORMATION
The financial information of the Company set forth below for the two years
ended June 30, 1995 and 1996 has been derived from the Company's audited
financial statements included herein. Interim information for the nine months
ended March 31, 1996 and 1997 has been derived from unaudited financial
statements, which are also included herein. The results of operations for the
nine months ended March 31, 1997 are not necessarily indicative of the results
to be expected for the year ending June 30, 1997. The financial information
should be read in conjunction with the financial statements, related notes and
other financial information included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
UNAUDITED
NINE MONTHS ENDED MARCH
YEAR ENDED JUNE 30, 31,
--------------------------- --------------------------
1996 1995 1997 1996
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales............................................... $ 7,641,539 $ 5,027,278 $ 9,067,049 $ 5,651,707
Gross profit............................................ 1,819,202 1,276,968 2,981,910 1,409,201
Operating income (loss)................................. (637,288) 134,515 588,140 100,069
Interest expense........................................ 349,560 121,704 152,340 167,892
Net income (loss)....................................... $ (983,462) $ 23,418 $ 343,422 $ (65,391)
------------- ------------ ------------ ------------
------------- ------------ ------------ ------------
Weighted average shares outstanding..................... 5,767,663 5,767,663 5,767,663 5,767,663
Net income (loss) per share............................. $ (.17) $ -- $ .06 $ (.01)
</TABLE>
<TABLE>
<CAPTION>
UNAUDITED
AT MARCH 31, AS
1997 ADJUSTED(1)
------------ -------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)........................................................... $ (212,305) $ 3,843,975
Total assets........................................................................ 7,961,873 11,485,873
Long-term debt...................................................................... 409,974 409,974
Total liabilities................................................................... 5,057,140 4,357,140
Shareholders' equity................................................................ $2,904,733 $ 7,128,733
</TABLE>
- ------------------------
(1) As adjusted to give effect to the receipt and application of the estimated
net proceeds of the Offering without giving effect to exercise of the
Overallotment Option, the Representatives' Warrants or other outstanding
stock options or common stock purchase warrants. See "Use of Proceeds" and
"Description of Securities."
5
<PAGE>
RISK FACTORS
Prospective purchasers of the Common Stock should carefully consider the
following risk factors and other information contained in this Prospectus before
making an investment in the Common Stock. Information contained in this
Prospectus includes "forward-looking statements" which can be identified by the
use of forward-looking terminology such as "believes," "expects," "may,"
"should" or "anticipates" or the negative thereof or other variations thereon or
comparable terminology, or by discussions of strategy. See, e.g., "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business--Strategy." No assurance can be given that the future results
addressed by the forward-looking statements will be achieved. The following
matters constitute cautionary statements identifying important factors with
respect to such forward-looking statements, including certain risks and
uncertainties that could cause actual results to vary materially from the future
results addressed in such forward-looking statements. Other factors could also
cause actual results to vary materially from the future results addressed in
such forward-looking statements.
LIMITED PROFITABILITY; SIGNIFICANT ACCUMULATED DEFICIT; FUTURE OPERATING
RESULTS. Although the Company achieved increasing levels of revenues for the
years ended June 30, 1995 and 1996 and the nine months ended March 31, 1997, the
Company reported a loss for the year ended June 30, 1996 and limited
profitability in other periods. Moreover, at March 31, 1997 the Company had an
accumulated deficit of $1,066,988. Future events, including unanticipated
expenses, increased price competition, unfavorable general economic conditions
or decreased consumer demand for organic food products, could have a material
adverse effect on the Company's future operating results. There can be no
assurance that the Company's revenue growth will continue in the future or that
its operations will be profitable. See "Financial Statements."
COST OF RAW MATERIALS; RISK OF MARKET PRICE FLUCTUATIONS; DEPENDENCE UPON
SUPPLIERS. The Company's operating results and financial condition may be
adversely affected by market fluctuations in the cost and availability of its
raw materials, particularly whole and processed organic tomatoes. Raw materials
costs are determined by a constantly changing market upon which the Company has
no control. The Company often enters into fixed price contracts to purchase a
portion of its organic tomatoes. Nevertheless, cost fluctuations in the open
market could increase the Company's product costs (for products not covered by
fixed price contracts) and adversely affect its operations. Moreover, market
price declines for raw materials which are covered by fixed price contracts
would increase the Company's product costs relative to its competitors and
reduce its gross profits on finished goods. While many raw materials are
available from a number of sources, the Company currently purchases its organic
tomato products from only three suppliers and has written agreements covering
only a portion of its anticipated tomato product purchases. Two suppliers each
accounted for 10% or more of the Company's total purchases for the nine months
ended March 31, 1997. Any interruption in raw materials supply (caused by
factors such as drought, insect infestation or the like) would interrupt the
Company's production and adversely affect its operations. Overcontracting for
organic tomatoes or other raw materials in order to fix prices could cause cash
flow difficulties until the excess raw materials are processed and sold. For
instance, a portion of the proceeds of the Offering has been allocated to pay
for tomato paste contracted in prior years. See "Use of Proceeds" and
"Business--Manufacturing Facilities and Suppliers."
COMPETITION. The organic food and health food industries in general and the
pasta sauce and pasta, salsa, condiment and fruit juice businesses in particular
are highly competitive, and there are numerous multinational, national, regional
and local firms that currently compete, or are capable of competing, with the
Company. Multinational nonorganic (i) pasta sauce competitors include Prego,
Ragu, Classico and Newman's Own, (ii) salsa competitors include Pace, El Paso
and La Victoria, (iii) condiment competitors include Heinz, French's and
Guilden's, and (iv) fruit juice competitors include Minute Maid and Del Monte.
The Company also competes with national cut pasta manufacturers such as RF,
Ronzoni and DeBoles, smaller organic or natural pasta sauce and organic salsa
competitors such as Simply Natural, Muir Glen and Enrico and smaller fruit juice
competitors such as Odwalla and Knudsen. Most of the
6
<PAGE>
Company's competitors are larger than the Company and have more financial,
marketing and management resources, and brand name recognition, than the
Company. See "Business--Competition."
DEPENDENCE UPON MAJOR CUSTOMERS. One customer accounted for approximately
40% of the Company's revenues for the year ended June 30, 1996, and two
customers accounted for approximately 35% of the Company's revenues for the nine
months ended March 31, 1997. A loss of any of these customers would have a
material adverse effect on the Company's operations. See "Business--Distribution
and Marketing."
LIMITED EXPERIENCE WITH CLUB STORES AND CHAIN GROCERY STORES. Although the
Company has sold its products to health food stores since 1987, sales to club
stores and chain grocery stores commenced in December 1994 and August 1995,
respectively. There can be no assurance that (i) the Company will be able to
maintain or expand its sales to club stores and chain grocery stores or (ii)
sales will be sufficient to offset slotting fees or in-store demonstration fees
incurred to obtain shelf space in club stores and chain grocery stores. See
"Business--Distribution and Marketing."
PRODUCT LIABILITY. Food processors are subject to significant liability
should the consumption of their products cause injury, illness or death.
Although the Company carries product liability insurance, with limits per
occurrence of up to $2,000,000, there can be no assurance that this insurance
will be adequate to protect against product liability claims or that insurance
coverage will continue to be available at reasonable prices.
POSSIBLE FLUCTUATIONS IN OPERATING RESULTS. The Company's operating results
could vary from period to period as a result of a number of factors, including
the purchasing patterns of significant customers, the timing of new product
introductions by the Company and its competitors, the amount of slotting fees
and new product advertising expenses incurred by the Company, variations in
sales by distribution channel, fluctuations in market prices of raw materials
and competitive pricing policies. These factors could cause the Company's
performance to differ from investor expectations, resulting in volatility in the
price of the Common Stock. See "Management's Discussion of Financial Condition
and Results of Operations-- Business and Organization."
GOVERNMENT REGULATION. The Company is subject to various federal, state and
local laws affecting its business. The Company's food processing facility is
subject to regulation by various governmental agencies, including state and
local licensing, zoning, land use, construction and environmental regulations
and various federal, state, and local health, sanitation, immigration, safety
and fire codes and standards. In order to offer organic food products, the
Company is also subject to inspection and regulation by the United States
Department of Agriculture ("USDA"). Suspension of any licenses or approvals, due
to failure to comply with applicable regulations, could interrupt the Company's
operations, cause a loss of its organic food designation, limit the number of
employees working within its facilities or otherwise materially and adversely
affect its business. The Company is also subject to federal and state laws
establishing minimum wages and regulating overtime and working conditions. Since
some of the Company's personnel are paid at rates not far above the federal or
California state minimum wage, increases in the federal or California minimum
wage will result in increases in the Company's labor costs. See
"Business--Government Regulation."
GEOGRAPHIC CONCENTRATION. The Company distributes its products in a limited
number of markets, which exposes it to fluctuations caused by such factors as
adverse economic conditions and changing consumer preferences in these markets.
See "Business--Distribution and Marketing."
DEPENDENCE UPON EXECUTIVE OFFICERS. The Company's operations depend upon
its ability to hire and retain qualified personnel. There is competition for
such personnel, and there can be no assurance that the Company will be
successful in this regard. The Company's operations are also dependent upon the
continued services of its executive officers. The loss of the services of any of
these executive officers, whether as a result of death, disability or otherwise,
would have a material adverse effect upon the business
7
<PAGE>
of the Company. The Company has employment agreements with its Chief Executive
Officer and its President, and has agreed to purchase key person life insurance
on the life of its Chief Executive Officer in the face amount of $1,000,000. The
Company does not carry key person life insurance on the lives of any other
executive officers. See "Management--Directors and Executive Officers."
OFFERING TO BENEFIT PRINCIPAL STOCKHOLDERS. The Company intends to repay
from proceeds of the Offering $700,000 of debt (16.6% of the net proceeds of the
Offering) due to two of the Company's principal shareholders. See "Use of
Proceeds."
LACK OF PUBLIC MARKET; DETERMINATION OF OFFERING PRICE. Prior to the
Offering, there has been no public trading market for the Company's Common
Stock. The initial public offering price of the Common Stock has been determined
by negotiations between the Company and the Representatives and does not
necessarily bear any relationship to recognized criteria for the valuation of
such securities. There can be no assurance that a regular trading market for the
Company's Common Stock will develop or continue after the Offering or, if such a
market develops, that the market price of the Common Stock will exceed the
Offering price. See "Underwriting."
IMMEDIATE SUBSTANTIAL DILUTION. The Offering involves an immediate and
substantial dilution of $3.27 per share of Common Stock, an 82% difference
between the public offering price of $4.00 per share of Common Stock and the net
tangible book value of $.73 per share of Common Stock upon completion of the
Offering, assuming no exercise of the Overallotment Option, the Representatives'
Warrants or other outstanding stock options or common stock purchase warrants of
the Company. See "Dilution."
NO DIVIDENDS. The Company has not paid any dividends on its Common Stock
and does not intend to pay dividends in the foreseeable future. See "Description
of Securities--Dividends."
POSSIBLE VOLATILITY OF SECURITIES PRICES. The market price of the Company's
Common Stock following the Offering may be highly volatile, as has been the case
with the securities of other companies completing initial public offerings.
Factors such as the Company's operating results or announcements by the Company
or its competitors may have a significant effect on the market price of the
Company's securities. In addition, market prices for securities of many emerging
and small capitalization companies have experienced wide fluctuations in
response to variations in quarterly operating results and general economic
indicators and conditions, as well as other factors beyond the control of the
Company.
SHARES ELIGIBLE FOR FUTURE SALE. Sales of substantial amounts of Common
Stock in the open market or the availability of such shares for sale following
the Offering could adversely affect the market price for the Common Stock.
Following the Offering, the 1,300,000 shares of Common Stock offered by the
Company may be sold in the open market. The remaining 5,297,913 shares of the
Company's Common Stock are currently eligible for sale under Rule 144 ("Rule
144") promulgated under the 1933 Act. Notwithstanding the above, all of the
Company's shareholders have agreed with Sentra Securities Corporation not to
sell or otherwise dispose of their shares of Common Stock without the prior
written consent of the Representatives for a period of 12 months from the date
of this Prospectus. See "Description of Securities--Common Stock Eligible for
Future Sale" and "Underwriting."
UNDERWRITERS' INFLUENCE ON THE MARKET. A significant amount of the Common
Stock offered hereby may be sold to customers of the Representatives and the
Underwriters. Such customers subsequently may engage in transactions for the
sale or purchase of Common Stock through or with the Underwriters. Although they
have no obligation to do so, the Representatives intend to make a market in the
Company's Common Stock and may otherwise effect transactions in the Common
Stock. This market-making activity may terminate at any time. If they
participate in the market, the Representatives may exert a dominating influence
on the market, if one develops, for the Common Stock. The price and liquidity of
the Common Stock may be significantly affected by the degree, if any, of the
Underwriters' participation in such market.
CONTROL BY MANAGEMENT; AUTHORIZATION AND ISSUANCE OF PREFERRED STOCK;
PREVENTION OF CHANGES IN CONTROL. Upon completion of the Offering, the
Company's officers and directors will own approximately
8
<PAGE>
41.0% of the then issued and outstanding shares of Common Stock (assuming no
exercise of the Overallotment Option, the Representatives' Warrants or other
outstanding stock options or common stock purchase warrants not exercisable
within 60 days from the date hereof) and will continue to elect a majority of
the Company's directors and control the affairs of the Company. The Company's
Articles of Incorporation authorize the issuance of up to 5,000,000 shares of
Preferred Stock with such rights and preferences as may be determined from time
to time by the Board of Directors. Accordingly, under the Articles of
Incorporation, the Board of Directors may, without shareholder approval, issue
Preferred Stock with dividend, liquidation, conversion, voting, redemption or
other rights which could adversely affect the voting power or other rights of
the holders of the Common Stock. The issuance of any shares of Preferred Stock
having rights superior to those of the Common Stock may result in a decrease of
the value or market price of the Common Stock and could further be used by the
Board of Directors as a device to prevent a change in control of the Company.
The Company has no other anti-takeover provisions in its Articles of
Incorporation or Bylaws. Holders of Preferred Stock may also be granted the
right to receive dividends, certain preferences in liquidation, and conversion
rights. See "Description of Securities."
LIMITATIONS ON LIABILITY OF DIRECTORS. The Company's Articles of
Incorporation substantially limit the liability of the Company's directors to
the Company and its shareholders for breach of fiduciary or other duties to the
Company. See "Description of Securities--Limitation on Liabilities."
MAINTENANCE CRITERIA FOR THE SMALLCAP MARKET SECURITIES. The National
Association of Securities Dealers, Inc. ("the NASD"), which administers the
SmallCap Market, sets the criteria for continued eligibility on The NASDAQ
SmallCap Market. In order to continue to be included on the SmallCap Market, a
company must maintain $2 million in total assets, a $200,000 market value of its
public float and $1 million in total capital and surplus. In addition, continued
inclusion requires two market-makers, at least 300 holders of the Common Stock
and a minimum bid price of $1 per share; provided, however, that if a company
falls below such minimum bid price, it will remain eligible for continued
inclusion in the SmallCap Market if the market value of the public float is at
least $1 million and the company has $2 million in capital and surplus. The
Company's failure to meet these maintenance criteria in the future or future
maintenance requirements imposed by the SmallCap Market may result in the
discontinuance of the inclusion of its securities in the SmallCap Market. In
such event, trading, if any, in the securities may then continue to be conducted
in the non-NASDAQ over-the-counter market in what are commonly referred to as
the electronic bulletin board or the "pink sheets." As a result, an investor may
find it more difficult to dispose of or to obtain accurate quotations as to the
market value of the securities. In addition, the Company would be subject to
Rule 15g (the "Rule") promulgated under the Exchange Act which imposes various
sales practice requirements on broker-dealers who sell securities governed by
the Rule to persons other than established customers and accredited investors.
For these types of transactions, the broker-dealer must make a special
suitability determination for the purchaser and have received the purchaser's
written consent to the transactions prior to sale. Consequently, the Rule may
have an adverse effect on the ability of broker-dealers to sell the securities,
which may affect the ability of purchasers in the Offering to sell the
securities in the secondary market. The NASD recently proposed significantly
more stringent maintenance requirements which require $2 million in net tangible
assets, 500,000 shares in the public float and elimination of the exception to
the $1 per share bid price requirement. Should these new maintenance
requirements be adopted, it will be progressively more difficult for the Company
to remain on the SmallCap Market.
DISCLOSURE RELATED TO PENNY STOCKS. The Commission has adopted rules that
define a "penny stock" as equity securities priced at under $5.00 per share
which are not listed for trading on NASDAQ unless (i) the issuer has a net worth
of $2,000,000 if in business for more than three years or $5,000,000 if in
business for less than three years or (ii) the issuer has had average annual
revenues of $6,000,000 for the prior three years. In the event that any of the
Company's securities are characterized in the future as penny stock,
broker-dealers dealing in the securities will be subject to the disclosure rules
for transactions involving penny stocks which require the broker-dealer among
other things to (i) determine the suitability of
9
<PAGE>
purchasers of the securities and obtain the written consent of purchasers to
purchase such securities and (ii) disclose the best (inside) bid and offer
prices for such securities and the price at which the broker-dealer last
purchased or sold the securities. The additional burdens imposed upon
broker-dealers may discourage them from effecting transactions in penny stocks,
which could reduce the liquidity of the securities offered hereby.
DILUTION
At March 31, 1997, the net tangible book value of the Company was $291,734
(unaudited), or $.06 per share of Common Stock. "Net tangible book value" per
share represents the total amount of tangible assets of the Company, less the
total amount of liabilities of the Company, divided by the number of shares of
Common Stock outstanding. Without taking into account any changes in net
tangible book value after March 31, 1997, other than to give effect to the sale
by the Company of the 1,300,000 shares of Common Stock offered hereby, less
underwriting discounts and commissions and estimated costs of the Offering not
recorded as deferred costs as of March 31, 1997, the net tangible book value of
the Company at March 31, 1997 would have been $4,798,014, or approximately $.73
per share. This represents an immediate increase in net tangible book value of
$.67 per share of Common Stock to existing shareholders and an immediate
dilution of $3.27 per share to new shareholders. "Dilution" per share represents
the difference between the price to be paid by the new shareholders and the net
tangible book value per share of Common Stock immediately after this Offering.
The foregoing is illustrated in the following table:
<TABLE>
<S> <C> <C>
Public offering price per share................................ $ 4.00
Net tangible book value per share before Offering.............. $ .06
Increase in net tangible book value per share attributable to
new investors purchasing in the Offering..................... $ .67
Net tangible book value per share after the Offering........... $ .73
---------
Dilution of net tangible book value per share to new
investors.................................................... $ 3.27
---------
Percent reduction of net tangible book value to new
investors.................................................... 82%
</TABLE>
The following table sets forth the number of shares of Common Stock
purchased, the total consideration paid and the average price per share paid by
existing shareholders as of March 31, 1997 and new investors purchasing Common
Stock in the Offering:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------------- ---------------------------- PRICE PER
NUMBER PERCENTAGE AMOUNT PERCENTAGE SHARE
---------- ------------- ------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
New investors................. 1,300,000 19.7% $ 5,200,000 52.2% $ 4.00
Existing shareholders......... 5,297,913 80.3% $ 4,768,433 47.8% $ .90
---------- ----- ------------- -----
Totals........................ 6,597,913 100.0% $ 9,968,433 100.0%
---------- ----- ------------- -----
---------- ----- ------------- -----
</TABLE>
The preceding discussion and the accompanying tables assume no exercise of
(i) the Overallotment Option, (ii) the Representatives' Warrants, (iii)
outstanding stock options to purchase up to 625,000 shares of Common Stock
issued under the Company's 1995 Stock Option Plan, or (iv) common stock purchase
warrants to purchase up to 550,000 shares of Common Stock. See "Capitalization,"
"Description of Securities" and "Underwriting."
10
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at March
31, 1997 and as adjusted to give effect to the sale by the Company of 1,300,000
shares of Common Stock offered hereby, without giving effect to the exercise of
the Overallotment Option, the Representatives' Warrants or other outstanding
stock options or common stock purchase warrants.
<TABLE>
<CAPTION>
ACTUAL AS ADJUSTED(1)
------------- --------------
<S> <C> <C>
(UNAUDITED) (UNAUDITED)
Current liabilities................................................................ $ 4,647,166 $ 3,947,166
------------- --------------
Long-term liabilities.............................................................. 409,974 409,974
------------- --------------
Shareholders' equity
Preferred Stock, 5,000,000 no par value shares authorized, none issued........... -0- -0-
Common Stock, 20,000,000 no par value shares authorized, 5,297,913 shares
outstanding, and 6,597,913 shares outstanding, as adjusted..................... 3,971,721 8,195,721
Accumulated deficit.............................................................. (1,066,988) (1,066,988)
------------- --------------
Total shareholders' equity..................................................... 2,904,733 7,128,733
------------- --------------
Total capitalization......................................................... $ 7,961,873 $ 11,485,873
------------- --------------
------------- --------------
</TABLE>
- ------------------------
(1) As adjusted to give effect to the receipt and application of the estimated
net proceeds of the Offering. See "Use of Proceeds."
11
<PAGE>
USE OF PROCEEDS
The net proceeds to be received by the Company from the Offering are
estimated to be $4,224,000 ($4,902,600 if the Overallotment Option is
exercised). The Company intends to use the net proceeds of the Offering as set
forth in the table below:
<TABLE>
<CAPTION>
PERCENT OF NET
PURPOSE AMOUNT PROCEEDS
- ------------------------------------------------------------------ ------------ --------------
<S> <C> <C>
Purchase of raw materials(1)...................................... $ 1,350,000 32.0
Purchase of equipment............................................. 450,000 10.6
Repayment of debt(2).............................................. 1,300,000 30.8
Marketing expenses................................................ 950,000 22.5
Working capital................................................... 174,000 4.1
------------ -----
Total......................................................... $ 4,224,000 100.0%
</TABLE>
- ------------------------
(1) Represents the purchase of organic tomato products ($386,775 of which was
previously contracted) and other organic vegetables and fruits to support
the Company's plan to expand product offerings and increase manufacturing
volumes. See "Business--Strategy" and "Business--Manufacturing Facilities
and Suppliers."
(2) Represents (i) a $700,000 principal reduction on an unsecured promissory
note in the principal amount of $1,560,000 issued to two principal
shareholders (and former officers and directors) in connection with the
Company's October 1995 purchase of 1,100,000 shares of the Company's Common
Stock from these two individuals at $2.00 per share (the balance of $860,000
is payable in installments of $40,000 per month and bears interest at 6% per
annum), and (ii) repayment of a bridge loan in the amount of $600,000 used
by the Company for working capital, bearing interest at 10% per annum due
the earlier of the closing of the Offering or May 1998. See "Certain
Transactions."
The Company estimates, but cannot assure, that the net proceeds of the
Offering, together with existing cash resources and available credit facilities,
will be sufficient to fund the Company's estimated cash requirements for at
least 12 months following the Offering. Pending application, the net proceeds
may be invested in short-term interest bearing obligations. Any funds received
by the Company from exercise of the Overallotment Option or the Representatives'
Warrants will be added to working capital.
12
<PAGE>
SELECTED FINANCIAL DATA
The financial information of the Company set forth below for the two years
ended June 30, 1995 and 1996 has been derived from the Company's audited
financial statements included herein. Interim information for the nine months
ended March 31, 1996 and 1997 has been derived from unaudited financial
statements which are also included herein. The results of operations for the
nine months ended March 31, 1997 are not necessarily indicative of the results
to be expected for the year ending June 30, 1997. The financial information
should be read in conjunction with the financial statements, related notes and
other financial information included elsewhere in this Prospectus. In the
opinion of management of the Company, the unaudited financial statements have
been prepared on the same basis as the audited financial statements and include
all adjustments, consisting only of normal recurring adjustments, necessary for
a fair presentation of the financial position and the results of operations for
these periods. This data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the financial statements and related notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
UNAUDITED
NINE MONTHS ENDED
YEAR ENDED JUNE 30, MARCH 31,
--------------------------- ------------------------------
1996 1995 1997 1996
------------- ------------ --------------- -------------
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales........................................... $ 7,641,539 $ 5,027,278 $ 9,067,049 $ 5,651,707
Gross profit........................................ 1,819,202 1,276,968 2,981,910 1,409,201
Operating income (loss)............................. (637,288) 134,515 588,140 100,069
Interest expense.................................... 349,560 121,704 152,340 167,892
Net income (loss)................................... $ (983,462) $ 23,418 $ 343,422 $ (65,391)
------------- ------------ --------------- -------------
------------- ------------ --------------- -------------
Weighted average shares outstanding................. 5,767,663 5,767,663 5,767,663 5,767,663
Net income (loss) per share......................... $ (.17) $ -- $ .06 $ (.01)
</TABLE>
<TABLE>
<CAPTION>
UNAUDITED
AT MARCH 31, AS
1997 ADJUSTED(1)
--------------- -------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)......................................................... $ (212,305) $ 3,843,975
Total assets...................................................................... 7,961,873 11,485,873
Long-term debt.................................................................... 409,974 409,974
Total liabilities................................................................. 5,057,140 4,357,140
Shareholders' equity.............................................................. 2,904,733 7,128,733
</TABLE>
- ------------------------
(1) As adjusted to give effect to the receipt and application of the estimated
net proceeds of the Offering without giving effect to exercise of the
Overallotment Option, the Representatives' Warrants or other outstanding
stock options or common stock purchase warrants. See "Use of Proceeds" and
"Description of Securities."
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BUSINESS AND ORGANIZATION
Since 1987, the Company has manufactured and marketed pesticide-free
("organic") and preservative-free ("all natural") pasta sauces, salsas and
condiments under the brand names "Garden Valley Naturals" and "Parrot." The
Company began marketing its Parrot line of salsas in 1987, its Garden Valley
Naturals line of condiments in 1991 and its Garden Valley Naturals line of
pastas and salsas in 1994. In June 1996, the Company merged with OFP, which also
marketed (since 1988) a line of organic food products (including pasta sauces
and salsas, together with dry cut pastas and organic children's meals) under the
"Millina's Finest" brand name.
The Company was incorporated in July 1987 as S&D Foods, Inc. In November
1995, the Company changed its name to Garden Valley Naturals, Inc. ("GVN").
Following its June 1996 merger with OFP, the Company's name was changed to
Organic Food Products, Inc.
The Company sells its products either directly or through distributors or
independent commissioned food brokers and specialty food brokers to (i) health
food and specialty food stores, (ii) club stores (including Price/Costco and
BJ's), and (iii) retail chain and independent grocery stores (including Safeway,
A&P, Waldbaum's, Trader Joe's, Stop 'N Shop, Edward's, Lucky's and Big Y).
The Company's business strategy is to (i) increase revenues by offering
additional organic food products through the Company's existing distribution
network, (ii) reduce costs and improve operating efficiencies by using the
Company's excess manufacturing capabilities to increase the volume of products
it manufactures for itself as well as for others, (iii) expand the Company's
current geographic and retail store distribution by offering the Company's
products in new markets and increasing distribution in existing markets, and
(iv) specialize exclusively in the marketing of organic food products. Proceeds
of the Offering will be used for these and other purposes.
The Company's operating results could vary from period to period as a result
of a number of factors, including the purchasing patterns of significant
customers, the timing of new product introductions by the Company and its
competitors, the amount of slotting fees and new product advertising expenses
incurred by the Company, variations in sales by distribution channel,
fluctuations in market prices of raw materials and competitive pricing policies.
These factors could cause the Company's performance to differ from investor
expectations, resulting in volatility in the price of the Common Stock.
Moreover, the amortization of goodwill in connection with the OFP merger is
expected to result in a charge against the Company's operations in the
approximate amount of $100,000 per year.
Prospective purchasers of the Common Stock should carefully consider the
following information as well as other information contained in this Prospectus
before making an investment in the Common Stock. Information contained in this
Prospectus contains "forward-looking statements" which can be identified by the
use of forward-looking terminology such as "believes," "expects," "may,"
"should" or "anticipates" or the negative thereof or other variations thereon or
comparable terminology, or by discussions of strategy. See, e.g.,
"Business--Strategy." No assurance can be given that the future results covered
by the forward-looking statements will be achieved. The following matters
constitute cautionary statements identifying important factors with respect to
such forward-looking statements, including certain risks and uncertainties that
could cause actual results to vary materially from the future results covered in
such forward-looking statements. Other factors, such as the information
contained in "Risk Factors," could also cause actual results to vary materially
from the future results covered in such forward-looking statements.
The following discussion of the results of operations and financial
condition of the Company should be read in conjunction with the Company's
Financial Statements and Notes thereto included elsewhere in this Prospectus.
Historical results and percentage relationships among accounts are not
necessarily an indication of trends in operating results for any future period.
The following analysis presents the accounts of GVN and OFP on a combined basis
for all periods presented, based on the purchase method of
14
<PAGE>
accounting. The following analysis also discusses the separate historical
results of operations of GVN and OFP.
RESULTS OF OPERATIONS--YEAR ENDED JUNE 30, 1996 COMPARED TO YEAR ENDED JUNE 30,
1995
REVENUES
Pro forma revenues increased 65.2% from $8,133,000 in 1995 to $13,436,000 in
1996. GVN's sales increased from $3,106,000 to $5,794,000, an 86.5% increase,
while OFP's sales increased from $5,027,000 to $7,642,000, a 52.0% increase.
GVN's sales increased due to further penetration of its branded products into
club stores and chain grocery stores occasioned by expanded marketing efforts
which were funded by equity financings. GVN also increased its number of product
offerings, which increased its shelf space in retail stores.
OFP's sales increased due to further penetration of its branded products
into health food stores and the introduction of three new product categories.
The new product categories were a canned tomato line introduced in September
1995, a dry boxed cut pasta line introduced in May 1995, and a line of organic
canned meals for children introduced in March 1995. OFP also had an
approximately $1,000,000 increase in sales of organic fruit raw materials. The
Company, in the current fiscal year, has phased out the sale of organic fruit,
and in the future will be offering only raw materials that are consistent with
food ingredients used in its own products.
COST OF GOODS SOLD
Pro forma cost of goods sold on a combined basis increased to $10,521,000,
or 78.3% of sales in 1996, from $6,079,000, or 74.7% of sales in 1995. OFP's
cost of goods sold increased to $5,822,000, 76.2% of sales in 1996, from
$3,750,000, 74.6% of sales. This percentage increase was related to sales of a
higher proportion of lower gross profit, bulk products sold in 1996 and a
co-packer relationship change which resulted in higher co-packer charges. GVN's
cost of goods sold increased to $4,699,000, 81.1% of sales in 1996, from
$2,329,000, 75.0% of sales in 1995. This percentage increase was related to the
reformulating of GVN's pasta sauces to provide a more marketable product, the
relocation of GVN's factory and certain retooling of its manufacturing process.
SALES AND MARKETING EXPENSES
Pro forma combined sales and marketing expenses were $2,186,000, or 16.3% of
net sales in 1996, versus $666,000, or 8.2% in 1995. The percentage increase was
primarily due to the implementation of a new marketing program by GVN in 1996
which included the payment of slotting fees (payments to retailers to obtain
store shelf space for products), totaling approximately $473,000, in-store food
demonstration fees of approximately $200,000, and increases of broker
commissions and sales and marketing salaries of approximately $330,000. OFP's
selling and marketing expenses increased $509,246 in 1996 which related to
expenses for advertising, product development, samples and sales materials. In
addition, OFP incurred manufacturer's chargebacks of $424,000, which represent
reductions in product prices to the Company's customers in order to encourage
increased product purchases in new markets.
GENERAL AND ADMINISTRATIVE EXPENSES
Pro forma general and administrative expenses on a combined basis increased
to $1,760,000, or 13.1% of sales in 1996, from $782,000, or 9.6% of sales in,
1995. The increase is primarily attributed to salary increases for existing
personnel and additions of personnel for expansion purposes. OFP also incurred
significant professional fees as a result of due diligence efforts to analyze
other merger and acquisition candidates prior to its June 1996 merger with the
Company.
15
<PAGE>
RESTRUCTURING CHARGE
Pro forma restructuring charges were $451,000 in 1996 and included costs
incurred in the elimination of duplicate products, personnel, property and
equipment following the June 1996 merger. The principal costs included $183,000
for elimination of redundant inventory, $190,000 in severance pay benefits, and
$78,000 for disposal of excess equipment and miscellaneous expenses.
INTEREST EXPENSE
Pro forma interest expense increased $280,000 to $404,000 in 1996 from
$124,000 in 1995. This increase was due to the change in the co-packer
relationship by OFP, wherein the co-packer charged a financing fee for carrying
product it manufactured on behalf of OFP. This financing fee amounted to
approximately $230,000 in 1996. In addition, GVN's interest expense increased by
approximately $50,000, due to debt incurred in the repurchase of 1,100,000
shares of Common Stock prior to the June 1996 merger with the Company. See
"Certain Transactions."
RESULTS OF OPERATIONS--NINE MONTHS ENDED MARCH 31, 1997 COMPARED TO NINE MONTHS
ENDED MARCH 31, 1996
REVENUES
Revenues for the nine month period ended March 31, 1997 were $9,067,049, a
decrease of $773,139, or 8%, from the pro forma revenues for the same period in
the prior year. The principal reason for this decline was the decision to phase
out the Company's sales of organic raw fruit, due to lower profit margins on
bulk sales which represented a substantial portion of the total decrease.
The Company placed marketing emphasis on expanding its Millina's Finest
brand in health food stores, while reducing expenditures for slotting fees in
Garden Valley Naturals' club and grocery store markets. Salsa lines were
consolidated under the Parrot brand. Management believes these decisions reduced
redundancies and competitiveness in each market and promoted product
recognition. The Company plans to reinstitute slotting fees in markets where it
believes payment of the fees will be offset by increased sales.
COST OF GOODS SOLD
Cost of goods sold for the nine month period ended March 31, 1997 was
$6,085,139, compared to $7,690,820 (pro forma) for the same period in the prior
year, a decrease of $1,605,681, or 21%. This reduction is partly due to the
decision to promote sales of products with higher profit margins, but is also
due to increased efficiencies at the manufacturing level, and an elimination of
the use of co-packer relationships. Costs were also reduced by the June 1996
merger with OFP, which resulted in economies of scale from combined operations
and greater leverage in negotiating purchase contracts and pricing. The cost of
goods in 1997 was substantially lower than the costs associated with either
company's pre-merger costs of production.
SALES AND MARKETING EXPENSE
Sales and marketing expense for the nine month period ended March 31, 1997
was $1,497,059, compared to $996,131 (pro forma) for the same period in the
prior year. While this appears to be an increase of $500,928, representing 16.5%
of sales to 10.1% (pro forma) for the prior year, it is important to note that
while these expenses were higher in the fourth quarter of last year, for the
year ended June 30, 1996, such expense was 16.3%. Accordingly, the current
year's expenses are consistent with the prior year's expenses. Efficiencies and
reductions of discretionary marketing expenses were partially offset by adding
three employees to the marketing staff.
16
<PAGE>
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expenses for the nine month period ended March
31, 1997 were $896,711, or 9.9% of net sales, as compared to $1,198,254 (pro
forma), or 12.2%, for the same period in the prior year. Combining the Company
and OFP reduced general and administrative overhead through the elimination of
redundancies and enhanced operating efficiencies. Duplicated staff was
eliminated, and office space, insurance and professional services were revised.
Controls have been installed to monitor expenditures. Management anticipates
increases in general and administrative expenses to support expansion into new
markets and new product lines.
INTEREST
Interest expense for the nine months ended March 31, 1997 was $152,340, as
compared to $204,611 (pro forma), for the same period in the prior year. The
interest for the nine month period ended March 31, 1997 includes approximately
$60,000 of interest related to $700,000 of promissory notes scheduled to be
repaid from the proceeds of the Offering. See "Use of Proceeds." The balance of
the interest expense is the result of the Company's revolving line of credit. In
1997, this line of credit was renegotiated, providing the Company with a larger
and more diversified facility, at an interest rate of prime plus 1%. A portion
of the reduction in interest expense is due to the renegotiated lower interest
rate.
SEASONALITY
Historically, GVN and OFP have experienced little seasonal fluctuation in
revenues. In relation to product purchasing, the Company will seasonally
contract for certain product for the entire year at harvest time or at planting
time to secure raw materials through the year. These purchases take place
annually from early spring to mid-summer and are effected to reduce the risk of
price swings due to demand fluctuations. These annual purchases can create
overages or shortages in inventory. The Company's intention to sell certain bulk
raw materials to other manufacturers may assist in reducing any overages and
should allow for more effective purchasing of the required raw materials.
LIQUIDITY AND CAPITAL RESOURCES
The Company will use capital raised from the Offering to purchase raw
materials and equipment, to repay debt and to provide marketing funds to
introduce new products and introduce existing products into new markets. In
addition, capital will be used to reduce existing debt and provide cost savings
related thereto.
Equipment purchases will be used for retooling and to acquire additional
packaging equipment to convert production from boxed cases to shrink wrap cases.
During the nine-month period ended March 31, 1997, the Company financed its
operations from current sales and the resulting net profit. In February 1997,
the Company established a new credit facility of $2,000,000, which included a
working capital line of $1,700,000 and a new equipment line of $300,000, at an
annual rate of prime plus 1%. Notes payable increased from $1,049,107 at June
30, 1996 to $1,688,923 at March 31, 1997, reflecting this increased credit
facility. The Company also generated net proceeds of $1,700,000 from additional
equity sold in a private placement in July 1996. These funds were used to
purchase inventory, for working capital and to retire Common Stock, as discussed
above.
During the nine-month period March 31, 1997, capital equipment was purchased
increasing property by $280,000 to $1,091,082. Debt to related parties was
reduced by $322,000, payables were reduced by $423,000 and $78,000 of Common
Stock was retired. See "Certain Transactions". Also, $211,000 was expended in
connection with the Offering. Additional capital was used to promote new product
lines, and improve markets for existing lines. Receivables increased by $327,000
to $1,145,252, and inventories increased by $1,580,000 to $3,014,630. The
Company has entered into fixed price contracts covering approximately 2,000,000
pounds of organic tomatoes, which required payments of approximately $900,000,
of which $386,775 remains due and payable on or before July 30, 1997. See
"Business--Litigation."
17
<PAGE>
The Company believes that the net proceeds of this Offering, together with
its existing cash resources and available credit facilities, will be sufficient
to meet the Company's anticipated working capital needs for the next 12 months.
The Company, however, may raise capital through the issuance of long-term or
short-term debt or the issuance of securities in private or public transactions
if necessary to fund future expansion of its business. There can be no assurance
that acceptable financing for future transactions can be obtained. If such
financing is sought and obtained by the Company, it may be necessary to encumber
the Company's assets which could be lost in the event of any default by the
Company. Moreover, there can be no assurance that the Company would be able to
generate sufficient funds to satisfy interest payments due on any such
financing.
18
<PAGE>
BUSINESS
INTRODUCTION
Since 1987, the Company has manufactured and marketed pesticide-free
("organic") and preservative-free ("all natural") pasta sauces, salsas and
condiments under the brand names "Garden Valley Naturals" and "Parrot." The
Company began marketing its Parrot line of salsas in 1987, its Garden Valley
Naturals line of condiments in 1991 and its Garden Valley Naturals line of
pastas and salsas in 1994. In June 1996, the Company merged with Organic Food
Products, Inc. ("OFP"), which also marketed a line of organic food products
(including pasta sauces and salsas, together with dry cut pastas and organic
children's meals) under the "Millina's Finest" brand name. See "Certain
Transactions."
In June 1996, the Company restructured its Garden Valley Naturals, Parrot
and Millina's Finest product lines by (i) eliminating all nonorganic products,
(ii) eliminating salsas and ketchups sold under the Millina's Finest brand name,
and (iii) adding pasteurized organic fruit juices and organic frozen entrees to
its product offerings. In addition to its current products, the Company will
introduce a line of organic grill sauces and organic salad dressings in
September 1997. See "Business--Products."
All of the Company's products (with the exception of its organic mustards)
are manufactured at the Company's 24,000 square foot processing and warehouse
facility in Morgan Hill, California. See "Business--Manufacturing Facilities."
The Company sells its products either directly or through distributors or
independent commissioned food brokers and specialty food brokers to (i) health
food and specialty food stores, (ii) club stores (including Price/Costco and
BJ's), and (iii) retail chain and independent grocery stores (including Safeway,
A&P, Waldbaum's, Trader Joe's, Stop 'N Shop, Edward's, Lucky's and Big Y). See
"Business--Distribution and Marketing."
STRATEGY
The Company's business strategy is to (i) increase revenues by offering
additional organic food products through the Company's existing distribution
network, (ii) reduce costs and improve operating efficiencies by using the
Company's excess manufacturing capabilities to increase the volume of products
it manufactures for itself as well as for others, (iii) expand the Company's
current geographic and retail store distribution by offering the Company's
products in new markets and increasing distribution in existing markets, and
(iv) specialize exclusively in the marketing of organic food products. Proceeds
of the Offering will be used for these and other purposes. See "Use of
Proceeds."
(i) OFFER ADDITIONAL ORGANIC FOOD PRODUCTS. Since its merger with OFP, the
Company has added organic fruit juices and will add organic grill sauces and
organic frozen entrees to its product offerings in September 1997. The Company
believes that offering additional products will increase revenues without
proportionately increasing costs, due to the economies of scale which result
from volume product manufacturing efficiencies as well as the utilization of the
Company's existing distribution channels to offer new product lines.
(ii) INCREASE MANUFACTURING VOLUMES. The Company believes it can reduce
per unit manufacturing costs by using the Company's excess manufacturing
capabilities to increase manufacturing volume. The Company seeks to increase the
volume of products it manufactures by increasing sales of existing products,
increasing its new product offerings and by manufacturing food products for
other food marketers on a contract basis. Although it has done so in the past,
the Company does not currently manufacture food products for others and has no
pending agreements or arrangements to do so.
(iii) EXPAND GEOGRAPHIC AND RETAIL STORE DISTRIBUTION. Although the
Company has national geographic distribution for its products in health food
stores, distribution of products through club stores and grocery stores is
primarily limited to northern California and the northeast coast of the United
States. Upon completion of the Offering, the Company intends to select
additional regional distributors and
19
<PAGE>
independent food brokers, offer advertising concessions and pay retail store
slotting fees in order to increase its club store and grocery store sales
throughout the United States. See "Use of Proceeds."
(iv) SPECIALIZE EXCLUSIVELY IN ORGANIC FOOD PRODUCTS. Following its merger
with OFP, the Company eliminated all nonorganic food lines from its product
offerings. The Company believes it can achieve superior product recognition and
customer loyalty by promoting awareness that the Company only markets organic
foods.
PRODUCTS
The Company introduces and discontinues products on a regular basis,
consistent with customary practices of other firms in the processed food
industry. The Company's current product lines (ranked by percentage of total
sales) are as follows:
ORGANIC PASTA SAUCES AND PASTAS
The Company markets a line of 18 organic pasta sauces under the Garden
Valley Naturals and Millina's Finest brand names. The pasta sauces are all
natural and most are fat-free. Varieties include garden vegetable, sun-dried
tomato, roasted garlic tomato, tomato mushroom, sweet pepper and onions, hot and
spicy, smoked garlic and zesty basil. The Company also offers uncooked organic
dry cut pastas including spaghetti, linguini, fettucini, angel hair, rotini,
penne and bow tie.
ORGANIC SALSAS
The Company markets a line of 16 organic and all natural salsas under the
Garden Valley Naturals brand name including five varieties of fat-free and
vinegar-free salsas (sun-dried tomato, roasted garlic tomato, black bean, black
bean and corn and chunky organic tomato) in three levels of heat, mild, medium
and hot. A medium green tomatillo salsa is also available. The Company also
markets a line of ten organic salsas under the Parrot brand name. Varieties
include chunky, black bean, tomatillo, spicy gourmet and enchilada sauce.
ORGANIC CONDIMENTS
The Company offers two varieties of organic catsups and three organic
mustards under the Garden Valley Naturals brand name. The tomato catsup and
spicy garlic catsup are sweetened with organic fruit juice. All three mustards
use organic mustard seed for flavoring and are offered in yellow, stoneground
and dijon. All condiments are fat-free and sugar-free.
The Company also offers under the Parrot brand name an organic enchilada
sauce which is fat free and low in sodium and will introduce grill sauces used
for barbecuing hamburgers, hot dogs, chicken and fish in September 1997.
CHILDREN'S MEALS
The Company offers three canned organic children's meals, composed of pasta
O's in tomato sauce and tomato cheese sauce and beans with veggie franks.
OTHER NEW PRODUCTS
The Company introduced a line of four pasteurized organic fruit juices under
the "Cinagro" brand name in apple-carrot, tomato, vegetable and
carrot/lemon-lime flavors in May 1997, and introduced an additional four fruit
juices in July 1997. The Company will introduce (i) three low fat organic frozen
entrees, black bean and corn ravioli, wild mushroom ravioli and roasted
vegetable ravioli in August 1997, (ii) three organic salad dressings, sesame
seed, sun dried tomato and roasted garlic in September 1997 (iii) two organic
fruit based salsas, roasted pineapple and tropical mango in September 1997 and
(iv) two organic grill sauces, hot dog and hamburger sauce and roasted pineapple
sauce in September 1997.
20
<PAGE>
DISTRIBUTION AND MARKETING
The Company sells its products either directly or through distributors or
independent commissioned food brokers and specialty food brokers to (i) health
food and specialty food stores, (ii) club stores (including Price/Costco and
BJ's) and (iii) retail chain and independent grocery stores (including Safeway,
A&P, Waldbaum's, Trader Joe's, Stop 'N Shop, Edward's and Lucky's). Currently
the Company's products are offered in over 6,000 health food stores, 250 club
stores and 1,200 grocery stores located in all 50 states and in the Far East,
Middle East and Canada. The Company currently uses 12 specialty food brokers and
50 food distributors to sell to health food and other independent retail stores
and eight food brokers to sell to club stores and certain grocery store chains.
The Company also sells directly to other grocery store chains. In order to
increase its distribution and sales, primarily to club stores and grocery store
chains, the Company pays "slotting fees", which are payments made by food
processors and distributors to retail stores in order to acquire retail shelf
space for their food products.
The Company's product marketing emphasizes the organic, all natural and
generally fat-free content of its products as a healthful and tasty alternative
to similar traditional food products. The Company promotes its Millina's Finest
product line for sale to natural food and health food stores and the specialty
or "gourmet" departments of grocery stores. The Garden Valley Naturals and
Parrot brands are targeted primarily for club stores and grocery stores with
Garden Valley Naturals representing the higher priced product line. The Company
also promotes a pricing strategy in which its organic products are offered at
prices only slightly higher than their nonorganic counterparts. One customer
(Price/Costco) accounted for more than 10% of the Company's revenues for the
year ended June 30, 1996, and two customers (Price/ Costco and Stow Mills) each
accounted for more than 10% of the Company's revenues for the nine months ended
March 31, 1997. A loss of any of these customers would have a material adverse
effect on the Company's operations.
MANUFACTURING FACILITIES AND SUPPLIERS
The Company manufactures its products in a 24,000 square foot food
processing warehouse facility it leases in Morgan Hill, California. Manufacture
involves mixing the product's ingredients in 1,000 gallon kettles and then
bottling, labeling and casing the product for delivery to the customer. Some
products are packaged in shrink-wrapped combination packs consisting of two or
more separate products in one tray. The Company manufactures all of its
products, except its three mustard condiments, which are processed and packaged
for the Company by a co-packer. In addition to the Morgan Hill facility, the
Company uses public warehouse facilities on the east coast of the United States
for inventory storage and distribution.
While many raw materials are available from a number of sources, the Company
currently purchases its organic tomato products from only three suppliers and
has written agreements covering only a portion of its anticipated tomato product
purchases. The Company previously contracted for 2,000,000 pounds of organic
tomatoes and is required to pay the remaining $386,775 on the contract by July
30, 1997. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business--Litigation."
Two suppliers, Sun Garden Packing Company and Gilroy Canning Company, each
accounted for 10% or more of the Company's purchases for the nine months ended
March 31, 1997. The Company does not have a written agreement with either
supplier but believes that similar products are available from a number of other
suppliers for approximately the same prices.
COMPETITION
The natural food and health food industries in general and the pasta sauce,
salsa, condiment and fruit juice businesses in particular are highly
competitive, and there are numerous multinational, regional and local firms that
currently compete, or are capable of competing, with the Company. Multinational
nonorganic (i) pasta sauce competitors include Prego, Ragu, Classico and
Newman's Own, (ii) salsa competitors include Pace, El Paso and La Victoria,
(iii) condiment competitors include Heinz, French's
21
<PAGE>
and Guilden's, and (iv) fruit juice competitors include Minute Maid and Del
Monte. The Company also competes with national pasta manufacturers such as RF,
Ronzoni and DeBoles, smaller regional or local organic or natural pasta sauce
and salsa competitors such as Simply Natural, Muir Glen and Enrico and smaller
fruit juice competitors such as Odwalla and Knudsen. Most of the Company's
competitors are larger than the Company and have more financial, marketing and
management resources, and brand name recognition, than the Company.
Competitive factors in the pasta sauce, salsa and related specialty foods
industry include price, quality and flavor. The Company positions its product
lines to be slightly more expensive than their nonorganic food counterparts but
consistent with prices charged by other organic food marketers. The Company
believes its products compete favorably against other organic foods with respect
to quality and flavor.
TRADE NAMES AND TRADEMARKS
The Company has registered its "Millina's Finest" and Parrot trademarks in
California and has applied for federal trademark registration. The Company has
applied for California trademark and trade name protection for its "Garden
Valley Naturals" brand. There can be no assurance that any trademark or trade
name registrations will be granted to the Company, or, if granted, that the
trademarks or trade names will not be copied or challenged by others.
GOVERNMENT REGULATION
The Company is subject to various federal, state and local regulations
relating to cleanliness, maintenance of food production equipment, food storage
and food handling, and the Company is subject to unannounced on-site inspections
of its manufacturing facilities. As a manufacturer and distributor of foods, the
Company is subject to regulation by the U.S. Food and Drug Administration
("FDA"), state food and health boards and local health boards in connection with
the manufacturing, handling, storage, transportation, labeling and processing of
food products. In order to offer organic food products, the Company is also
subject to inspection and regulation by the USDA. Regulations in new markets and
future changes in the regulations may adversely impact the Company by raising
the cost to manufacture and deliver the Company's products and/or by affecting
the perceived healthfulness of the Company's products. A failure to comply with
one or more regulatory requirements could interrupt the Company's operations and
result in a variety of sanctions, including fines and the withdrawal of the
Company's products from store shelves. The Company holds all material licenses
and permits required to conduct its operations.
The Company is also subject to federal and state laws establishing minimum
wages and regulating overtime and working conditions. Since some of the
Company's personnel are paid at rates not far above the federal or California
state minimum wage, recent and future increases in the federal or California
minimum wage have and will result in increases in the Company's labor costs.
EMPLOYEES
The Company employs 45 individuals including its executive officers, food
production, processing and warehousing employees and administrative personnel.
The Company's employees are not covered by a collective bargaining agreement,
but the Company considers its employee relations to be satisfactory.
PROPERTIES
The Company leases approximately 24,000 square feet for its corporate
office, manufacturing and warehouse facility in Morgan Hill, California from a
non-affiliate on a seven-year lease expiring April 30, 2003, at a monthly rental
of $6,480. Commencing in March 1997, the rental rate will increase 3% per year.
The Company also leases 800 square feet of temporary office space at the same
location on a monthly basis for $350 per month. The Company is negotiating with
its landlord to lease to the Company an additional 26,000 square feet of space
for additional warehousing facilities, although no such lease has been executed.
22
<PAGE>
LITIGATION
In May 1997 Gilroy Canning Company brought an action against the Company
("Gilroy Canning Company vs. Organic Food Products, Inc. et al" Civil Action No.
97ASO2468 in the Superior Court of California) alleging that the Company failed
to make a payment for tomato products in the amount of $398,000 due March 31,
1997 with an additional payment of $386,775 due June 30, 1997. The Company
subsequently paid the March 31, 1997 payment and has until July 30, 1997 to
satisfy the June 30, 1997 payment. The Company intends to tender the June 30,
1997 payment prior to its July 30, 1997 due date.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The name, age and term of office of each of the executive officers and
directors of the Company are set forth below:
<TABLE>
<CAPTION>
OFFICER
OR
DIRECTOR
NAME POSITION HELD WITH THE COMPANY AGE SINCE
- --------------------------------------------------- ----------------------------------------- --- -----------
<S> <C> <C> <C>
Floyd R. Hill(1)................................... Chief Executive Officer and Director 53 1995
John Battendieri(1)................................ President and Director 50 1996
Donald L. Ladwig................................... Vice President--Marketing and Sales 49 1995
Perry T. Valassis.................................. Chief Financial Officer 52 1997
Kenneth A. Steel Jr.(1)(2)......................... Director 39 1996
Charles B. Bonner(2)............................... Director 55 1996
Charles R. Dyer(2)................................. Director 53 1996
</TABLE>
- ------------------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
Directors hold office for a period of one year from their election at the
annual meeting of shareholders or until their successors are duly elected and
qualified. Officers of the Company are elected by, and serve at the discretion
of, the Board of Directors.
BACKGROUND
The following is a summary of the business experience of each executive
officer and director of the Company for at least the last five years:
FLOYD R. HILL joined the Company in November 1995 as its Chief Operating
Officer and a director, and was appointed Chief Executive Officer in December
1995. In 1989, Mr. Hill co-founded Monterey Pasta, Inc. ("Monterey"), a publicly
traded pasta and salsa manufacturer. Mr. Hill served as Monterey's Chief
Executive Officer from 1989 to 1993, and its senior vice president from 1993 to
November 1995. From 1969 to 1989, Mr. Hill was employed by Eli Lilly & Co. in
various marketing and product development positions.
JOHN BATTENDIERI founded OFP in 1988 and was its President until it merged
with the Company in June 1996. In 1987, he founded Santa Cruz Naturals, an
organic fruit juice company, which he sold to Smuckers Corporation in 1992. For
more than 25 years, Mr. Battendieri has grown, developed and marketed a wide
variety of natural food products.
DONALD L. LADWIG joined the Company in June 1995 as its Vice
President--Marketing and Sales. From 1992 to May 1995, Mr. Ladwig was employed
by Del Monte Foods Corporation as a Vice President of
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<PAGE>
Sales. From 1974 to 1992, he was employed by Proctor and Gamble Corporation in
various sales positions, including his last position as Customer Business
Development Manager. Mr. Ladwig earned a Masters in Business Administration
degree from Pepperdine University.
PERRY T. VALASSIS joined the Company in January 1997 as its Chief Financial
Officer. From 1990 through 1996, he was employed by Western Microwave, Inc. as
its Controller. He has more than 20 years experience in financial reporting for
private industry and earned a Masters degree in Business Administration from the
University of Southern California.
KENNETH A. STEEL, JR. has been employed by K.A. Steel Chemicals, Inc. ("K.A.
Steel") since 1978 and has been its Executive Vice President since 1979. K.A.
Steel is a privately-held Chicago, Illinois based chemical company in which Mr.
Steel holds primary responsibilities for sales, marketing and operations
management. Mr. Steel is also the acting Chief Executive Officer and a director
of Monterey Pasta, Inc., a publicly traded pasta and salsa manufacturer.
CHARLES B. BONNER has been President and majority shareholder since 1990 of
Pacific Resources Inc., a Fresno, California merger/acquisition and venture
capital firm. From 1975 to 1989, he was President of Bonner Packing Company, a
California dried fruit producer and marketer. Mr. Bonner has been a director
(since 1993) and an officer (from 1993 to 1994) of Monterey Pasta, Inc., a
publicly traded pasta and salsa manufacturer. Mr. Bonner earned a Bachelor of
Arts degree from Stanford University.
CHARLES R. DYER founded and has been an executive officer and principal of
Monterey Bay Food Group, a marketing consultant to the food industry, since
1979. Mr. Dyer earned a Bachelor of Arts degree from the University of
California.
EXECUTIVE COMPENSATION
The following table discloses compensation paid to certain of the Company's
executive officers for the years ended June 30, 1995 and 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
-------------------------------------------
AWARDS
ANNUAL COMPENSATION --------------- PAYOUTS
----------------------------------------- -------------
(E) (F)
(A) OTHER ANNUAL RESTRICTED (G) (H)
NAME AND (B) (C) (D) COMPEN- STOCK OPTIONS/ LTIP
PRINCIPAL POSITION YEAR SALARY($) BONUS($) SATION($) AWARD(S)($) SARS(#) PAYOUTS($)
- -------------------------- --------- ------------ ------------- ------------ --------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Floyd R. Hill............. 1995 $ 85,000 -0- -0- -0- -0- -0-
Chief Executive Officer 1996 $ 110,000 -0- -0- -0- 200,000(1) -0-
John Battendieri.......... 1995 $ 220,000(2) -0- -0- -0- -0- -0-
President 1996 $ 110,000(2) -0- -0- -0- -0-
<CAPTION>
(I)
(A) ALL OTHER
NAME AND COMPEN-
PRINCIPAL POSITION SATION($)
- -------------------------- -----------
<S> <C>
Floyd R. Hill............. -0-
Chief Executive Officer -0-
John Battendieri.......... -0-
President 250,000(3)
</TABLE>
- --------------------------
(1) See "--1995 Stock Option Plan" and "Principal Shareholders."
(2) Represents salary paid Mr. Battendieri by OFP in 1995 and through June 1996,
the date of the Company's merger with OFP. From June through December 1996,
the Company paid Mr. Battendieri a salary of $55,000.
(3) Represents the assumption of a $250,000 obligation due from OFP to Mr.
Battendieri, which was assumed and paid by the Company in connection with
the OFP merger.
The Company has entered into an employment agreement with Mr. Hill expiring
July 1999 which provides for an annual salary of $110,000. Mr. Hill was
initially granted stock options to purchase 200,000 shares of Common Stock at
$2.00 per share in connection with his November 1995 employment with the
Company, all of which are fully vested. Subsequently, as a part of his July 1996
employment
24
<PAGE>
agreement, Mr. Hill was issued stock options to purchase an additional 200,000
shares of the Company's Common Stock at $2.50 per share exercisable until July
2003. Options to purchase a total of 100,000 of such shares vest in June 1997,
50,000 options vest in June 1998, and the remaining 50,000 options vest in June
1999.
Upon completion of the merger with OFP, the Company and Mr. Battendieri
(OFP's then President) entered into a three-year employment agreement expiring
June 1999, which provides for an annual salary of $110,000 and monthly
non-interest bearing loans of $7,500 during the full term of the employment
agreement, repayable the earlier of two years from the date of this Prospectus
or upon termination of the employment agreement. As of March 31, 1997, an
aggregate of $64,900 had been loaned to Mr. Battendieri. The Company agreed to
the loan arrangement as a negotiated part of its merger with OFP.
The Company's nonsalaried directors do not receive any cash compensation as
directors, although they are reimbursed for out-of-pocket expenses in attending
Board of Directors' meetings and have been granted an aggregate of 100,000 stock
options under the Company's 1995 Stock Option Plan exercisable at prices of
$2.00 to $2.50 per share.
1995 STOCK OPTION PLAN
In November 1995, the Company adopted a stock option plan (the "Plan") which
provides for the grant of stock options intended to qualify as "incentive stock
options" or "nonqualified stock options" within the meaning of Section 422 of
the United States Internal Revenue Code of 1986 (the "Code"). Incentive stock
options are issuable only to eligible officers, directors and key employees of
the Company.
The Plan is administered by the Board of Directors. The Company had reserved
625,000 shares of Common Stock for issuance under the Plan. Under the Plan, the
Board of Directors determines which individuals shall receive stock options, the
time period during which the options may be partially or fully exercised, the
number of shares of Common Stock that may be purchased under each option and the
option price.
For incentive stock options (i) the per share exercise price of the Common
Stock may not be less than the fair market value of the Common Stock on the date
the option is granted and (ii) no person who owns, directly or indirectly, at
the time of the granting of an incentive stock option, more than 10% of the
total combined voting power of all classes of stock of the Company is eligible
to receive stock options unless the option price is at least 110% of the fair
market value of the Common Stock subject to the option on the date of grant.
No stock options may be transferred by an optionee other than by will or the
laws of descent and distribution, and during the lifetime of an optionee, the
option may only be exercisable by the optionee. Stock options may be exercised
only if the option holder remains continuously associated with the Company from
the date of grant to the date of exercise. Stock options under the Plan must be
granted within ten years from the effective date of the Plan. The exercise date
of a stock option granted under the Plan cannot be later than ten years from the
date of grant. Any options that expire unexercised or that terminate upon an
optionee's ceasing to be employed by the Company become available once again for
issuance. Shares issued upon exercise of an option will rank equally with other
shares then outstanding.
As of the date of this Prospectus, 625,000 stock options have been granted
under the Plan to officers, directors and employees at exercise prices of either
$2.00 or $2.50 per share including an aggregate of 555,000 options granted to
executive officers and directors.
25
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information with respect to the
ownership of the Company's Common Stock as of May 31, 1997 by (i) each person
who is known by the Company to own of record or beneficially more than 5% of the
Company's Common Stock, (ii) each of the Company's directors and (iii) all
directors and officers of the Company as a group. The persons listed in the
table have sole voting and investment powers with respect to the shares of
Common Stock, and the address of each person is in care of the Company at 550
Monterey Road, Morgan Hill, California 95037.
<TABLE>
<CAPTION>
PERCENT PERCENT
AMOUNT OF OF CLASS OF CLASS
NAME OWNERSHIP PRIOR TO OFFERING AFTER OFFERING
- -------------------------------------------------------------------- ---------- ------------------- ---------------
<S> <C> <C> <C>
Floyd R. Hill(1).................................................... 351,200 6.0 4.9
John Battendieri.................................................... 2,102,499 35.7 29.3
Kenneth A. Steel(2)................................................. 304,163 5.2 4.2
Charles B. Bonner(3)................................................ 5,000 * *
Charles R. Dyer(4).................................................. 32,000 * *
Dean E. Nicholson................................................... 450,000 7.6 6.3
Steven A. Reedy..................................................... 450,000 7.6 6.3
Spelman & Co., Inc.(5).............................................. 350,000 5.9 4.9
All officers and directors as
a group (7 persons)(1)(2)(3)(4)................................... 2,804,862 50.7 41.0
</TABLE>
- ------------------------
* Less than 1%
(1) Includes stock options to purchase 200,000 shares of Common Stock at $2.00
per share at any time until November 1, 2000. Does not include options
issued in connection with Mr. Hill's employment agreement to purchase an
additional 200,000 shares of Common Stock at $2.50 per share at various
times until July 2003, which options have not yet vested. See
"Management--Executive Compensation."
(2) Includes options to purchase 30,000 shares of Common Stock at $2.00 per
share until March 2001. Does not include stock options to purchase an
additional 20,000 shares of Common Stock at $2.50 per share at any time
through May 2002, which options have not yet vested. See "Management--Stock
Option Plan" and "Certain Transactions."
(3) Includes stock options to purchase 5,000 shares of Common Stock at $2.00 per
share at any time until March 2001. Does not include options to purchase an
additional 20,000 shares of Common Stock at any time through May 2002, which
options have not yet vested. See "Management--Stock Option Plan."
(4) Does not include stock options to purchase 25,000 shares of Common Stock at
$2.50 per share at any time through May 2002, which options have not yet
vested. See "Management--Stock Option Plan."
(5) Represents common stock purchase warrants to purchase (i) 150,000 shares of
Common Stock at $2.00 per share at any time until December 31, 2002 and (ii)
200,000 shares at $2.50 per share at any time until July 31, 2003. See
"Underwriting."
26
<PAGE>
CERTAIN TRANSACTIONS
In October 1995, the Company entered into an agreement with Dean E.
Nicholson and Steven A. Reedy, former officers and directors and founding
shareholders of the Company, pursuant to which it agreed to repurchase from
these individuals an aggregate of 1,100,000 shares of the Company's Common Stock
at $2.00 per share for a total purchase price of $2,200,000. The Company paid
Messrs. Nicholson and Reedy an aggregate of $640,000 and is required to pay an
additional $700,000 of the purchase price the earlier of November 1997 or the
closing of the Offering. The balance of $860,000 is payable in installments of
$40,000 per month with interest at the rate of 6% per annum. See "Use of
Proceeds."
In October 1995, the Company entered into an agreement with Kenneth A.
Steel, a director of the Company, under which it borrowed $500,000 from Mr.
Steel for working capital. The loan bore interest at 10.25% per annum and was
due March 31, 1996. In February 1996, Mr. Steel converted the principal amount
of the loan into 250,000 shares of the Company's Common Stock at $2.00 per
share.
The Company previously leased certain machinery and equipment from Messrs.
Nicholson and Reedy, paying to them an aggregate of $81,596 and $71,992 for the
years ending June 30, 1995 and 1994, respectively. In July 1995, Messrs. Reedy
and Nicholson gratuitously contributed the machinery and equipment to the
Company's capital.
In June 1996, the Company entered into a merger agreement (the "Merger
Agreement") with OFP pursuant to which the two companies merged, with the
Company becoming the surviving entity. Under the terms of the Merger Agreement,
the Company (i) issued 2,250,000 shares of its Common Stock to the shareholders
of OFP in exchange for all 606,061 shares of OFP's outstanding Common Stock and
(ii) assumed all of the obligations of OFP including a $250,000 obligation due
to John Battendieri (OFP's then President and currently the President and a
director of the Company), and a revolving line of credit in the approximate
aggregate amount of $1,100,000 due to a commercial bank and personally
guaranteed by Mr. Battendieri.
Under the terms of Mr. Battendieri's June 1996 employment agreement, the
Company is required to advance to Mr. Battendieri non-interest bearing loans of
$7,500 per month during the full term of his employment agreement, which expires
in June 1999. See "Management--Executive Compensation."
In June 1996, the Company cancelled its employment agreement with Mr.
Nicholson and agreed to pay him a termination fee of $175,000 evidenced by a
promissory note in like amount, bearing interest at 8% per annum payable $7,292
per month with the balance of principal and interest due in full in August 1998.
At March 31, 1997, the balance due to Mr. Nicholson under the promissory note
was $110,851.
In May 1997, the Company borrowed $600,000 for working capital from a group
of lenders evidenced by promissory notes bearing interest at 10% per annum due
the earlier of the closing of the Offering or May 1998. As additional
consideration for the loans, the Company issued to the lenders 200,000 common
stock purchase warrants, each warrant entitling the holder to purchase one share
of Common Stock at $3.00 per share at any time until December 31, 1999. If the
loans are not paid by December 1, 1997, each month thereafter 20% of the
warrants convert into Common Stock at no cost to the lenders. The lenders have
the option to waive interest on the loans in exchange for an additional
aggregate of 20,000 warrants carrying the same terms as the initial 200,000
warrants. The loans will be repaid with proceeds of the Offering. See "Use of
Proceeds."
The Company believes that the terms and conditions of the above transactions
were fair, reasonable and consistent with terms the Company could have obtained
from unaffiliated third parties. Any future transactions with the Company's
executive officers or directors will be entered into on terms that are no less
favorable to the Company than those that are available from unaffiliated third
parties, and all such transactions will be approved by a majority of the
Company's disinterested directors.
27
<PAGE>
DESCRIPTION OF SECURITIES
COMMON STOCK
The Company is authorized to issue 20,000,000 shares of no par value Common
Stock. Upon issuance, the shares of Common Stock are not subject to further
assessment or call. The holders of Common Stock are entitled to one vote for
each share held of record on each matter submitted to a vote of shareholders.
Cumulative voting for election of directors is permitted. Subject to the prior
rights of any series of Preferred Stock which may be issued by the Company in
the future, holders of Common Stock are entitled to receive ratably such
dividends as may be declared by the Board of Directors out of funds legally
available therefor, and, in the event of the liquidation, dissolution or winding
up of the Company, are entitled to share ratably in all assets remaining after
payment of liabilities. Holders of Common Stock have no preemptive rights and
have no rights to convert their Common Stock into any other securities. The
outstanding Common Stock is, and the Common Stock to be outstanding upon
completion of the Offering will be, validly issued, fully paid and
nonassessable.
PREFERRED STOCK
The Company is authorized to issue 5,000,000 shares of no par value
preferred stock (the "Preferred Stock"). The Preferred Stock may, without action
by the shareholders of the Company, be issued by the Board of Directors
("Board") from time to time in one or more series for such consideration and
with such relative rights, privileges and preferences as the Board may
determine. Accordingly, the Board has the power to fix the dividend rate and to
establish the provisions, if any, relating to voting rights, redemption rates,
sinking funds, liquidation preferences and conversion rights for any series of
Preferred Stock issued in the future.
It is not possible to state the actual effect of any other authorization of
Preferred Stock upon the rights of holders of Common Stock until the Board
determines the specific rights of the holders of any other series of Preferred
Stock. The Board's authority to issue Preferred Stock also provides a convenient
vehicle in connection with possible acquisitions and other corporate purposes
but could have the effect of making it more difficult for a third party to
acquire a majority of the outstanding voting stock. Accordingly, the issuance of
Preferred Stock may be used as an "anti-takeover" device without further action
on the part of the shareholders of the Company and may adversely affect the
holders of the Common Stock. See "Risk Factors--Control by Management;
Authorization and Issuance of Preferred Stock; Prevention of Changes in
Control."
COMMON STOCK ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, there will be 6,597,913 shares of Common
Stock outstanding, of which 1,300,000 shares have been registered in the
Offering, and the remaining 5,297,913 shares have not been registered in the
Offering and are "restricted securities" under Rule 144 of the 1933 Act. In
general, under Rule 144, a person (or persons whose shares are aggregated) who
has satisfied a one-year holding period may, under certain circumstances, sell
within any three-month period the number of shares which does not exceed the
greater of one percent of the then outstanding shares of Common Stock
(approximately 65,979 shares immediately after the Offering assuming no exercise
of the Representatives' Warrants, the Overallotment Option, or other outstanding
stock options or common stock purchase warrants) or the average weekly trading
volume during the four calendar weeks prior to such sale. Rule 144 also permits,
under certain circumstances, the sale of shares by a person without any quantity
limitation after the securities have been held for two years. All 5,297,913
shares of Common Stock are restricted securities but may be sold under Rule 144,
commencing 90 days after the effective date of the Offering. The Company is
unable to predict the effect that any sales, under Rule 144 or otherwise, may
have on the then prevailing market price of the Common Stock. All of the
Company's shareholders have agreed not to sell or otherwise dispose of any of
their shares of Common Stock for a period of 12 months from the date of
28
<PAGE>
this Prospectus, without the prior written consent of the Representatives. The
Company has also granted certain demand and piggy-back registration rights to
the Representatives with respect to the Representatives' Warrants as well as the
Common Stock issuable upon exercise of the Representatives' Warrants.
TRANSFER AGENT
The Company has appointed Corporate Stock Transfer, Inc., 370 17th Street,
Suite 2350, Denver, Colorado 80202, as the transfer agent for the Common Stock.
DIVIDENDS
The Company has not paid dividends on its Common Stock since inception and
does not plan to pay dividends in the foreseeable future. Earnings, if any, will
be retained to finance growth.
LIMITATION ON LIABILITIES
The Company's Articles of Incorporation provide that liability of directors
to the Company for monetary damages is eliminated to the full extent provided by
California law. Under California law, a director is not personally liable to the
Company or its shareholders for monetary damages for breach of fiduciary duty as
a director except for liability (i) for any breach of the director's duty of
loyalty to the Company or its shareholders, (ii) for acts or omissions not in
good faith or that involve intentional misconduct or a knowing violation of law,
(iii) for authorizing the unlawful payment of a dividend or other distribution
on the Company's capital stock or the unlawful purchases of its capital stock,
or (iv) for any transaction from which the director derived any improper
personal benefit.
The effect of this provision in the Articles of Incorporation is to
eliminate the rights of the Company and its shareholders (through shareholders'
derivative suits on behalf of the Company) to recover monetary damages from a
director for breach of the fiduciary duty of care as a director (including
breaches resulting from negligent or grossly negligent behavior) except in the
situations described in clauses (i) through (iv) above. This provision does not
limit or eliminate the rights of the Company or any shareholder to seek
non-monetary relief, such as an injunction or rescission, in the event of a
breach of a director's duty of care or any liability for violation of the
federal securities laws.
29
<PAGE>
UNDERWRITING
The Underwriters named below have severally agreed, subject to the terms and
conditions of the Underwriting Agreement, to purchase from the Company the
number of shares set forth opposite their names.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- --------------------------------------------------------------------------------- ----------
<S> <C>
Sentra Securities Corporation....................................................
Spelman & Co., Inc...............................................................
Paradise Valley Securities, Inc..................................................
----------
Total........................................................................ 1,300,000
----------
----------
</TABLE>
The Company has been advised by the Representatives that the Underwriters
propose to offer the Common Stock purchased by them directly to the public at
the public offering price set forth on the cover page of this Prospectus and to
certain dealers at a price that represents a concession of $ per share. The
Underwriters may allow, and such dealers may reallow, a concession within the
discretion of the Representatives. The Underwriters are committed to purchase
and pay for all of the Common Stock if any Common Stock is taken. After the
initial public offering of the Common Stock, the offering price and the selling
terms may be changed by the Underwriters.
The Company has granted the Representatives an Overallotment Option,
exercisable within 30 days from the date of this Prospectus, to purchase up to
195,000 shares of Common Stock solely to cover overallotments.
The Underwriters will purchase the Common Stock (including Common Stock
subject to the Overallotment Option) from the Company at a price of $3.60 per
share. In addition, the Company has agreed to pay to Sentra Securities
Corporation and Spelman & Co., Inc. a 3% nonaccountable expense allowance on the
aggregate initial public offering price of the shares of Common Stock, including
shares subject to the Overallotment Option, none of which has been paid.
The Company has agreed to issue the Representatives' Warrants to the
Representatives for a consideration of $100. The Representatives' Warrants are
exercisable at any time in the four-year period commencing one year from the
date of this Prospectus to purchase up to 130,000 shares of Common Stock for
$4.80 per share. The Representatives' Warrants are not transferable (nor may
they be sold, hypothecated or pledged) for one year from the date of this
Prospectus except (i) to an Underwriter or a partner or officer of an
Underwriter or (ii) by will or operation of law. During the term of the
Representatives'
30
<PAGE>
Warrants, the holder thereof is given the opportunity to profit from a rise in
the market price of the Company's securities. The Company may find it more
difficult to raise additional equity capital while the Representatives' Warrants
are outstanding. At any time at which the Representatives' Warrants are likely
to be exercised, the Company would probably be able to obtain additional equity
capital on more favorable terms. The Company has registered the Common Stock
underlying the Representatives' Warrants under the 1933 Act. If the Company
files a registration statement relating to an equity offering under the
provisions of the 1933 Act at any time during the five-year period following the
date of this Prospectus, the holders of the Representatives' Warrants or
underlying Common Stock will have the right, subject to certain conditions, to
include in such registration statement, at the Company's expense, all or part of
the underlying Common Stock at the request of the holders. Additionally, the
Company has agreed, for a period of five years commencing on the date of this
Prospectus, on demand of the holders of a majority of the Representatives'
Warrants or the Common Stock issued or issuable thereunder, to register the
Common Stock underlying the Representatives' Warrants one time at the Company's
expense. The registration of securities pursuant to the Representatives'
Warrants may result in substantial expense to the Company at a time when it may
not be able to afford such expense and may impede future financing. The Company
may find that the terms on which it could obtain additional capital may be
adversely affected while the Representatives' Warrants are outstanding. The
number of shares of Common Stock covered by the Representatives' Warrants and
the exercise price are subject to adjustment under certain events to prevent
dilution.
In connection with the Offering, the Underwriters may purchase and sell the
Common Stock in the open market. These transactions may include over-allotment
and stabilizing transactions and purchases to cover syndicate short positions
created in connection with the Offering. Stabilizing transactions consist of
certain bids or purchases for the purposes of preventing or retarding a decline
in the market price of the Common Stock; and syndicate short positions involve
the sale by the Underwriters of a greater number of shares of Common Stock than
they are required to purchase from the Company in the Offering. The Underwriters
also may impose a penalty bid, whereby selling concessions allowed to syndicate
members of other broker-dealers in respect of the Common Stock sold in the
Offering for their account may be reclaimed by the syndicate if such securities
are repurchased by the syndicate in stabilizing or covering transactions. These
activities may stabilize, maintain or otherwise affect the market price of the
Common Stock, which may be higher than the price that might otherwise prevail in
the open market; and these activities, if commenced, may be discontinued at any
time. These transactions may be effected on the SmallCap Market.
The initial public offering price of the Common Stock was determined by
negotiations between the Company and the Representatives and does not
necessarily bear any relationship to recognized criteria for the valuation of
such securities. Factors considered in such negotiations included the Company's
current level of revenues and earnings, its prospects for future growth based
upon proceeds of the Offering, the nature of the Company's products, the organic
food products industry in general and the level of competition within the
industry. There can be no assurance that a regular trading market for the Common
Stock will develop or continue after the Offering or, if such a market develops,
that the market price will exceed the offering price.
Spelman & Co., Inc. ("Spelman") acted as the Company's Placement Agent in
two prior private placements of the Company's securities pursuant to which
Spelman sold (i) 1,350,000 shares of the Company's Common Stock at $2.00 per
share and (ii) 823,500 shares of the Company's Common Stock at $2.50 per share.
In connection with the first private placement completed in November 1995, the
Company paid Spelman an aggregate of $351,000 in cash and issued to it common
stock purchase warrants to purchase 150,000 shares at $2.00 per share
exercisable at any time until December 31, 2002. In connection with the second
private placement completed in July 1996, the Company paid Spelman an aggregate
of $267,638 in cash and issued to it common stock purchase warrants to purchase
an additional 200,000 shares at $2.50 per share exercisable at any time until
July 31, 2003. See "Principal Shareholders."
31
<PAGE>
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the 1933 Act, or to contribute to
payments that any Underwriter may be required to make in respect thereof. The
Representatives do not intend to sell any of the Common Stock to accounts over
which they exercise discretionary authority.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Gary A. Agron, Englewood, Colorado. Certain legal
matters in connection with the Offering will be passed upon for the
Representatives by Luce, Forward, Hamilton & Scripps LLP, San Diego, California.
EXPERTS
The financial statements of the Company for the years ended June 30, 1995
and 1996, appearing in this Prospectus, have been audited by Semple & Cooper
LLP, independent certified public accountants, as stated in their report
appearing herein, and have been so included herein in reliance upon such report
given upon the authority of that firm as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form SB-2 (the "Registration
Statement") under the 1933 Act with respect to the securities offered hereby.
This Prospectus does not contain all the information set forth in the
Registration Statement, certain items of which are omitted in accordance with
the rules and regulations of the Commission. For further information with
respect to the Company and the securities offered by this Prospectus, reference
is made to such Registration Statement and the exhibits thereto which may be
inspected without charge at the public reference facilities of the Commission at
Judiciary Plaza, 450 Fifth Street N.W., Washington, DC 20549; Northwest Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, IL 60661; 7 World Trade
Center, New York, NY 10048; and 5670 Wilshire Boulevard, Los Angeles, CA 90036.
The Company will be subject to the informational requirements of the
Securities Exchange Act of 1934 (the "1934 Act") and, in accordance therewith,
will file reports, proxy statements and other information with the Commission.
Such reports, proxy statements and other information may be inspected at public
reference facilities of the Commission at Judiciary Plaza, 450 Fifth Street
N.W., Washington, DC 20549; Northwest Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, IL 60661; 7 World Trade Center, New York, NY 10048; and
5670 Wilshire Boulevard, Los Angeles, CA 90036. Copies of such material can be
obtained from the Public Reference Section of the Commission at Judiciary Plaza,
450 Fifth Street N.W., Washington, DC 20549 at prescribed rates.
The Company will furnish annual reports to its shareholders which will
include year end audited financial statements. The Company will also furnish to
its shareholders quarterly reports and such other reports as may be authorized
by its Board of Directors.
32
<PAGE>
To The Shareholders and Board of Directors of
Organic Food Products, Inc.
We have audited the accompanying balance sheet of Organic Food Products, Inc. as
of June 30, 1996, and the related statements of operations, changes in
shareholders' equity, and cash flows for the years ended June 30, 1996 and 1995.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Organic Food Products, Inc. as
of June 30, 1996, and the results of its operations, changes in shareholders'
equity, and its cash flows for the years ended June 30, 1996 and 1995, in
conformity with generally accepted accounting principles.
SEMPLE & COOPER, LLP
Certified Public Accountants
Phoenix, Arizona
February 28, 1997
F-1
<PAGE>
ORGANIC FOOD PRODUCTS, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JUNE 30,
1996
------------ MARCH 31,
1997
------------
(UNAUDITED)
<S> <C> <C>
Current Assets:
Current Assets:
Cash................................................................................ $ 191,073 $ 200
Accounts receivable, net (Notes 1 and 4)............................................ 818,342 1,145,252
Inventory (Notes 1, 2, 4 and 6) 1,429,743 3,014,630
Prepaid expenses.................................................................... 25,240 28,010
Advances to shareholder (Note 3).................................................... -- 64,914
Income tax refund receivable........................................................ 259,447 134,355
Deferred tax asset (Note 9) -- 47,500
------------ ------------
Total Current Assets.............................................................. 2,723,845 4,434,861
------------ ------------
Property and Equipment: (Notes 1, 4 and 5)............................................
Computer software................................................................... 24,431 57,757
Leasehold improvements.............................................................. 109,182 150,471
Machinery and equipment............................................................. 595,396 795,997
Office equipment.................................................................... 51,781 61,256
Printing plates..................................................................... 12,738 12,997
Vehicles............................................................................ 16,088 12,604
------------ ------------
809,616 1,091,082
Less: accumulated depreciation...................................................... (59,030) (138,947)
------------ ------------
750,586 952,135
------------ ------------
Other Assets:
Deposits and other.................................................................. 24,003 9,378
Deferred offering costs (Notes 1 and 14)............................................ 71,225 282,280
Goodwill, net (Note 1).............................................................. 2,372,175 2,283,219
------------ ------------
2,467,403 2,574,877
------------ ------------
Total Assets...................................................................... $ 5,941,834 $ 7,961,873
------------ ------------
------------ ------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements
F-2
<PAGE>
ORGANIC FOOD PRODUCTS, INC.
BALANCE SHEETS (CONTINUED)
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1996 1997
------------- -------------
<S> <C> <C>
(UNAUDITED)
Current Liabilities:
Notes payable--current portion (Note 4)........................................... $ 1,048,595 $ 1,688,923
Notes payable--related parties--current portion (Note 3).......................... 333,732 1,251,609
Capital lease obligations--current portion (Notes 1 and 5)........................ 5,323 7,752
Accounts payable.................................................................. 2,030,234 1,606,934
Accrued wages and taxes........................................................... 74,499 91,948
------------- -------------
Total Current Liabilities....................................................... 3,492,383 4,647,166
------------- -------------
Long-Term Liabilities:
Notes payable--long-term portion (Note 4)......................................... 512 --
Notes payable--related parties--long-term portion (Note 3)........................ 1,540,541 361,729
Capital lease obligations--long-term portion (Notes 1 and 5)...................... 1,408 18,745
Deferred income taxes payable (Note 9)............................................ -- 29,500
------------- -------------
1,542,461 409,974
------------- -------------
Commitments (Notes 3 and 6)......................................................... -- --
Shareholders' Equity: (Note 8)......................................................
Common stock...................................................................... 2,317,400 3,971,721
Accumulated deficit from S Corporation............................................ (1,410,410) (1,410,410)
Retained earnings................................................................. -- 343,422
------------- -------------
906,990 2,904,733
------------- -------------
Total Liabilities and Shareholders' Equity...................................... $ 5,941,834 $ 7,961,873
------------- -------------
------------- -------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements
F-3
<PAGE>
ORGANIC FOOD PRODUCTS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTH PERIODS ENDED
-------------------------- --------------------------
JUNE 30, JUNE 30, MARCH 31, MARCH 31,
1996 1995 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
(UNAUDITED)
Revenues................................................. $ 7,641,539 $ 5,027,278 $ 9,067,049 $ 5,651,707
Cost of Goods Sold....................................... 5,822,337 3,750,310 6,085,139 4,242,506
------------ ------------ ------------ ------------
Gross Profit............................................. 1,819,202 1,276,968 2,981,910 1,409,201
------------ ------------ ------------ ------------
Sales and Marketing Expense.............................. 954,108 444,862 1,497,059 464,083
General and Administrative Expenses...................... 1,244,914 697,591 896,711 845,049
Restructuring charge (Note 13)........................... 257,468 -- -- --
------------ ------------ ------------ ------------
2,456,490 1,142,453 2,393,770 1,309,132
------------ ------------ ------------ ------------
Income (Loss) from Operations............................ (637,288) 134,515 588,140 100,069
Interest Income (Expense), Net........................... (349,122) (121,704) (151,338) (167,454)
Other Income (Expense), Net.............................. 2,948 10,607 13,712 1,994
------------ ------------ ------------ ------------
Income (Loss) before Provision for Income Taxes.......... (983,462) 23,418 450,514 (65,391)
------------ ------------ ------------ ------------
Provision for Income Tax Benefit (Expense):
(Note 1)
--current............................................ -- -- (125,092) --
--deferred........................................... -- -- 18,000 --
------------ ------------ ------------ ------------
-- -- (107,092) --
------------ ------------ ------------ ------------
Net Income (Loss)........................................ (983,462) 23,418 $ 343,422 (65,391)
------------
------------
Pro forma income tax (expense) benefit
(unaudited)............................................. 334,400 (5,600) 15,000
------------ ------------ ------------
Pro forma Net Income (Loss) after Income Tax Adjustment
(unaudited)............................................. $ (649,062) $ 17,818 $ (50,391)
------------ ------------ ------------
------------ ------------ ------------
Earnings (Loss) per Share (Note 1)....................... $ .06
Pro forma Net Income (Loss) per Share (unaudited)........ $ (.11) $ -- $ (.01)
------------ ------------ ------------
------------ ------------ ------------
Weighted Average Number of Shares Outstanding............ 5,767,663 5,767,663 5,767,663 5,767,663
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements
F-4
<PAGE>
ORGANIC FOOD PRODUCTS, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED JUNE 30, 1996 AND 1995 AND
FOR THE NINE MONTH PERIOD ENDED MARCH 31, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
ACCUMULATED TOTAL
COMMON STOCK ADDITIONAL DEFICIT RETAINED SHAREHOLDERS'
------------------------ PAID-IN FROM S EARNINGS EQUITY
SHARES AMOUNT CAPITAL CORPORATION (DEFICIT) (DEFICIT)
---------- ------------ ----------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1994.......... 2,250,000 $ 67,400 $ 8,571 $ (458,937) $ -- $ (382,966)
Net income for the year ended June
30, 1995........................ -- -- -- 23,418 -- 23,418
---------- ------------ ----------- ------------ ---------- ------------
Balance at June 30, 1995.......... 2,250,000 67,400 8,571 (435,519) -- (359,548)
Reverse merger and conversion of S
Corporation losses.............. 2,250,000 2,250,000 (8,571) 8,571 -- 2,250,000
Net loss for the year ended June
30, 1996........................ -- -- -- (983,462) -- (983,462)
---------- ------------ ----------- ------------ ---------- ------------
Balance at June 30, 1996.......... 4,500,000 2,317,400 -- (1,410,410) -- 906,990
Proceeds from private offering,
net of costs of $340,462........ 823,500 1,718,288 -- -- -- 1,718,288
Purchase and retirement of
treasury stock.................. (31,250) (78,125) -- -- -- (78,125)
Stock issued for director
expenses........................ 5,663 14,158 -- -- -- 14,158
Net income for the nine month
period ended March 31, 1997
(unaudited)..................... -- -- -- -- 343,422 343,422
---------- ------------ ----------- ------------ ---------- ------------
Balance at March 31, 1997......... 5,297,913 $ 3,971,721 $ -- $ (1,410,410) $ 343,422 $2,904,733
---------- ------------ ----------- ------------ ---------- ------------
---------- ------------ ----------- ------------ ---------- ------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements
F-5
<PAGE>
ORGANIC FOOD PRODUCTS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTH PERIODS ENDED
---------------------------- -----------------------------
JUNE 30, JUNE 30, MARCH 31,
1996 1995 MARCH 31, 1997 1996
------------- ------------- -------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Increase (Decrease) in Cash:
Cash flows from operating activities:
Cash received from customers...................... $ 7,164,566 $ 4,736,771 $ 8,771,812 $ 5,138,654
Cash paid to suppliers and employees.............. (7,834,712) (4,411,400) (10,033,456) (5,343,288)
Interest paid..................................... (319,879) (92,023) (91,443) (167,892)
Interest received................................. 438 -- 1,002 438
Net liabilities acquired in merger................ 717,591 -- -- --
------------- ------------- -------------- -------------
Net cash provided (used) by operating
activities.................................... (271,996) 233,348 (1,352,085) (372,088)
------------- ------------- -------------- -------------
Cash flows from investing activities:
Purchase of fixed assets.......................... (17,135) (9,824) (294,457) (49,011)
Advances to shareholder........................... -- -- (64,914) --
------------- ------------- -------------- -------------
Net cash used by investing activities........... (17,135) (9,824) (359,371) (49,011)
------------- ------------- -------------- -------------
Cash flows from financing activities:
Repayment of capital lease........................ (4,532) (2,142) (3,986) (3,103)
Repayment of notes payable........................ (11,847) (170,467) (2,290) (196,267)
Repayment of notes payable--related parties....... (65,781) (173,875) (321,832) (57,299)
Proceeds from notes payable....................... 509,395 9,936 419,583 632,768
Proceeds from notes payable--related party........ 52,169 111,000 -- 44,500
Proceeds from issuance of stock................... -- -- 1,718,288 --
Purchase of treasury stock........................ -- -- (78,125) --
Deferred offering costs........................... -- -- (211,055) --
------------- ------------- -------------- -------------
Net cash provided (used) by financing
activities.................................... 479,404 (225,548) 1,520,583 420,599
------------- ------------- -------------- -------------
Net increase (decrease) in cash..................... 190,273 (2,024) (190,873) (500)
Cash at beginning of period......................... 800 2,824 191,073 800
------------- ------------- -------------- -------------
Cash at end of period............................... $ 191,073 $ 800 $ 200 $ 300
------------- ------------- -------------- -------------
------------- ------------- -------------- -------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements
F-6
<PAGE>
ORGANIC FOOD PRODUCTS, INC.
STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTH PERIODS ENDED
-------------------------- --------------------------
JUNE 30, JUNE 30, MARCH 31, MARCH 31,
1996 1995 1997 1996
------------- ----------- ------------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Reconciliation of Net Income (Loss) to Net Cash Provided
(Used) by Operating Activities:
Net Income (Loss)........................................ $ (983,462) $ 23,418 $ 343,422 $ (65,391)
------------- ----------- ------------- -----------
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Depreciation and amortization........................ 18,875 13,785 207,655 20,766
Loan discount amortization........................... -- -- 60,897 --
Accrued interest added to note principal............. 29,681 29,681 -- 22,261
(Gain) loss on sale of assets........................ -- -- (2,039) --
Employment contract settlement....................... -- -- -- --
Net liabilities acquired in merger................... 717,591 -- -- --
Inventory financed through notes payable............. -- -- 222,523 --
Stock issued for director's expenses, net............ -- -- 14,158 --
Changes in Assets and Liabilities:
Accounts receivable, net............................. (245,424) (264,319) (326,910) (515,047)
Inventory............................................ (1,167,388) 340,964 (1,584,887) (600,201)
Prepaid expenses..................................... (2,077) (15,593) (2,770) (58,456)
Income tax refund receivable......................... (259,447) -- 125,092 --
Deferred tax asset................................... -- -- (47,500) --
Refundable deposits.................................. (24,003) -- 14,625 --
Accounts payable..................................... 1,599,404 75,167 (423,300) 821,113
Accrued wages and taxes.............................. 44,254 30,245 17,449 2,867
Income taxes payable--deferred....................... -- -- 29,500 --
------------- ----------- ------------- -----------
711,466 209,930 (1,695,507) (306,697)
------------- ----------- ------------- -----------
Net cash provided (used) by operating activities......... $ (271,996) $ 233,348 $ (1,352,085) $ (372,088)
------------- ----------- ------------- -----------
------------- ----------- ------------- -----------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements
F-7
<PAGE>
ORGANIC FOOD PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, NATURE OF OPERATIONS AND USE OF
ESTIMATES:
NATURE OF OPERATIONS:
Organic Food Products, Inc. (formerly Garden Valley Naturals, Inc.) is a
Corporation which was duly formed and organized under the laws of the State of
California. The Corporation was incorporated in the State of California on July
7, 1987. The principal business purpose of the Company is the production and
distribution of organic food products throughout the United States.
ACQUISITION AND MERGER:
As of June 28, 1996, Garden Valley Naturals, Inc. (GVN) acquired all of the
outstanding common stock of Organic Food Products, Inc. (OFP) for 2,250,000
shares of GVN's common stock. Under the terms of the acquisition, OFP obtained
fifty percent (50%) of the voting control of GVN. Although GVN is the parent
company of OFP following the transaction, the transaction was accounted for as a
recapitalization of OFP and a purchase by OFP of GVN, as the principal
shareholder of OFP obtained forty-nine and one-half percent (49.5%) of the
voting rights, and, as the single largest shareholder, effectively controls the
post-merger company. The accompanying financial statements of OFP include the
accounts of OFP for all periods presented, and the accounts of GVN from June 28,
1996, the effective date of the acquisition.
PERVASIVENESS OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
INTERIM FINANCIAL STATEMENTS:
The interim financial statements for the nine month periods ended March 31,
1997 and 1996 are unaudited. In the opinion of management, such statements
reflect all adjustments (consisting only of normal recurring adjustments)
necessary for a fair representation of the results of the interim periods. The
results of operations for the nine month period ended March 31, 1997 are not
necessarily indicative of the results for the entire year.
STOCK-BASED COMPENSATION:
In 1996, the Company adopted for footnote disclosure purposes only, SFAS No.
123, "Accounting for Stock-Based Compensation", which requires that companies
measure the cost of stock-based employee compensation at the grant date based on
the value of the award and recognize this cost over the service period. The
value of the stock-based award is determined using the intrinsic value method
whereby compensation cost is the excess of the market prices of the stock at
grant date or other measurement date over the amount an employee must pay to
acquire the stock.
ACCOUNTS RECEIVABLE:
The Company follows the allowance method of recognizing uncollectible
accounts receivable. The allowance method recognizes bad debt expense as a
percentage of accounts receivable based on a review of
F-8
<PAGE>
ORGANIC FOOD PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, NATURE OF OPERATIONS AND USE OF
ESTIMATES: (CONTINUED)
the individual accounts outstanding, and the Company's prior history of
uncollectible accounts receivable. At June 30, 1996 and March 31, 1997, an
allowance of $89,983 and $40,000 (unaudited), respectively, has been established
for potentially uncollectible accounts receivable.
INVENTORY:
Inventory quantities and valuations are determined by a physical count and
pricing of same. Inventory is stated at the lower of cost, first-in, first-out
method, or market. At June 30, 1996 and March 31, 1997, inventory is stated net
of an allowance for obsolete inventory, in the amounts of $107,072 and $70,000
(unaudited), respectively.
EARNINGS PER SHARE:
Earnings per share are based upon the weighted average number of shares
outstanding for each of the respective periods, after giving retroactive effect
to the 2,250,000 shares issued in the purchase transaction. In addition, for
purposes of this computation, the stock split and private offering (as described
in Note 8) have been given retroactive effect. The Company has proposed an
initial public offering of its common stock. Pursuant to Securities and Exchange
Commission rules, shares of common stock issued for consideration below the
anticipated offering price per share prior to filing of the registration
statement have been included in the calculation of common stock equivalent
shares as if they had been outstanding for all periods presented. In addition,
shares of common stock that are subject to options and warrants having exercise
prices that are below the anticipated offering price per share, whether or not
exercisable, have been included in the earnings per share calculation, using the
treasury stock method.
PROPERTY AND EQUIPMENT:
Property and equipment are recorded at cost. Depreciation is provided for
using the straight-line method over the estimated useful lives of the assets.
Maintenance and repairs that neither materially add to the value of the property
nor appreciably prolong its life are charged to expense as incurred. Betterments
or renewals are capitalized when incurred. For the years ended June 30, 1996 and
1995, and for the nine month periods ended March 31, 1997 and 1996, depreciation
expense was $18,875, $13,785, $118,699 (unaudited) and $20,766 (unaudited),
respectively.
A summary of the estimated useful lives is as follows:
<TABLE>
<S> <C>
Computer software.............................................. 5 years
Leasehold improvements......................................... 7 years
7 - 20
Machinery and equipment........................................ years
Office equipment............................................... 5 years
Printing plates................................................ 7 years
Vehicles....................................................... 5 years
</TABLE>
The Company is the lessee of vehicles and equipment under capital lease
agreements expiring through October, 1997. The assets and liabilities under the
capital leases are recorded at the lower of the present value of the minimum
lease payments or the fair market value of the assets. The assets are
depreciated over their estimated productive lives. Depreciation of the assets
under the capital leases is included in
F-9
<PAGE>
ORGANIC FOOD PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, NATURE OF OPERATIONS AND USE OF
ESTIMATES: (CONTINUED)
depreciation expense, as noted above, for the years ended June 30, 1996 and
1995, and for the nine month periods ended March 31, 1997 and 1996.
DEFERRED OFFERING COSTS:
Deferred offering costs represent costs incurred in connection with the
Company's equity offerings subsequent to the respective balance sheet dates. As
of June 30, 1996 and March 31, 1997, the Company had incurred $71,225 and
$282,280 (unaudited), respectively, in relation to these activities. Deferred
offering costs will be charged against the net proceeds from the offerings.
INCOME TAXES:
Prior to the merger, OFP had elected to be treated as a Subchapter S
Corporation for federal and state tax reporting purposes. As such, all taxable
income and available tax credits are passed from the corporate entity to the
individual shareholder. It is the responsibility of the individual shareholders
to report the taxable income and tax credits, and pay the resulting taxes.
Effective June 28, 1996, the date of the merger, the Subchapter S election was
revoked.
Deferred income taxes arise from timing differences resulting from revenues
and expenses reported for financial accounting and tax reporting purposes in
different periods. Deferred income taxes represent the estimated tax asset or
liability from different depreciation methods used for financial accounting and
tax reporting purposes and for timing differences in the utilization of net
operating loss carryforwards and valuation allowances.
GOODWILL:
Goodwill represents the excess of the cost of the Company acquired over the
fair value of their net assets at the date of acquisition, and is being
amortized on the straight-line method over twenty-five (25) years. Amortization
expense charged to operations for the nine month period ended March 31, 1997 was
$88,956. The Company evaluates the estimated net realizable value of its
goodwill at each balance sheet date, and records writedowns if the net book
value exceeds net realizable value.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
The fair value of the Company's notes payable and notes payable-related
parties is based on rates currently available from the bank for debt with
similar terms and maturities. The fair value of the Company's committments to
purchase inventory is based on current market prices available to the Company.
F-10
<PAGE>
ORGANIC FOOD PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. INVENTORY:
As of June 30, 1996 and March 31, 1997, inventory consisted of the
following:
<TABLE>
<CAPTION>
JUNE 30,
1996
------------ MARCH 31,
1997
------------
(UNAUDITED)
<S> <C> <C>
Raw materials.................................................... $ 678,034 $1,854,984
Finished goods................................................... 858,781 1,229,646
------------ ------------
1,536,815 3,084,630
Less: provision for obsolete inventory........................... (107,072) (70,000)
------------ ------------
$ 1,429,743 $3,014,630
------------ ------------
------------ ------------
</TABLE>
3. RELATED PARTY TRANSACTIONS:
ADVANCES TO SHAREHOLDER:
As of March 31, 1997, the Company has advanced $64,914 to a shareholder. The
advance is unsecured, non-interest bearing, and considered short-term in nature.
NOTES PAYABLE-RELATED PARTIES:
At June 30, 1996 and March 31, 1997, notes payable-related parties, consist
of the following:
<TABLE>
<CAPTION>
JUNE 30,
1996
------------ MARCH 31,
1997
-------------
(UNAUDITED)
<S> <C> <C>
Two (2) 6% interest bearing $780,000 notes payable to two (2) corporate shareholders,
$700,000 due on the completion of an initial public offering, in addition to
monthly payments of $40,000, including principal and interest until paid in full,
net of imputed discount of $118,411 and $57,513, (unaudited), respectively......... $ 1,441,589 $ 1,502,487
8% note payable to a corporate shareholder, with monthly payments of $7,292,
including principal and interest, due August, 1998; unsecured...................... 175,000 110,851
Various non-interest bearing notes payable to a corporate shareholder, due January,
1997; unsecured.................................................................... 10,349 --
12% note payable to a corporate shareholder, due in full January, 1997; unsecured.... 247,335 --
------------ -------------
1,874,273 1,613,338
Less: current portion................................................................ (333,732) (1,251,609)
------------ -------------
$ 1,540,541 $ 361,729
------------ -------------
------------ -------------
</TABLE>
F-11
<PAGE>
ORGANIC FOOD PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. RELATED PARTY TRANSACTIONS: (CONTINUED)
A schedule of future minimum principal payments due on notes payable
outstanding at June 30, 1996 and March 31, 1997, is as follows:
<TABLE>
<CAPTION>
YEAR ENDING
YEAR JUNE 30,
- ----------------------------------------------------------------- ------------ YEAR ENDING
MARCH 31,
------------
(UNAUDITED)
<S> <C> <C>
1997............................................................. $ 333,732 $ --
1998............................................................. 1,524,157 1,251,609
1999............................................................. 16,384 361,729
------------ ------------
$ 1,874,273 $1,613,338
------------ ------------
------------ ------------
</TABLE>
COMMITMENTS:
The Company was leasing facilities from a related party. The lease was
cancelled during February, 1996. The terms of the lease agreement required the
Company to pay common area maintenance, taxes and other costs, as well as a
discretionary base rent of approximately $4,500 per month. Rent expense under
the operating lease agreement for the nine month period ended March 31, 1996 was
$14,500 (unaudited).
4. NOTES PAYABLE:
At June 30, 1996 and March 31, 1997, notes payable consist of the following:
<TABLE>
<CAPTION>
JUNE 30, 1996
------------- MARCH 31,
1997
-------------
(UNAUDITED)
<S> <C> <C>
A revolving line of credit with Wells Fargo Bank for $1,700,000, interest at the
bank's prime rate plus 1% per annum, interest due monthly, with the outstanding
principal balance due in full November 1, 1997; collateralized by various
corporate assets.................................................................. $ -- $ 1,466,400
Non-interest bearing note payable to a supplier in five monthly installments of
$44,505, commencing June 1, 1997; unsecured....................................... -- 222,523
Three (3) lines of credit with Wells Fargo Bank totalling $1,178,000 ($546,000,
$500,000 and $132,000), interest at the bank's prime rate plus .75%, 2%, and 2%,
respectively, per annum, interest due monthly, with $1,046,000 expiring October,
1996, and the remaining $132,000 expiring February, 2001; collateralized by
various corporate assets and the personal guarantee of the corporate
shareholder....................................................................... 1,046,818 --
9.5% note payable to GMAC in monthly installments of $173, including principal and
interest, due in full September, 1997; collateralized by a vehicle................ 2,289 --
------------- -------------
1,049,107 1,688,923
Less: current portion of long-term notes payable.................................... (1,048,595) (1,688,923)
------------- -------------
$ 512 $ --
------------- -------------
------------- -------------
</TABLE>
F-12
<PAGE>
ORGANIC FOOD PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. NOTES PAYABLE: (CONTINUED)
A schedule of future minimum principal payments due on notes payable
outstanding at June 30, 1996 and March 31, 1997, is as follows:
<TABLE>
<CAPTION>
YEAR ENDING
YEAR JUNE 30,
- --------------------------------------------------------------------------- ------------ YEAR ENDING
MARCH 31,
------------
(UNAUDITED)
<S> <C> <C>
1997....................................................................... $ 1,048,595 $ --
1998....................................................................... 512 1,688,923
------------ ------------
$ 1,049,107 $1,688,923
------------ ------------
------------ ------------
</TABLE>
5. OBLIGATIONS UNDER CAPITAL LEASES:
The Company is the lessee of vehicles and equipment, with an aggregate cost
of $49,811, under capital lease agreements which expire through September, 1997.
As of June 30, 1996 and March 31, 1997, minimum future lease payments due under
the capital lease agreements, are as follows:
<TABLE>
<CAPTION>
YEAR
ENDING
YEAR JUNE 30,
- ------------------------------------------------------------------------------- --------- YEAR ENDING
MARCH 31,
------------
(UNAUDITED)
<S> <C> <C>
1997........................................................................... $ 7,972 $ --
1998........................................................................... 2,208 10,226
1999........................................................................... -- 5,952
2000........................................................................... -- 5,952
2001........................................................................... -- 5,952
2002........................................................................... -- 4,464
--------- ------------
Total minimum lease payments................................................... 10,180 32,546
Less: amount representing interest............................................. (3,449) (6,049)
--------- ------------
Present value of net minimum lease payments.................................... 6,731 26,497
Less: current maturities of capital lease obligations.......................... (5,323) (7,752)
--------- ------------
Non-current maturities of capital lease obligations............................ $ 1,408 $ 18,745
--------- ------------
--------- ------------
</TABLE>
Interest rates under the capital lease obligations range from ten percent
(10%) to twenty-one percent (21%) per annum, and are imputed based on the
lessor's implicit rate of return at the inception of the lease.
6. COMMITMENTS:
INVENTORY PURCHASES:
The Company is committed to purchase tomatoes over the next year at
contracted prices. At March 31, 1997, these future committed purchases
aggregated approximately $387,000 (unaudited), based on the contracted prices.
F-13
<PAGE>
ORGANIC FOOD PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. COMMITMENTS: (CONTINUED)
LEASE OBLIGATIONS:
The Company leases office, warehouse and production space in Morgan Hill,
California under a non-cancellable operating lease agreement, expiring April,
2003. The Company leased office space in Santa Cruz, California, under a
non-cancellable operating lease agreement that expired in June, 1996.
In addition, the Company is currently leasing a vehicle under a
non-cancellable operating lease agreement, expiring August, 1997. Rent expense
under the lease agreements for the years ended June 30, 1996 and 1995, and for
the nine month periods ended March 31, 1997 and 1996 was $8,889, $8,889, $6,667
(unaudited), and $6,667 (unaudited), respectively.
A schedule of future minimum lease payments due under the non-cancellable
operating leases at June 30, 1996 and March 31, 1997, is as follows:
<TABLE>
<CAPTION>
YEAR
ENDING YEAR ENDING
YEAR JUNE 30, MARCH 31,
- ----------------------------------------------------------------------------- ---------- ------------
<S> <C> <C>
(UNAUDITED)
1997......................................................................... $ 86,649 $ --
1998......................................................................... 80,020 84,027
1999......................................................................... 80,896 77,955
2000......................................................................... 83,320.... 80,297
2001......................................................................... 85,820 82,701
2002......................................................................... -- 85,183
Subsequent................................................................... 148,492 170,372
---------- ------------
$ 565,197 $ 580,535
---------- ------------
---------- ------------
</TABLE>
EMPLOYMENT CONTRACTS:
The Company has entered into employment contracts with two (2) key
employees. The contracts expire through July, 1999 and provide for minimum
annual salaries, adjusted for cost-of-living changes, and incentives based on
the Company's attainment of specified levels of sales and earnings. As of March
31, 1997, the total commitment, excluding incentives, was approximately $467,500
(unaudited).
7. ECONOMIC DEPENDENCY:
For the years ended June 30, 1996 and 1995, the Company had one (1) customer
which accounted for approximately forty percent (40%) of the total sales volume.
For the nine month period ended March 31, 1997, the Company had two (2)
customers which accounted for approximately thirty-five percent (35%)
(unaudited) of the total sales volume. At June 30, 1996 and March 31, 1997, the
amounts due from the customers included in accounts receivable was $60,947 and
$367,521 (unaudited), respectively.
For the years ended June 30, 1996 and 1995, the Company had one (1) supplier
which accounted for approximately sixty-five percent (65%) and forty-seven
percent (47%), respectively, of the total purchases. For the nine month period
ended March 31, 1997, the Company had two (2) suppliers which accounted for
approximately twenty-three percent (23%) of the total purchases. At June 30,
1996 and March 31, 1997, the amounts due to the suppliers included in accounts
payable were $357,570 and $540,630 (unaudited), respectively.
F-14
<PAGE>
ORGANIC FOOD PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. STOCKHOLDERS' EQUITY:
COMMON STOCK AND STOCK SPLIT:
On October 3, 1995, the GVN increased its authorized capital from 1,000 to
20,000,000 shares of no par value common stock, and declared a 2,000 for 1 split
of its common stock. At June 30, 1996, the Company had 4,500,000 shares issued
and outstanding. At March 31, 1997, the Company had 5,297,913 (unaudited) shares
issued and outstanding.
PRIVATE OFFERING AND WARRANTS:
GVN issued 1,350,000 shares (after 2,000 for 1 split) of common stock for
$2,700,000 through a private offering during the year ended June 30, 1996,
including the issuance of 250,000 shares for the conversion of a loan from a
director. The net proceeds were $2,238,225, of which $640,000 was used as a down
payment to purchase 1,100,000 shares of common stock held by the principal
shareholders. In connection with this offering, the Company issued warrants to
purchase up to 150,000 shares of common stock at $2 per share to an underwriter.
These options are exercisable at any time through December 31, 2002. As of March
31, 1997, no warrants have been exercised.
In addition, GVN had a second private offering in the nine month period
ended March 31, 1997. The proceeds from the offering of 823,500 shares were
$1,718,288, net of costs of $340,462 (unaudited). In connection with this
offering, the Company issued warrants to purchase up to 200,000 shares of common
stock at $2.50 per share to an underwriter. As of March 31, 1997, none of the
warrants have been exercised.
PREFERRED STOCK:
On October 3, 1995, the corporate Articles of Incorporation were amended to
authorize the issuance of 5,000,000 shares of preferred stock, no par value. The
Board of Directors are authorized to issue preferred stock with such rights,
privileges, preferences and restrictions, as they deem appropriate. As of June
30, 1996 and March 31, 1997, no preferred stock has been issued.
STOCK OPTIONS AND STOCK OPTION PLAN:
Effective November, 1995, the Company's Board of Directors adopted a stock
option plan. The Company has 625,000 reserved shares of common stock for
issuance under the Plan, pending Board approval. The Board of Directors
determines which individuals shall receive options. The time period during which
the options may be partially or fully exercised, the number of shares of common
stock that may be purchased under each option, and the option price. As of March
31, 1997, 538,000 (unaudited) options were granted under the Plan at exercise
prices of $2.00 to $2.50 per share, exercisable until November 1, 2003. As of
March 31, 1997, none of the options have been exercised. (See Note 14--
Subsequent Events).
F-15
<PAGE>
ORGANIC FOOD PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES AND DEFERRED INCOME TAXES:
For the year ended June 30, 1996 and for the nine month period ended March
31, 1997, components of deferred income taxes, are as follows:
<TABLE>
<CAPTION>
JUNE 30,
1996
---------- MARCH 31,
1997
-----------
(UNAUDITED)
<S> <C> <C>
Current Assets:
Allowances.................................................................. $ 68,298 $ 47,500
Asset valuation allowance................................................... (68,298) --
---------- -----------
$ -- $ 47,500
---------- -----------
---------- -----------
Long-Term Asset (Liability):
Depreciation................................................................ $ (16,466) $ (29,500)
Net operating loss carryforward............................................. 114,000
---
----------
-----------
Total net deferred tax asset (liability).................................... 97,534 (29,500)
Less: valuation allowance................................................... (97,534) --
---------- -----------
$ -- $ (29,500)
---------- -----------
---------- -----------
</TABLE>
A reconciliation of the federal statutory rate to the tax provision of the
corresponding periods, is as follows:
<TABLE>
<CAPTION>
NINE MONTH PERIODS
ENDED
YEARS ENDED JUNE 30, MARCH 31,
------------------------ -----------------------
1996 1995 1997 1996
----------- ----------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Tax benefit (expense) at effective statutory
rates............................................. $ 630,000 $ (168,000) $ (183,500) $ 76,000
S-Corporation loss.................................. (340,000) -- -- (71,100)
Valuation limitation on net operating loss.......... (114,000) -- -- --
State income taxes.................................. -- (33,000) (14,500) --
Net operating loss carry-forward.................... -- -- 91,000 --
----------- ----------- ----------- ----------
$ 176,000 $ (201,000) $ (107,000) $ 4,900
----------- ----------- ----------- ----------
----------- ----------- ----------- ----------
</TABLE>
10. STATEMENTS OF CASH FLOWS:
NON-CASH INVESTING AND FINANCING ACTIVITIES:
The Company recognized investing, operating and financing activities that
affected assets and liabilities, but did not result in cash receipts or
payments:
For the year ended June 30, 1996, these non-cash activities are as follows:
Accrued interest on notes payable was added to the principal portion of
the loan, in the amount of $29,681.
The Company financed the purchase of two (2) vehicles, with a recorded
cost of $7,331, through a capital lease obligation in the same amount.
F-16
<PAGE>
ORGANIC FOOD PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. STATEMENTS OF CASH FLOWS: (CONTINUED)
For the year ended June 30, 1995, these non-cash activities are as follows:
Accrued interest on notes payable was added to the principal portion of
the loan, in the amount of $29,681.
For the nine month period ended March 31, 1997, these non-cash activities
are as follows:
Inventory in the amount of $222,523 was financed through the issuance of
a note payable.
Interest in the amount of $60,897 was imputed on a discounted note
payable.
Asset additions in the amount of $23,752 were financed through capital
lease obligations.
Stock in the amount of $14,158 was issued to a director as reimbursement
for expenses.
For the nine month period ended March 31, 1996, these non-cash activities
are as follows:
Accrued interest on a note payable was added to the principal portion of
the loan, in the amount of $22,261.
Asset additions in the amount of $7,331 were financed through capital
lease obligations.
11. CONCENTRATION OF CREDIT RISK:
The Company maintains cash balances at Wells Fargo Bank. Deposits not to
exceed $100,000 at the institution are insured by the Federal Deposit Insurance
Corporation. At March 31, 1997, the Company had uninsured cash in the
approximate amount of $20,000 (unaudited).
12. RESTRUCTURING CHARGE:
In June, 1996, the Company adopted a restructuring plan to eliminate excess
equipment, personnel and inventory, that represented redundancies as a result of
the merger. For the year ended June 30, 1996, the Company reported a
restructuring charge of $257,468, which was comprised of the following:
<TABLE>
<S> <C>
Redundant inventory....................................................... $ 177,515
Disposal of equipment..................................................... 21,329
Other..................................................................... 58,624
---------
$ 257,468
---------
---------
</TABLE>
13. COMPENSATION FROM OPTIONS AND WARRANTS:
The Company has a stock option plan pursuant to which options to purchase
shares of the Company's common stock may be granted to employees. The plan
provides that the option price shall not be less than the fair market value of
the shares on the date of grant, and that the options expire ten years after
grant. Options vest ratably over four or five year periods as provided for in
each employee's option agreement. At March 31, 1997, there were 625,000
(unaudited) shares reserved for options to be granted under the plan.
In addition, the Company has issued warrants to an underwriter in connection
with their two private placement offerings. As of March 31, 1997, 350,000
(unaudited) warrants have been issued at exercise
F-17
<PAGE>
ORGANIC FOOD PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
13. COMPENSATION FROM OPTIONS AND WARRANTS: (CONTINUED)
prices of $2.00 to $2.50 per share and expire in approximately five years. The
following summarizes stock options and warrant transactions:
<TABLE>
<CAPTION>
STOCK
OPTIONS WARRANTS PRICE PER SHARE
--------- --------- ----------------
<S> <C> <C> <C>
Outstanding at July 1, 1995................. -- -- $ --
Granted................................... 538,000 150,000 $ 2.00 to $2.50
Exercised................................. -- -- $ --
Expired................................... -- -- $ --
--------- --------- ----------------
Outstanding at June 30, 1996................ 538,000 150,000 $ 2.00 to $2.50
Granted................................... -- 200,000 $ 2.50
Exercised................................. -- -- $ --
Expired................................... -- -- $ --
--------- --------- ----------------
Outstanding at March 31, 1997............... 538,000 350,000 $ 2.00 to $2.50
--------- --------- ----------------
--------- --------- ----------------
</TABLE>
Information relating to stock options and warrants at March 31, 1997,
summarized by exercise price are as follows:
<TABLE>
<CAPTION>
EXERCISE OUTSTANDING EXERCISABLE
PRICE ---------------------------- -----------
PER SHARE SHARES LIFE (YEARS) SHARES
- --------- --------- ----------------- -----------
<S> <C> <C> <C>
$2.00 433,000 5 401,000
2.50 455,000 5 200,000
</TABLE>
All stock options issued to employees have an exercise price not less than
the fair market value of the Company's common stock on the date of grant, and in
accordance with accounting for such options utilizing the intrinsic value
method, there is no related compensation expense recorded in the Company's
financial statements. Had compensation cost for stock-based compensation been
determined based on the fair value of the options on the grant dates consistent
with the method of SFAS 123, the Company's net income and earnings per share for
the year ended June 30, 1996 and for the nine month period ended March 31, 1997,
would have been reduced to the pro forma amounts presented below:
<TABLE>
<CAPTION>
MARCH 31,
JUNE 30, 1996 1997
------------- -----------
<S> <C> <C>
(UNAUDITED)
Net income (loss)
As reported..................................................... $ (649,062) $ 343,422
Pro forma....................................................... (712,385) 277,422
Earnings (loss) per share
As reported..................................................... $ (.11) $ .06
Pro forma....................................................... (.12) .05
</TABLE>
The fair value of option and warrant grants are estimated on the date of
grant utilizing the Black-Scholes option-pricing model, with the following
assumptions for grants in the periods ended June 30, 1996 and March 31, 1997,
respectively; expected life of options of five years, expected volatility of
14.4% and 19.3%, risk-free interest rates of 8% and a 0% dividend yield. The
fair value at date of grant for options and warrants for the aforementioned
periods approximated $.23 and $.33 per option.
F-18
<PAGE>
ORGANIC FOOD PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
14. SUBSEQUENT EVENTS:
The Company's Board of Directors has resolved to proceed with a proposed
initial public offering of its common stock to the public. The Company is
currently in the process of filing a Form SB-2 Registration Statement with the
Securities and Exchange Commission to register its common stock for sale to the
public. The proposed offering is intended to issue 1,300,000 common shares at
four dollars ($4.00) per share.
The Company entered into various ten percent (10%) promissory notes payable
agreements, in the aggregate amount of $600,000, due the earlier of the
completion of an initial public offering or May, 1998, to provide working
capital. In relation to the promissory notes 200,000 common stock purchase
warrants were issued. The warrants have an exercise price of $3.00 per share
exercisable at any time until December 31, 1999.
Subsequent to March 31, 1997, the Company entered into an agreement with a
supplier to purchase product in the approximate amount of $222,000. The
accompanying financial statements reflect this transaction, in addition to an
allowance of approximately $30,000 for obsolescence related to the product
purchased.
Subsequent to March 31, 1997 the Company granted an additional 87,000
options to purchase the Company's stock under their stock option plan. The
options are exercisable over various vesting schedules at an exercise price of
$2.50 per share.
15. PRO FORMA FINANCIAL INFORMATION:
The following unaudited pro forma condensed consolidated statements of
operations gives effect to the merger by the Company with GVN, pursuant to the
Agreement and Plan of Reorganization between the parties, and is based on
estimates and assumptions set forth herein and in the notes to such statements.
This pro forma information has been prepared by utilizing the historical
financial statements and notes thereto, which are incorporated by reference
herein. The pro forma financial data does not purport to be indicative of the
results which actually would have been obtained had the purchase been effected
on the dates indicated or of the results which may be obtained in the future.
The pro forma financial information is based on the purchase method of
accounting for the merger with GVN. The pro forma entries are described in the
accompanying footnotes to the unaudited pro forma condensed consolidated
statements of operations. The unaudited pro forma condensed consolidated
statements of operations assumes the acquisition took place on the first day of
the period presented.
F-19
<PAGE>
ORGANIC FOOD PRODUCTS, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS
OF OPERATIONS (UNAUDITED)
FOR THE YEAR ENDED JUNE 30, 1996
The following represents an unaudited pro forma condensed consolidated
statement of operations for the year ended June 30, 1996, assuming the Company's
reverse acquisition of Garden Valley Naturals, Inc. through the issuance of
2,250,000 shares of stock, and is accounted for under the purchase method of
accounting.
<TABLE>
<CAPTION>
GARDEN VALLEY ORGANIC FOOD PRO FORMA
NATURALS, PRODUCTS, PRO FORMA CONSOLIDATED
INC. INC. ADJUSTMENTS AMOUNTS
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues............................................. $ 5,794,095 $ 7,641,539 $ 13,435,634
Cost of Revenues..................................... 4,698,579 5,822,337 10,520,916
------------- ------------- -------------
Gross Profit......................................... 1,095,516 1,819,202 2,914,718
Sales and Marketing Expenses......................... 1,231,904 954,108 2,186,012
General and Administrative Expenses.................. 514,702 1,244,914 $ 118,600(2) 1,878,216
Restructuring Charge................................. 194,032 257,468 451,500
------------- ------------- -------------
Income (Loss) from Operations...................... (845,122) (637,288) (1,601,010)
Other Income (Expense), Net.......................... (7,678) 2,948 (4,730)
Interest Income (Expense), Net....................... (44,068) (349,122) (393,190)
------------- ------------- -------------
Net Income (Loss) before Income Taxes.............. (896,868) (983,462) (1,998,930)
Income Tax (Expense) Benefits........................ 176,023 -- 334,400(1) 510,423
------------- ------------- -------------
Net Income (Loss) after Income Tax................. $ (720,845) $ (983,462) $ (1,488,507)
------------- ------------- -------------
------------- ------------- -------------
Net Loss per Share $ (.12) $ (.21)
------------- -------------
------------- -------------
Weighted Average Number of Shares Outstanding........ 5,767,663 7,067,663
------------- -------------
------------- -------------
</TABLE>
- ------------------------
(1) Pro forma income tax adjustment to record the income tax effect of the
conversion of Organic Food Products, Inc. to a C Corporation.
(2) Amortization of goodwill recorded in the merger.
F-20
<PAGE>
To The Shareholders and Board of Directors of
Garden Valley Naturals, Inc.
We have audited the accompanying statements of operations, changes in
stockholders' equity, and cash flows of Garden Valley Naturals, Inc. for the
years ended June 30, 1996 and 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations, changes in stockholders'
equity, and cash flows of Garden Valley Naturals, Inc. for the years ended June
30, 1996 and 1995, in conformity with generally accepted accounting principles.
SEMPLE & COOPER LLP
Certified Public Accountants
Phoenix, Arizona
February 28, 1997
F-21
<PAGE>
GARDEN VALLEY NATURALS, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1996 AND 1995 AND
FOR THE NINE MONTH PERIOD ENDED MARCH 31, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1996 1995*
------------ ------------ MARCH 31,
1996
------------
(UNAUDITED)
<S> <C> <C> <C>
Revenues................................................................ $ 5,794,095 $ 3,106,227 $ 4,188,481
Cost of Goods Sold...................................................... 4,698,579 2,328,882 3,448,314
------------ ------------ ------------
Gross Profit............................................................ 1,095,516 777,345 740,167
------------ ------------ ------------
Sales and Marketing Expense............................................. 1,231,904 220,788 532,048
General and Administrative Expenses..................................... 514,702 84,326 353,205
Restructuring Charge.................................................... 194,032 -- --
------------ ------------ ------------
1,940,638 305,114 885,253
------------ ------------ ------------
Income (Loss) from Operations........................................... (845,122) 472,231 (145,086)
------------ ------------ ------------
Other Income (Expense):
Loss on sale of fixed asset........................................... (7,678) -- 14,791
Interest income....................................................... 9,938 518 9,938
Interest expense...................................................... (54,007) (3,082) (36,719)
------------ ------------ ------------
(51,747) (2,564) (11,990)
------------ ------------ ------------
Income (Loss) before Provision for Income Taxes......................... (896,869) 469,667 (157,076)
------------ ------------ ------------
Provision for Income Tax Benefit (Expense): (Note 1)
--current............................................................. 176,023 (200,602) 15,659
--deferred............................................................ -- -- (10,750)
------------ ------------ ------------
176,023 (200,602) 4,909
------------ ------------ ------------
Net Income (Loss)....................................................... $ (720,846) $ 269,065 $ (152,167)
------------ ------------ ------------
------------ ------------ ------------
Earnings (Loss) per Share............................................... $ (.23) $ .07 $ (.04)
------------ ------------ ------------
------------ ------------ ------------
Weighted Average Number of Shares Outstanding........................... 3,202,140 3,886,250 3,470,360
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
*As restated, for comparative purposes only.
The Accompanying Notes are an Integral Part of the Financial Statements
F-22
<PAGE>
GARDEN VALLEY NATURALS, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED JUNE 30, 1996 AND 1995
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED STOCKHOLDERS'
-------------------------- PAID-IN EARNINGS EQUITY
SHARES AMOUNT CAPITAL (DEFICIT) (DEFICIT)
----------- ------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1994..................... 2,000,000 $ 13,000 $ -- $ 100,990 $ 113,990
Net income for the year ended June 30,
1995....................................... -- -- -- 269,065 269,065
----------- ------------- ----------- ----------- -------------
Balance at June 30, 1995..................... 2,000,000 13,000 -- 370,055 383,055
Contribution of equipment by stockholders
(Notes 2 and 6)............................ -- -- 15,000 -- 15,000
Proceeds from private offering, net of costs
of $461,775................................ 1,350,000 2,238,225 -- -- 2,238,225
Execution of stock purchase agreement........ (1,100,000) (2,022,609) (15,000) -- (2,037,609)
Net loss for the year ended June 30, 1996.... -- -- -- (720,846) (720,846)
----------- ------------- ----------- ----------- -------------
Balance at June 30, 1996..................... 2,250,000 $ 228,616 $ -- $ (350,791) $ (122,175)
----------- ------------- ----------- ----------- -------------
----------- ------------- ----------- ----------- -------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements
F-23
<PAGE>
GARDEN VALLEY NATURALS, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1996 AND 1995 AND
FOR THE NINE MONTH PERIOD ENDED MARCH 31, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1996 1995
------------- ------------- MARCH 31,
1996
-------------
(UNAUDITED)
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents:
Cash flows from operating activities:
Cash received from customers...................................... $ 5,918,884 $ 2,683,438 $ 4,254,490
Cash paid to suppliers and employees.............................. (6,384,020) (2,760,808) (4,531,020)
Interest paid..................................................... (10,026) (3,082) (36,719)
Interest received................................................. 9,938 518 9,938
Income taxes paid................................................. (74,977) (865) (235,341)
------------- ------------- -------------
Net cash used by operating activities........................... (540,201) (80,799) (538,652)
------------- ------------- -------------
Cash flows for investing activities:
Purchase of fixed assets.......................................... (690,523) (26,766) (395,364)
Advances for notes receivable..................................... (15,484) -- --
Collection of notes receivable.................................... 15,484 -- --
Advances to shareholder........................................... -- -- (15,484)
------------- ------------- -------------
Net cash used by investing activities........................... (690,523) (26,766) (410,848)
------------- ------------- -------------
Cash flows from financing activities:
Repayment of debt................................................. (250,512) (32,018) (403,817)
Repayment of debt--related parties................................ (649,353) -- (640,000)
Proceeds from debt--related parties............................... 1,140,000 -- --
Proceeds from debt financing...................................... 106,406 176,124 250,358
Proceeds from issuance of stock................................... 1,667,000 -- 2,238,225
Repurchase of stock............................................... (640,000) -- --
------------- ------------- -------------
Net cash provided by financing activities....................... 1,373,541 144,106 1,444,766
------------- ------------- -------------
Net increase in cash and cash equivalents........................... 142,817 36,541 495,266
Cash and cash equivalents at beginning of year...................... 48,246 11,705 48,246
------------- ------------- -------------
Cash and cash equivalents at end of year............................ $ 191,063 $ 48,246 $ 543,512
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements
F-24
<PAGE>
GARDEN VALLEY NATURALS, INC.
STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED JUNE 30, 1996 AND 1995 AND
FOR THE NINE MONTH PERIOD ENDED MARCH 31, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1996 1995
------------ ------------ MARCH 31,
1996
------------
(UNAUDITED)
<S> <C> <C> <C>
Reconciliation of Net Income to Net Cash Used by Operating Activities:
Net Income (Loss)....................................................... $ (720,846) $ 269,065 $ (152,167)
------------ ------------ ------------
Adjustments to reconcile net income to net cash used by operating
activities:
Depreciation.......................................................... 23,923 3,728 10,948
Loss on sale of fixed asset........................................... 7,678 -- --
Loan discount amortization............................................ 43,980 -- 23,682
Employment contract settlement........................................ 175,000 -- --
Changes in Assets and Liabilities:
Accounts receivable................................................... 178,112 (422,789) 51,218
Inventory............................................................. (232,177) (430,897) (18,682)
Prepaid expenses...................................................... (5,366) 2,268 (245,738)
Income tax refund receivable.......................................... (259,447) -- (111,024)
Refundable deposits................................................... (22,105) (71) (6,480)
Accounts payable...................................................... 473,133 295,129 154,495
Accrued expenses...................................................... 48,914 3,031 (4,654)
Income taxes payable
--current........................................................... (251,000) 199,737 (251,000)
--deferred.......................................................... -- -- 10,750
------------ ------------ ------------
180,645 (349,864) (386,485)
------------ ------------ ------------
Net cash used by operating activities................................... $ (540,201) $ (80,799) $ (538,652)
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements
F-25
<PAGE>
GARDEN VALLEY NATURALS, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, NATURE OF OPERATIONS AND USE OF
ESTIMATES:
OPERATIONS:
Garden Valley Naturals, Inc. is a Corporation which was duly formed and
organized under the laws of the State of California. The Corporation was
incorporated in the State of California on July 7, 1987. The principal business
purpose of the Company is the production and distribution of organic food
products throughout the United States.
NAME CHANGE:
Pursuant to a vote of the Board of Directors, the Company amended the
Corporation's Articles of Incorporation to change the Corporation's name to
Garden Valley Naturals, Inc. as of November, 1995. The financial statements give
retroactive effect to this change.
ACQUISITION AND MERGER:
As of June 28, 1996, Garden Valley Naturals, Inc. acquired all of the
outstanding common stock of Organic Food Products, Inc. for 2,250,000 shares of
the Company's common stock, merged the companies into one surviving corporation,
and subsequently changed the name from Garden Valley Naturals, Inc. to Organic
Food Products, Inc. The financial statements do not give effect to the name
change.
For financial accounting purposes, the acquisition was accounted for under
the purchase method in accordance with Accounting Principles Board Opinion No.
16. The accompanying financial statements for the year ended June 30, 1996
reflect only the activity of Garden Valley Naturals, Inc. through the date of
the merger.
PERVASIVENESS OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
INTERIM FINANCIAL STATEMENTS:
The interim financial statement for the nine month period ended March 31,
1996 is unaudited. In the opinion of management, such statement reflects all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair representation of the results of the interim period, and are not
necessarily indicative of the results for the entire year.
STOCK-BASED COMPENSATION:
In 1996, the Company adopted for footnote disclosure purposes only, SFAS No.
123, "Accounting for Stock-Based Compensation," which requires that companies
measure the cost of stock-based employee compensation at the grant date based on
the value of the award and recognize this cost over the service period. The
value of the stock-based award is determined using the intrinsic value method,
whereby compensation cost is the excess of the market prices of the stock at
grant date or other measurement date over the amount an employee must pay to
acquire the stock.
F-26
<PAGE>
GARDEN VALLEY NATURALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, NATURE OF OPERATIONS AND USE OF
ESTIMATES: (CONTINUED)
EARNINGS PER SHARE:
Earnings per share are based upon the weighted average number of shares
outstanding for each of the respective periods, after giving retroactive effect
to the 2,250,000 shares issued in the purchase combination. In addition, for
purposes of this computation, the stock split and private offerings (as
described in Note 8), have been given retroactive effect. The Company has
proposed an initial public offering of its common stock. Pursuant to Securities
and Exchange Commission rules, shares of common stock issued for consideration
below the anticipated offering price per share prior to filing of the
registration statement have been included in the calculation of common stock
equivalent shares, as if they had been outstanding for all periods presented. In
addition, shares of common stock that are subject to options and warrants having
exercise prices that are below the anticipated offering price per share, whether
or not exercisable, have been included in the earnings per share calculation,
using the treasury stock method.
PROPERTY AND EQUIPMENT:
Property and equipment are recorded at cost. Depreciation is provided for
using the straight-line method over the estimated useful lives of the assets.
Maintenance and repairs that neither materially add to the value of the property
nor appreciably prolong its life are charged to expense as incurred. Betterments
or renewals are capitalized when incurred. For the years ended June 30, 1996 and
1995, and for the nine month period ended March 31, 1996, depreciation expense
was $23,923, $3,728, and $10,948 (unaudited), respectively.
A summary of the estimated useful lives is as follows:
<TABLE>
<S> <C>
Computer software.............................................. 5 years
7 - 20
Machinery and equipment........................................ years
Office equipment............................................... 5 years
</TABLE>
INCOME TAXES:
For financial accounting and tax reporting purposes, the Company reports
revenue and expenses based on the accrual method of accounting. For the years
ended June 30, 1996 and 1995, provisions were made for federal and state income
tax expense (benefit) in the amounts of $(176,023) and $200,602, respectively.
DEFERRED INCOME TAXES:
Deferred income taxes arise from timing differences resulting from revenues
and expenses reported for financial accounting and tax reporting purposes in
different periods. Deferred income taxes represent the estimated tax liability
from different depreciation methods used for financial accounting and tax
reporting purposes.
2. RELATED PARTY TRANSACTIONS:
ADVANCES TO STOCKHOLDER:
As of March 31, 1996, advances to shareholder consist of a $15,484
(unaudited) advance to a shareholder. The advance is non-interest bearing and is
expected to be collected in the current year.
F-27
<PAGE>
GARDEN VALLEY NATURALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. RELATED PARTY TRANSACTIONS: (CONTINUED)
COMMITMENTS:
The Company was leasing facilities from a related party. The lease was
cancelled during February, 1996. The terms of the lease agreement required the
Company to pay common area maintenance, taxes and other costs, as well as a
discretionary base rent of approximately $4,500 per month. Rent expense under
the foregoing operating lease agreement for the years ended June 30, 1996 and
1995, and for the nine month period ended March 31, 1996, was $14,500, $50,217,
and $15,091 (unaudited), respectively.
The Company was leasing machinery and equipment from a related party. The
lease was cancelled as of July 1, 1995. Rent expense under the foregoing lease
agreement for the year ended June 30, 1995 was $72,996.
PRIVATE OFFERING:
The Company issued 1,100,000 shares (after 2 for 1 split) of common stock
for $2,200,000 through a private offering in November, 1995. The net proceeds
were $1,803,225, of which $640,000 was used to retire 1,100,000 shares of common
stock held by the principal shareholders (See Note 8).
3. NOTE PAYABLE:
As of June 30, 1996 and 1995, the note payable consists of the following:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1996 1995
----------- -----------
<S> <C> <C>
$200,000 revolving line of credit with Wells Fargo Bank. The line of credit is due and
payable on March 10, 1996, with an interest rate of prime plus 1.5%. Borrowings are
collateralized by accounts receivable and
inventory............................................................................. $ -- $ 144,106
Less: current portion of long-term note payable......................................... -- (144,106)
----------- -----------
$ -- $ --
----------- -----------
----------- -----------
</TABLE>
As of the effective date of the private offering, November 15, 1995, the
revolving line of credit was cancelled.
4. ECONOMIC DEPENDENCY:
For the years ended June 30, 1996 and 1995, the Company had one and two
customers, respectively, which accounted for approximately 23% and 43%,
respectively, of the total sales volume. At June 30, 1996 and 1995, the amounts
due from these customers included in accounts receivable were $89,842 and
$332,379, respectively.
For the nine month period ended March 31, 1996, the Company had one customer
which accounted for approximately 23% (unaudited) of the total sales volume. At
March 31, 1996, the amount due from this customer included in accounts
receivable was $122,529 (unaudited), respectively.
For the years ended June 30, 1996 and 1995, the Company had two suppliers
which accounted for approximately 43% of the total purchases. At June 30, 1996
and 1995, amounts due these suppliers included in accounts payable were $250,284
and $79,755, respectively.
F-28
<PAGE>
GARDEN VALLEY NATURALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. ECONOMIC DEPENDENCY: (CONTINUED)
For the nine month period ended March 31, 1996, the Company had two
suppliers which accounted for approximately 50% (unaudited) of the total
purchases. At March 31, 1996, amounts due these suppliers included in accounts
payable were $217,792 (unaudited), respectively.
5. COMMITMENTS:
INVENTORY PURCHASES:
The Company is committed to purchase tomatoes over the next year at
contracted prices. At June 30, 1996, these future committed purchases aggregated
approximately $1,370,000, based on contracted prices.
LEASE OBLIGATIONS:
The Company is currently leasing office space in Morgan Hill, California
under a non-cancellable operating lease agreement, expiring April, 2003. For the
year ended June 30, 1996 and for the nine month period ended March 31, 1996,
rent expense under the aforementioned non-cancellable operating lease agreement
was $31,766 and $12,326 (unaudited), respectively.
A schedule of future minimum lease payments due under the non-cancellable
operating lease, is as follows:
<TABLE>
<CAPTION>
YEAR ENDING
JUNE 30, AMOUNT
- -------------------------------------------------------------- ----------
<S> <C>
1997........................................................ $ 86,649
1998........................................................ 80,020
1999........................................................ 80,896
2000........................................................ 83,320
2001........................................................ 85,820
Subsequent.................................................. 148,492
----------
$ 565,197
----------
----------
</TABLE>
6. STATEMENTS OF CASH FLOWS:
NON-CASH INVESTING AND FINANCING ACTIVITIES:
During the years ended June 30, 1996 and 1995, and for the nine month period
ended March 31, 1996, the Company recognized investing and financing activities
that affected assets, liabilities and equity, but did not result in cash
receipts or payments.
For the year ended June 30, 1996, these non-cash activities consisted of the
following:
The Company financed $1,560,000 of the purchase of treasury stock in the
amount of $2,200,000. The note has been recorded net of imputed interest.
The Company repaid notes payable to related parties in the amount of
$175,000, through the settlement of an employment contract.
Accrued interest on notes payable was added to the principal portion of
the loan, in the amount of $43,980.
F-29
<PAGE>
GARDEN VALLEY NATURALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. STATEMENTS OF CASH FLOWS: (CONTINUED)
The Company repaid notes payable in the amount of $500,000, with proceeds
from a private placement.
For the year ended June 30, 1995, these non-cash activities are as follows:
Accrued interest on notes payable was added to the principal portion of
the loan, in the amount of $29,681.
For the nine month period ended March 31, 1996, these non-cash activities
are as follows:
The Company financed $1,560,000 (unaudited) of the purchase of treasury
stock in the amount of $2,200,000. The note has been recorded net of
imputed interest.
7. STOCKHOLDERS' EQUITY:
COMMON STOCK AND STOCK SPLIT:
On October 3, 1995, the Company increased its authorized capital from 1,000
to 20,000,000 shares of no par value common stock, and declared a 2,000 for 1
split of its common stock.
PRIVATE OFFERING AND WARRANTS:
The Company issued 1,350,000 shares (after 2,000 for 1 split) of common
stock for $2,700,000 through a private offering during the year ended June 30,
1996, including the issuance of 250,000 shares for the conversion of a loan from
a director. The net proceeds were $2,238,225, of which $640,000 was used as a
down payment to purchase 1,100,000 shares of common stock held by the principal
shareholders. In connection with this offering, the Company issued warrants to
purchase up to 150,000 shares of common stock at $2 per share to an underwriter.
These options are exercisable at any time through December 31, 2002. As of June
30, 1996, no warrants have been exercised.
In addition, the Company had a second private offering subsequent to June
30, 1996. The proceeds from the offering of 823,500 shares were $1,718,288, net
of costs of $340,462 (unaudited). In connection with this offering, the Company
issued warrants to purchase up to 200,000 shares of common stock at $2.50 per
share to an underwriter.
PREFERRED STOCK:
On October 3, 1995, the corporate Articles of Incorporation were amended to
authorize the issuance of 5,000,000 shares of preferred stock, no par value. The
Board of Directors are authorized to issue preferred stock with such rights,
privileges, preferences and restrictions, as they deem appropriate. As of June
30, 1996, no preferred stock has been issued.
STOCK OPTIONS AND STOCK OPTION PLAN:
Effective November, 1995, the Company's Board of Directors adopted a stock
option plan. The Company has 625,000 reserved shares of common stock for
issuance under the Plan, pending Board approval. The Board of Directors
determines which individuals shall receive options. The time period during which
the options may be partially or fully exercised, the number of shares of common
stock that may be purchased under each option, and the option price. As of June
30, 1996, 483,000 options were granted under the Plan at exercise prices of
$2.00 to $2.50 per share, exercisable until November 1, 2003. As of June 30,
1996, none of the options have been exercised.
F-30
<PAGE>
GARDEN VALLEY NATURALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES AND DEFERRED INCOME TAXES:
For the year ended June 30, 1996, components of deferred income taxes, are
as follows:
<TABLE>
<S> <C>
Current Assets:
Allowances..................................................... $ 68,298
Asset valuation allowance...................................... (68,298)
---------
$ --
---------
---------
Long-Term Asset (Liability):
Depreciation................................................... $ (16,466)
Net operating loss carryforward................................ 149,104
---------
Total net deferred tax asset (liability)....................... 132,638
Less: valuation allowance...................................... (132,638)
---------
$ --
---------
---------
</TABLE>
A reconciliation of income tax benefit (expense) at the statutory rate to
the Company's effective rate, is as follows:
<TABLE>
<CAPTION>
JUNE 30,
1996 JUNE 30, 1995
------------ ------------- MARCH 31, 1996
---------------
(UNAUDITED)
<S> <C> <C> <C>
Benefit (Expense) Computed at the Expected Statutory Rate... 34% (34)% 34%
State Income Taxes.......................................... 9 (9) 9
Surtax Exemption............................................ -- -- (11)
Deferred Tax Asset Valuation Allowance...................... (23) -- (28)
--
--- ---
20% (43)% 4%
--
--
--- ---
--- ---
</TABLE>
For the year ended June 30, 1996, the Company has net operating losses
available to offset federal and state taxable income in the approximate amounts
of $127,000 and $344,000, respectively.
9. COMPENSATION FROM OPTIONS AND WARRANTS:
The Company has a stock option plan pursuant to which options to purchase
shares of the Company's common stock may be granted to employees. The plan
provides that the option price shall not be less than the fair market value of
the shares on the date of grant, and that the options expire ten years after
grant. Options vest ratably over four or five year periods as provided for in
each employee's option agreement. At June 30, 1996, there were 625,000 shares
reserved for options to be granted under the plan.
In addition, the Company has issued warrants to an underwriter in connection
with the private placement offering. As of June 30, 1996, 150,000 warrants have
been issued at an exercise price of $2.00
F-31
<PAGE>
GARDEN VALLEY NATURALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. COMPENSATION FROM OPTIONS AND WARRANTS: (CONTINUED)
per share and expire in approximately five years. The following summarizes stock
options and warrant transactions:
<TABLE>
<CAPTION>
STOCK
OPTIONS WARRANTS PRICE PER SHARE
--------- --------- ----------------
<S> <C> <C> <C>
Outstanding at June 30, 1995.......................... -- -- $ --
Granted............................................. 538,000 150,000 $ 2.00 to $2.50
Exercised........................................... -- -- $ --
Expired............................................. -- -- $ --
--------- --------- ----------------
Outstanding at June 30, 1996.......................... 538,000 150,000 $ 2.00 to $2.50
--------- --------- ----------------
--------- --------- ----------------
</TABLE>
Information relating to stock options and warrants at June 30, 1996,
summarized by exercise price, are as follows:
<TABLE>
<CAPTION>
EXERCISE OUTSTANDING EXERCISABLE
PRICE ---------------------------- -----------
PER SHARE SHARES LIFE (YEARS) SHARES
- --------- --------- ----------------- -----------
<S> <C> <C> <C>
$2.00 433,000 5 401,000
2.50 255,000 5 200,000
</TABLE>
All stock options issued to employees have an exercise price not less than
the fair market value of the Company's common stock on the date of grant, and in
accordance with accounting for such options utilizing the intrinsic value
method, there is no related compensation expense recorded in the Company's
financial statements. Had compensation cost for stock-based compensation been
determined based on the fair value of the grant dates consistent with the method
of SFAS 123, the Company's net income and earnings per share for the year ended
June 30, 1996 would have been reduced to the pro forma amounts presented below:
<TABLE>
<CAPTION>
NET LOSS LOSS PER SHARE
----------- ---------------
<S> <C> <C>
As reported...................................................... $ (720,846) $ (.23)
Pro forma........................................................ (831,938) $ (.26)
</TABLE>
The fair value of option and warrant grants are estimated on the date of
grant utilizing the Black-Scholes option-pricing model, with the following
assumptions for grants in the year ended June 30, 1996; expected life of options
of five years, expected volatility of 14.4% risk-free interest rates of 8% and a
0% dividend yield. The fair value at date of grant for options and warrants for
the aforementioned year approximated $.23 per option.
In addition, the Company granted 200,000 additional warrants to an
underwriter in relation to the second private placement offering.
F-32
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING DESCRIBED HEREIN, AND IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL,
OR THE SOLICITATION OF AN OFFER TO BUY, THE SECURITIES OFFERED HEREBY TO ANY
PERSON IN ANY STATE OR OTHER JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN
THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 6
Dilution....................................... 10
Capitalization................................. 11
Use of Proceeds................................ 12
Selected Financial Data........................ 13
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 14
Business....................................... 19
Management..................................... 23
Principal Shareholders......................... 26
Certain Transactions........................... 27
Description of Securities...................... 28
Underwriting................................... 30
Legal Matters.................................. 32
Experts........................................ 32
Available Information.......................... 32
Financial Statements........................... F-1
</TABLE>
------------------------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
1,300,000 SHARES
OF COMMON STOCK
ORGANIC FOOD
PRODUCTS, INC.
---------------------
PROSPECTUS
---------------------
SENTRA
SECURITIES CORPORATION
SPELMAN & CO., INC.
PARADISE VALLEY
SECURITIES, INC.
, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article IV of the Registrant's Articles of Incorporation provides as
follows:
"The liabilities of the directors of the corporation for monetary damages
shall be eliminated to the fullest extent permissible under California law."
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "1933 Act"), may be permitted to officers, directors or
persons controlling the Company, the Company has been advised that, in the
opinion of the Securities and Exchange Commission, Washington, D.C. 20549, such
indemnification is against public policy as expressed in the 1933 Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the officer, director or controlling person of the
Company in the successful defense of any action, suit or proceeding) is asserted
by such officer, director or controlling person in connection with the
securities being registered, the Company will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the 1933 Act and will be governed by the
final adjudication of such issue.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.(1)(2)
<TABLE>
<S> <C>
SEC Registration Fee........................................... $ 2,309
NASD Filing Fee................................................ 1,262
Blue Sky Filing Fees........................................... 12,000
Blue Sky Legal Fees............................................ 25,000
Printing Expenses.............................................. 60,000
Legal Fees and Expenses........................................ 85,000
Accounting Fees................................................ 80,000
Transfer Agent................................................. 3,000
NASDAQ Application Fee......................................... 25,000
Miscellaneous Expenses......................................... 6,429
-----------
TOTAL...................................................... $ 300,000(1)
-----------
-----------
</TABLE>
- ------------------------
(1) Does not include the Representatives' commission and expenses of $676,000
($777,400 if the Overallotment Option is exercised).
(2) All expenses, except the SEC registration fee and NASD filing fee, are
estimated.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
During the last three years, the Registrant sold the following shares of its
Common Stock which were not registered under the Securities Act of 1933, as
amended (the "1933 Act"):
(i) In November 1995, the Registrant sold 1,100,000 shares of its Common
Stock at $2.00 per share to the following persons:
<TABLE>
<CAPTION>
NUMBER
NAME OF SHARES
- ----------------------------------------------------------------------------------- -----------
<S> <C>
Jack London/Life O Boston Insurance................................................ 250,000
Enrique Feldman.................................................................... 175,000
Floyd Hill......................................................................... 151,200
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
NUMBER
NAME OF SHARES
- ----------------------------------------------------------------------------------- -----------
<S> <C>
Paul and Becky Sigfusson........................................................... 77,750
Lyonshare Venture Capital.......................................................... 62,500
Leslie Farkas...................................................................... 50,000
William Maines..................................................................... 50,000
Richard Froehlich MD, IRA.......................................................... 25,000
William Hay........................................................................ 25,000
Jane Zivney Interiors Pension Trust................................................ 25,000
Paul and Anne Janssens Lens........................................................ 25,000
James and Jane Zivney.............................................................. 17,500
Barry Donner....................................................................... 15,800
Alfred Zacher Profit Sharing Plan.................................................. 12,500
Glenn C. Cook and R. Cook.......................................................... 12,500
Delaware Charter G&T FBO........................................................... 12,500
Froelich Family Trust.............................................................. 12,500
Marvin and Pearl Stumpf............................................................ 12,500
Elliot Wagner...................................................................... 12,500
L. Stuart and Naomi Nagasawa....................................................... 12,500
Hirn Doheny Reed & Harper PS Trust................................................. 12,500
William Schlueter.................................................................. 12,500
John and Mary Jane Scott........................................................... 12,500
Kenneth Depersio................................................................... 6,250
Michael and Susan Gernant.......................................................... 6,250
Jerrold and Carolyn Johnson........................................................ 6,250
Kenneth Steel...................................................................... 6,500
</TABLE>
(ii) In February 1996, the Registrant sold 250,000 shares of its Common
Stock to Kenneth A. Steel, Jr. at $2.00 per share.
(iii) In July 1996, the Registrant sold 823,500 shares of its Common
Stock at $2.50 per share to the following individuals.
<TABLE>
<CAPTION>
NUMBER
NAME OF SHARES
- ----------------------------------------------------------------------------------- -----------
<S> <C>
Rizzo Trust........................................................................ 20,000
Lori Rizzo......................................................................... 15,000
Steven and Faith Chinskey.......................................................... 5,000
James R. Barge..................................................................... 5,000
Thomas and Susan Lusty............................................................. 10,000
Jerry and Jean Mikus............................................................... 20,000
Michael J. Mehalko................................................................. 5,000
Jane Chu........................................................................... 5,000
Sunbeam Ventures................................................................... 40,000
Glenn C. Cook...................................................................... 20,000
TBP Investments.................................................................... 14,000
Enrique Feldman.................................................................... 140,000
Jeff and Adelynn Barteir........................................................... 10,000
J. Michael Turley.................................................................. 10,000
Monica Koechlin.................................................................... 40,000
Paul and Becky Sigfusson........................................................... 100,000
Vern and Grace Thomsen............................................................. 40,000
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
NUMBER
NAME OF SHARES
- ----------------------------------------------------------------------------------- -----------
<S> <C>
Lawrence Cannizzaro................................................................ 20,000
Hooman Nikzad...................................................................... 4,000
Fred Djshandideh................................................................... 4,000
Harvey Belfer...................................................................... 10,000
Satoru Nilmoto..................................................................... 10,000
Lanny and Mariane Lahr............................................................. 10,000
William R. Maines.................................................................. 20,000
Ronald J. Faust.................................................................... 16,000
Lyonshare Venture Capital.......................................................... 25,500
Vestal Venture Capital............................................................. 15,000
Carroll and Joseph Dilustro........................................................ 10,000
Sylvanus V. Tunstall............................................................... 40,000
Donald L. Ladwig................................................................... 20,000
Mateo Lettunich.................................................................... 20,000
Marvin Stumpf...................................................................... 10,000
Donahue Bunch...................................................................... 10,000
Nathaniel and Mildred Orme......................................................... 10,000
Don Zinman......................................................................... 10,000
Kevin and Tracy McGovern........................................................... 5,000
Felicia Choi....................................................................... 10,000
John Jensen........................................................................ 15,000
Herman Kahan, Trustee.............................................................. 10,000
Poseidon Capital................................................................... 10,000
John Nelson........................................................................ 10,000
</TABLE>
(iv) In connection with the sales of Common Stock set forth in
subparagraph (i), (ii) and (iii) above, the Registrant issued to Spelman &
Co., Inc., its placement agent and one of the Representatives of the
Offering, 150,000 common stock purchase warrants exercisable at $2.00 per
share until December 31, 2002 and 200,000 common stock purchase warrants
exercisable at $2.50 per share until July 31, 2003.
(v) In July 1996 the Registrant issued 2,227,499 shares of its Common
Stock to John Battendieri and 22,501 shares to Casey Adams in connection
with the OFP merger.
(vi) From time to time, the Registrant has issued stock options
(currently aggregating 625,000 such stock options) to employees, officers
and directors under its 1995 Stock Option Plan.
(vii) In May 1997 the Registrant borrowed an aggregate of $600,000 from
the following individuals and issued to them as additional consideration for
the loans an aggregate of 200,000 common stock
II-3
<PAGE>
purchase warrants, each warrant exercisable to purchase one share of the
Registrant's Common Stock at any time until December 31, 1999.
<TABLE>
<CAPTION>
NAME NUMBER OF WARRANTS
- ---------------------------------------------------------------------------------------------
<S> <C>
Todd Belfer TPB Inv. Ltd. Partnership........................................................ 20,000
Harvey Belfer................................................................................ 20,000
Lanny Lahr................................................................................... 20,000
Ronald Faust................................................................................. 20,000
Robert Mapes................................................................................. 10,000
Eliot Ellefson............................................................................... 10,000
Bruce Ungerleider............................................................................ 10,000
William Hay.................................................................................. 20,000
William Schlueter............................................................................ 20,000
Kenneth Hersh................................................................................ 16,666
Sherri Rizzo Trust........................................................................... 16,666
Rizzo Trust.................................................................................. 16,667
-------
200,000
</TABLE>
With respect to the sales made, including the private placements set forth
in sub-paragraphs (i) and (iii), above, the Registrant relied on Section 4(2) of
the 1933 Act, and/or Regulation D, Rule 506. No advertising or general
solicitation was employed in offering the securities. The securities were
offered to a limited number of individuals all of whom were accredited investors
as that term is defined under Regulation D under the 1933 Act and were
experienced and sophisticated investors capable of analyzing the merits and
risks of their investment. All such investors acknowledged in writing that they
were acquiring the securities for investment and not with a view toward
distribution or resale and understood the speculative nature of their
investment. The transfer of the securities was appropriately restricted from
sale by the Registrant. The Registrant complied with all of the requirements of
Regulation D, Rule 506 and filed a Form D with the Commission within 15 days
from the first sale date in each such private placement.
II-4
<PAGE>
ITEM 27. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT NO. TITLE
- ------------- ------------------------------------------------------------------------------------------------
<C> <S>
1.01 Form of Underwriting Agreement (1)
1.02 Form of Selected Dealer Agreement (1)
1.03 Form of Representatives' Warrant (1)
1.04 Form of Amended Underwriting Agreement
1.05 Form of Amended Selected Dealer Agreement
1.06 Form of Amended Representatives' Warrant
1.07 Form of Lock-Up Agreement
3.01 Articles of Incorporation of the Registrant, as amended (1)
3.02 Bylaws of the Registrant (1)
5.01 Opinion of Gary A. Agron, regarding legality of the Common Stock (includes Consent) (1)
10.01 1995 Employee Stock Option Plan (1)
10.02 Office and Warehouse Lease (Morgan Hill, California) (1)
10.03 Employment Agreement with Mr. Hill (1)
10.04 Employment Agreement with Mr. Battendieri (1)
10.05 Merger Agreement between the Registrant (Garden Valley Naturals, Inc.) and Organic Food
Products, Inc. (1)
10.06 Loan Agreement with Mr. Steel
10.07 Stock Redemption Agreement with Messrs. Nicholson and Reedy
10.08 Settlement Agreement with Mr. Nicholson
10.09 First Amendment to Stock Redemption Agreement
10.10 Amendment to Promissory Notes issued to Messrs. Nicholson and Reedy
10.11 Form of Subscription Agreement, Promissory Note and Warrant for Bridge Loan
11.01 Computation of Earnings Per Share (1)
11.02 Computation of Earnings Per Share
23.01 Consent of Semple & Cooper LLP (1)
23.02 Consent of Gary A. Agron (See 5.01, above) (1)
23.03 Consent of Semple and Cooper LLP
27.01 Financial Data Schedule (1)
27.02 Financial Data Schedule
</TABLE>
- ------------------------
(1) Previously filed
ITEM 28. UNDERTAKINGS.
The Registrant hereby undertakes:
(a) That insofar as indemnification for liabilities arising under the 1933
Act may be permitted to directors, officers and controlling persons of the
Registrant, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer
II-5
<PAGE>
or controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
(b) That subject to the terms and conditions of Section 13(a) of the
Securities Exchange Act of 1934, it will file with the Securities and Exchange
Commission such supplementary and periodic information, documents and reports as
may be prescribed by any rule or regulation of the Commission heretofore or
hereafter duly adopted pursuant to authority conferred in that section.
(c) That any post-effective amendment filed will comply with the applicable
forms, rules and regulations of the Commission in effect at the time such
post-effective amendment is filed.
(d) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the 1933 Act;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
(e) That, for the purpose of determining any liability under the 1933 Act,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(f) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
Offering.
(g) To provide to the Underwriter at the closing specified in the
Underwriting Agreement certificates in such denominations and registered in such
names as required by the Underwriter to permit prompt delivery to each
purchaser.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the 1933 Act, as amended, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements of filing on Form SB-2 and has caused this Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in
Morgan Hill, California, on July 8, 1997.
<TABLE>
<S> <C> <C>
ORGANIC FOOD PRODUCTS, INC.
BY: /S/ FLOYD R. HILL
-----------------------------------------
Floyd R. Hill
CHIEF EXECUTIVE OFFICER
</TABLE>
Pursuant to the requirements of the 1933 Act, as amended, this Registration
Statement has been signed below by the following persons on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------------------ ---------------------------------------- ---------------
<C> <S> <C>
/s/ FLOYD R. HILL
------------------------------------------- Chief Executive Officer and Director July 8, 1997
Floyd R. Hill
/s/ JOHN BATTENDIERI
------------------------------------------- President and Director July 8, 1997
John Battendieri
/s/ DONALD L. LADWIG
------------------------------------------- Vice President--Marketing and Sales July 8, 1997
Donald L. Ladwig
/s/ PERRY T. VALASSIS
------------------------------------------- Chief Financial Officer and Principal July 8, 1997
Perry T. Valassis Accounting Officer
/s/ KENNETH A. STEEL, JR.
------------------------------------------- Director July 8, 1997
Kenneth A. Steel, Jr.
/s/ CHARLES B. BONNER
------------------------------------------- Director July 8, 1997
Charles B. Bonner
/s/ CHARLES R. DYER
------------------------------------------- Director July 8, 1997
Charles R. Dyer
</TABLE>
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. TITLE
- ------------- -----------------------------------------------------------------------------------------------------
<C> <S>
1.04 Form of Amended Underwriting Agreement
1.05 Form of Amended Selected Dealer Agreement
1.06 Form of Amended Representatives' Warrant
1.07 Form of Lock-Up Agreement
10.06 Loan Agreement with Mr. Steel
10.07 Stock Redemption Agreement with Messrs. Nicholson and Reedy
10.08 Settlement Agreement with Mr. Nicholson
10.09 First Amendment to Stock Redemption Agreement
10.10 Amendment to Promissory Notes issued to Messrs. Nicholson and Reedy
10.11 Form of Subscription Agreement, Promissory Note and Warrant for Bridge Loan
11.02 Computation of Earnings Per Share
23.03 Consent of Semple & Cooper LLP
27.02 Financial Schedule
</TABLE>
<PAGE>
ORGANIC FOOD PRODUCTS
1,300,000 Shares
UNDERWRITING AGREEMENT
_______________, 1997
Sentra Securities Corporation
Spelman & Co., Inc.
2355 Northside Drive, Suite 200
San Diego, CA 92108
(As Representatives of the Several
Underwriters Named in Schedule 1 hereto)
Dear Sirs:
Organic Food Products, a California corporation (the "Company"), hereby
confirms its agreement (this "Agreement") with the several underwriters named
in Schedule 1 hereto (the "Underwriters"), for whom Sentra Securities
Corporation and Spelman & Co., Inc. have been duly authorized to act as
representatives (in such capacity, the "Representatives"), as set forth below:
SECTION 1.
DESCRIPTION OF TRANSACTION
The Company proposes to issue and sell to the Underwriters on the
Closing Date (as defined below), pursuant to the terms and conditions of this
Agreement, an aggregate of 1,300,000 shares ("Firm Shares") of the Company's
Common Stock ("Common Stock") at a price of $4.00 per Share on the terms as
hereinafter set forth. The Company also proposes to issue and sell to the
several Underwriters on or after the Closing Date not more than 195,000
additional Shares if requested by the Representatives as provided in Section
3.02 of this Agreement (the "Option Shares"). The Firm Shares and any Option
Shares are collectively referred to herein as the "Shares."
SECTION 2.
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
In order to induce the Underwriters to enter into this Agreement, the
Company hereby represents and warrants to and agrees with the Underwriters
that:
<PAGE>
2.1 REGISTRATION STATEMENT AND PROSPECTUS. A registration statement on
Form SB-2 (File No. 333-22-997) with respect to the Shares, including the
related prospectus, copies of which have heretofore been delivered by the
Company to the Underwriters, has been filed by the Company in conformity with
the requirements of the Securities and Exchange Commission (the "Commission")
under the Securities Act of 1933, as amended (the "Act"), and one or more
amendments to such registration statement have been so filed. After the
execution of this Agreement, the Company will file with the Commission either
(a) if such registration statement, as it may have been amended, has been
declared by the Commission to be effective under the Act, a prospectus in the
form most recently included in an amendment to such registration statement
(or, if no such amendment shall have been filed, in such registration
statement), with such changes or insertions as are required by Rule 430A
under the Act or permitted by Rule 424(b) under the Act and as have been
provided to and approved by the Representatives prior to the execution of
this Agreement, or (b) if such registration statement, as it may have been
amended, has not been declared by the Commission to be effective under the
Act, an amendment to such registration statement, including a form of
prospectus, a copy of which amendment has been furnished to and approved by
the Representatives prior to the execution of this Agreement. As used in
this Agreement, the term "Registration Statement" means such registration
statement on Form SB-2 and all amendments thereto, including the prospectus,
all exhibits and financial statements, as it becomes effective; the term
"Preliminary Prospectus" means each prospectus included in said Registration
Statement before it becomes effective; and the term "Prospectus" means the
prospectus first filed with the Commission pursuant to Rule 424(b) under the
Act or, if no prospectus is required to be filed pursuant to said Rule
424(b), such term means the prospectus included in the Registration Statement
when it becomes effective.
2.2 ACCURACY OF REGISTRATION STATEMENT AND PROSPECTUS. Neither the
Commission nor the "blue sky" or securities authority of any jurisdiction has
issued any order preventing or suspending the use of any Preliminary
Prospectus. When (a) any Preliminary Prospectus was filed with the
Commission, (b) the Registration Statement or any amendment thereto was or
is declared effective, and (c) the Prospectus or any amendment or supplement
thereto is filed with the Commission pursuant to Rule 424(b) (or, if the
Prospectus or such amendment or supplement is not required to be so filed,
when the Registration Statement or the amendment thereto containing such
amendment or supplement to the Prospectus was or is declared effective) and
on the Closing Date the Prospectus, as amended or supplemented at any such
time, such filing (i) contained or will contain all statements required to be
stated therein in accordance with, and complied or will comply in all
material respects with the requirements of, the Act and the rules and
regulations of the Commission promulgated thereunder (the "Rules and
Regulations") and (ii) did not or will not include any untrue statement of a
material fact or omit to state any material fact necessary to make the
statements therein not misleading in light of the circumstances under which
they were made. The foregoing representation does not apply to statements or
omissions made in any Preliminary Prospectus, the Registration Statement or
any amendment thereto or the Prospectus or any amendment or supplement
thereto in reliance upon and in conformity with written information furnished
to the Company by any Underwriter through the Representatives specifically
for use therein.
2
<PAGE>
2.3 INCORPORATION AND STANDING. The Company has been duly incorporated
and is validly existing as a corporation in good standing under the laws of
the State of California and is duly qualified to transact business as a
foreign corporation and is in good standing under the laws of all other
jurisdictions where the ownership or leasing of its properties or the conduct
of its business requires such qualification, except where the failure to be
so qualified does not amount to a material liability or disability to the
Company.
2.4 DUE POWER AND AUTHORITY. The Company has full corporate power to
own or lease its properties and conduct its business as described in the
Registration Statement and the Prospectus or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus; and the Company has full
corporate power to enter into this Agreement and to carry out all the terms
and provisions hereof to be carried out by it. The execution and delivery of
this Agreement and consummation of the transactions contemplated herein have
been duly authorized by the Company and this Agreement has been duly executed
and delivered by the Company and constitutes the legal, valid and binding
obligation of the Company, enforceable against the Company in accordance with
the terms thereof, except as may be limited by applicable bankruptcy,
insolvency, reorganization or similar laws affecting creditors' rights
generally and by general equitable principles, and as rights to indemnity and
contribution hereunder may be limited by applicable law.
2.5 CONSENTS; NO DEFAULTS. The issuance, offering and sale of the
Shares to the Underwriters by the Company pursuant to this Agreement, the
compliance by the Company with the other provisions of this Agreement and the
consummation of the other transactions herein contemplated do not (a) require
the consent, approval, authorization, registration or qualification of or
with any governmental authority, except such as have been obtained, or as may
be required under the Act or under the securities or blue sky laws of any
jurisdiction, or (b) conflict with or result in a breach or violation of any
of the terms and provisions of, or constitute a default under, any indenture,
mortgage, deed of trust, lease or other material agreement or instrument to
which the Company is a party or by which the Company or any of its properties
is bound, or the charter documents or bylaws of the Company, or any statute
or any judgment, decree, order, rule or regulation of any court or other
governmental authority or any arbitrator applicable to the Company.
2.6 NO BREACH OR DEFAULT. The Company is not in breach of any term or
provision of its Articles of Incorporation or Bylaws; no default exists, and
no event has occurred which with notice or lapse of time or both, would
constitute a default, in the Company's due performance and observance of any
term, covenant or condition of any indenture, mortgage, deed of trust, lease,
note, bank loan or credit agreement or any other material agreement or
instrument to which the Company or its properties may be bound or affected in
any respect which would have a material adverse effect on the condition
(financial or otherwise), business, properties, prospects, net worth or
results of operations of the Company.
2.7 LICENSES. Except as described in the Prospectus, the Company
possesses all certificates, authorizations and permits issued by the
appropriate federal, state or foreign regulatory authorities necessary for
the conduct of its business, including without limitation the Food and Drug
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Administration, the United States Department of Agriculture and the
Environmental Protection Agency, and the Company has not received any notice
of proceedings relating to the revocation or modification of any such
certificate, authorization or permit which, singly or in the aggregate, if
the subject of an unfavorable decision, ruling or finding, would result in a
material adverse change in the condition (financial or otherwise), business
prospects, net worth or results of operations of the Company, except as
described in or contemplated by the Registration Statement. Each approval,
registration, qualification, license, permit, consent, order, authorization,
designation, declaration or filing by or with any regulatory, administrative
or other governmental body or agency necessary in connection with the
execution and delivery by the Company of this Agreement and the consummation
of the transactions contemplated (except such additional actions as may be
required by the National Association of Securities Dealers, Inc. or may be
necessary to qualify the Common Stock for public offering under state
securities or blue sky laws) has been obtained or made and each is in full
force and effect.
2.8 COMPLIANCE WITH LAWS. Except as disclosed in the Registration
Statement and in the Prospectus (or, if the Prospectus is not in existence,
the most recent Preliminary Prospectus), the Company is not in violation of
any laws, ordinances, governmental rules or regulations to which it is
subject, which would have a material adverse effect on the condition
(financial or otherwise), business, properties, prospects, net worth or
results of operations of the Company.
2.9 EXISTING CAPITAL STRUCTURE AND SHAREHOLDER RIGHTS. The Company has
an authorized, issued and outstanding capitalization as set forth in, and
capital stock conforms in all material respects to the description contained
in, the Prospectus or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus. Except as described in the Registration Statement
and in the Prospectus there are no outstanding (a) securities or obligations
of the Company convertible into or exchangeable for any capital stock of the
Company, (b) warrants, rights or options to subscribe for or purchase from
the Company any such capital stock or any such convertible or exchangeable
securities or obligations, or (c) obligations of the Company to issue such
shares, any such convertible or exchangeable securities or obligations, or
any such warrants, rights or obligations. All of the issued shares of capital
stock of the Company have been duly authorized and validly issued and are
fully paid and nonassessable, and have been issued in compliance with all
federal and state securities laws. No preemptive rights of shareholders
exist with respect to any capital stock of the Company. No shareholder of
the Company has any right pursuant to any agreement which has not been waived
or honored to require the Company to register the sale of any securities
owned by such shareholder under the Act in the public offering contemplated
herein except as disclosed in the Registration Statement. The Company has
no subsidiaries, and does not own any shares of stock or any other equity
interest in any firm, partnership, association or other entity.
2.10 AUTHORITY FOR ISSUANCE OF SHARES. The issuance of the Common
Stock issuable in connection with the Shares has been duly authorized and at
any Firm or Option Closing Date as defined herein after payment therefor in
accordance herewith, such Common Stock will be validly issued, fully paid and
nonassessable. The Shares will conform in all material respects with all
statements with regard thereto in the Registration Statement and the
Prospectus.
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2.11 TITLE TO TANGIBLE PROPERTY. Except as otherwise set forth in or
contemplated by the Registration Statement and Prospectus, the Company has
good and marketable title to all items of personal property owned by the
Company, free and clear of any security interest, liens, encumbrances,
equities, claims and other defects, except such as do not materially and
adversely affect the value of such property and do not materially interfere
with the use made or proposed to be made of such property by the Company, and
any real property and buildings held under lease by the Company are held
under valid, subsisting and enforceable leases, with such exceptions as are
not material and do not materially interfere with the use made or proposed to
be made of such property and buildings by the Company.
2.12 TITLE TO INTELLECTUAL PROPERTY. The Company owns the trademarks
and intellectual property described in the Registration Statement. The
Company does not own any patents. The Company owns or possesses, or can
acquire on reasonable terms, all material, trademarks, service marks, trade
names, licenses, copyrights and proprietary or other confidential information
currently employed by it in connection with its business, and the Company has
not received any notice of infringement of or conflict with asserted rights
of any third party with respect to any of the foregoing intellectual property
rights which, singly or in the aggregate, if the subject of an unfavorable
decision, ruling or finding would result in a material adverse change in the
condition (financial or otherwise), business prospects, net worth or results
of operations of the Company, except as described in or contemplated by the
Prospectus.
2.13 CONTRACT RIGHTS. The agreements to which the Company is a party
described in the Registration Statement and Prospectus are valid agreements,
enforceable by the Company in accordance with their terms, except as the
enforcement thereof may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting
creditor's rights generally or by equitable principles, and, to the Company's
knowledge, the other contracting party or parties thereto are not in material
breach or material default under any of such agreements.
2.14 NO MARKET MANIPULATION. The Company has not taken nor will it
take, directly or indirectly, any action designed to cause or result, or
which might reasonably be expected to cause or result, in the stabilization
or manipulation of the price of any security of the Company to facilitate the
sale or resale of the Common Stock.
2.15 NO OTHER SALES OR COMMISSIONS. The Company has not since the
filing of the Registration Statement (i) sold, bid for, purchased, attempted
to induce any person to purchase, or paid anyone any compensation for
soliciting purchases of, its capital stock or (ii) paid or agreed to pay to
any person any compensation for soliciting another to purchase any securities
of the Company except for the sale of Shares by the Company under this
Agreement.
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2.16 ACCURACY OF FINANCIAL STATEMENTS. The financial statements and
schedules of the Company included in the Registration Statement and the
Prospectus, or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus, fairly present in all material respects the financial
position of the Company and the results of operations and changes in
financial condition as of the dates and periods therein specified. Such
financial statements and schedules have been prepared in accordance with
generally accepted accounting principles consistently applied throughout the
periods involved except as otherwise noted therein and include all financial
information required to be included by the Act. The selected financial data
set forth under the captions "PROSPECTUS SUMMARY--Summary Financial
Information," "SELECTED FINANCIAL DATA" and "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" in the Prospectus,
or, if the Prospectus is not in existence the most recent Preliminary
Prospectus, fairly present in all material respects, on the basis stated in
the Prospectus or such Preliminary Prospectus, the information included
therein.
2.17 INDEPENDENT PUBLIC ACCOUNTANT. Semple & Cooper, which have
certified or shall certify certain of the financial statements of the Company
filed or to be filed as part of the Registration Statement and the
Prospectus, are independent certified public accountants within the meaning
of the Act and the Rules and Regulations.
2.18 INTERNAL ACCOUNTING. The Company maintains a system of internal
accounting controls sufficient to provide reasonable assurance that (a)
transactions are executed in accordance with management's general or specific
authorization; (b) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain asset accountability; (c) access to
assets is permitted only in accordance with management's general or specific
authorization; and (d) the recorded accountability for assets is compared
with the existing assets at reasonable intervals and appropriate action is
taken with respect to any differences.
2.19 LITIGATION. Except as set forth in the Registration Statement and
Prospectus, there is and at the Closing Date there will be no action, suit or
proceeding before any court or governmental agency, authority or body pending
or to the knowledge of the Company threatened which might result in judgments
against the Company not adequately covered by insurance or which collectively
might result in any material adverse change in the condition (financial or
otherwise), the business or the prospects of the Company, or would have a
material adverse effect on the properties or assets of the Company. The
Company is not subject to the provisions of any injunction, judgement, decree
or order of any court, regulatory body, administrative agency or other
governmental body or arbitral forum, which might result in a material adverse
change in the business, assets or condition of the Company.
2.20 NO MATERIAL ADVERSE CHANGE. Subsequent to the respective dates as
of which information is given in the Registration Statement and the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus), (a) the Company has not incurred any material
adverse change in or affecting the condition, financial or otherwise, of the
Company or the earnings,
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business affairs, management, or business prospects of the Company, whether
or not occurring in the ordinary course of business, (b) there has not been
any material transaction entered into by the Company, other than transactions
in the ordinary course of business or transactions specifically described in
the Registration Statement as it may be amended or supplemented, (c) the
Company has not sustained any material loss or interference with its business
or properties from fire, flood, windstorm, accident or other calamity, (d)
the Company has not paid or declared any dividends or other distribution with
respect to its capital stock and the Company is not in default in the payment
of principal or interest on any outstanding debt obligations, and (e) there
has not been any change in the capital stock (other than the sale of the
Common Stock hereunder or the exercise of outstanding stock options or
warrants as described in the Registration Statement) or material increase in
indebtedness of the Company. The Company does not have any known material
contingent obligation which is not disclosed in the Registration Statement
(or contained in the financial statements or related notes thereto), as such
may be amended or supplemented.
2.21 TRANSACTIONS WITH AFFILIATES. Subsequent to the respective dates
as of which information is given in the Registration Statement and Prospectus
or if the Prospectus is not in existence the most recent Preliminary
Prospectus, and except as may otherwise be indicated or contemplated herein
or therein, (a) the Company has not entered into any transaction with an
"affiliate" of the Company, as defined in the Act and the Rules and
Regulations, or (b) declared, paid or made any dividend or distribution of
any kind on or in connection with any class of its capital stock, and (c) the
Company has no knowledge of any transaction between any affiliate of the
Company and any significant customer or supplier of the Company, except in
its ordinary course of business.
2.22 INSURANCE. Except as otherwise set forth in or contemplated by
the Registration Statement and Prospectus, the Company is insured by insurers
of recognized financial responsibility against such losses and risks and in
such amounts as are prudent and customary in the business in which it is
engaged, including without limitation products liability insurance; the
Company has not been refused any insurance coverage sought or applied for;
and the Company has no reason to believe that it will not be able to renew
its existing insurance coverage as and when such coverage expires or to
obtain similar coverage from similar insurers as may be necessary to continue
its business at a cost that would not materially and adversely affect the
condition (financial or otherwise), business prospects, net worth or results
of operations of the Company.
2.23 TAX RETURNS. The Company has filed all foreign, federal, state
and local tax returns that are required to be filed or has requested
extensions thereof and has paid all taxes required to be paid by it and any
other assessment, fine or penalty levied against it, to the extent that any
of the foregoing is due and payable or adequate accruals have been set up to
cover any such unpaid taxes, except for any such assessment, fine or penalty
that is currently being contested in good faith.
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2.24 POLITICAL CONTRIBUTIONS. The Company has not directly or
indirectly, (a) made any unlawful contribution to any candidate for public
office, or failed to disclose fully any contribution in violation of law, or
(b) made any payment to any federal, state, local, or foreign governmental
officer or official, or other person charged with similar public or
quasi-public duties, other than payments required or permitted by the laws of
the United States or any other such jurisdiction.
2.25 RELATIONSHIPS WITH CUSTOMERS, SUPPLIERS AND MANUFACTURERS. The
Company does not currently have any written contracts with any of its
customers, suppliers and manufacturers. The Company is in compliance with
all oral agreements with its customers, suppliers and manufacturers. The
Company has not received notice from any of its customers, suppliers and
manufacturers alleging any breach of contract, representation or warranty
which, in the aggregate, would have a material adverse effect on the
financial condition or operations results of the Company.
2.26 INVESTMENT COMPANY ACT. The Company conducts its operations in a
manner that does not subject it to registration as an investment company
under the Investment Company Act of 1940, as amended, and the transactions
contemplated by this Agreement will not cause the Company to become an
investment company subject to registration under the Investment Company Act
of 1940, as amended.
SECTION 3.
PURCHASE, SALE AND DELIVERY OF THE SHARES
3.1 PURCHASE OF FIRM SHARES. On the basis of the representations,
warranties, agreements and covenants herein contained and subject to the
terms and conditions herein set forth, the Company agrees to issue and sell
to each of the Underwriters named in Schedule I hereto, and each of the
Underwriters, severally and not jointly, agrees to purchase from the Company,
at a purchase price of $4.50 per Share, the number of Firm Shares set forth
opposite the name of such Underwriter in Schedule 1 hereto. The Company will
make one or more certificates for Common Stock constituting the Firm Shares,
in definitive form and in such denomination or denominations and registered
in such name or names as the Representatives shall request upon notice to the
Company at least 48 hours prior to the Firm Closing Date, available for
checking and packaging by the Representatives at the offices of the Company's
transfer agent or registrar (or the correspondent or the agent of the
Company's transfer agent or registrar) at least 24 hours prior to the Firm
Closing Date. Payment for the Firm Shares shall be made by bank wire payable
in same day funds to the order of the Company drawn to the order of the
Company for the Firm Shares, against delivery of certificates therefor to the
Representatives. Delivery of the documents, certificates and opinions
described in Section 6 of this Agreement, the Firm Shares and payment for the
Firm Shares and the Option Shares shall be made at the offices of Sentra
Securities Corporation, 2355 Northside Drive, Suite 200, San Diego,
California 92108, at 9:00 a.m., San Diego time, on the third full business
day following the date hereof (on the fourth full business day if this
Agreement is executed after 1:30 p.m., San Diego time), or at such other
places, time or date as the Representatives and the Company
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may agree upon or as the Representatives may determine pursuant to Section 9
hereof, such time and date of delivery against payment being herein referred
to as the "Firm Closing Date" or "Closing Date" as applicable.
3.2 OVER-ALLOTMENTS; OPTION SHARES. For the purpose of covering any
over-allotments in connection with the distribution and sale of the Firm
Shares as contemplated by the Prospectus, the Company hereby grants to you on
behalf of the several Underwriters an option to purchase, severally and not
jointly, the Option Shares. The purchase price to be paid for any Option
Shares shall be the same price per share as the price per Share for the Firm
Shares set forth above in Section 3.1, plus, if the purchase and sale of any
Option Share takes place after the Firm Closing Date and after the Common
Stock is trading "ex-dividend," an amount equal to the dividends payable on
the Common Stock contained in such Option Shares. The option granted hereby
may be exercised in the manner described below as to all or any part of the
Option Shares from time to time within forty-five days after the date of the
Prospectus. The Underwriters shall not be under any obligation to purchase
any of the Option Shares prior to the exercise of such option. The
Representatives may from time to time exercise the option granted hereby by
giving notice in writing or by telephone (confirmed in writing) to the
Company setting forth the aggregate number of Option Shares as to which the
several Underwriters are then exercising the option and the date and time for
delivery of and payment for such Option Shares. Any such date of delivery
shall be determined by the Representatives but shall not be earlier than two
business days or later than seven business days after such exercise of the
option and, in any event, shall not be earlier than the Firm Closing Date.
The time and date set forth in such notice, or such other time on such other
date as the Representatives and the Company may agree upon or as the
Representatives may determine pursuant to Section 9 hereof, is herein called
the "Option Closing Date" with respect to such Option Shares. Upon each
exercise of the option as provided herein, subject to the terms and
conditions herein set forth, the Company shall become obligated to sell to
each of the several Underwriters, and each of the Underwriters (severally and
not jointly) shall become obligated to purchase from the Company, the same
percentage of the total number of the Option Shares as to which the several
Underwriters are then exercising the option as such Underwriter is obligated
to purchase of the aggregate number of Firm Shares, as adjusted by the
Representatives in such manner as it deems advisable to avoid fractional
shares. If the option is exercised as to all or any portion of the Option
Shares, one or more certificates for the Common Stock contained in such
Option Shares, in definitive form, and payment therefore, shall be delivered
on the related Option Closing Date in the manner, and upon the terms and
conditions, set forth in Section 3.1, except that reference therein to the
Firm Shares and the Firm Closing Date shall be deemed, for purposes of this
Section 3.2, to refer to such Option Shares and Option Closing Date,
respectively. No Option Shares shall be required to be, or be, sold and
delivered unless the Firm Shares have been, or simultaneously are, sold and
delivered as provided in this Agreement.
3.3 DEFAULT BY AN UNDERWRITER. It is understood that you, individually
and not as the Representatives, may (but shall not be obligated to) make
payment on behalf of any Underwriter or Underwriters for any of the Shares to
be purchased by such Underwriter or Underwriters. No such
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payment shall relieve such Underwriter or Underwriters from any of its or
their obligations hereunder.
SECTION 4.
OFFERING BY THE UNDERWRITERS
Upon payment by the Underwriters of the purchase price of $3.60 per
Share and the Company's authorization of the release of the Firm Shares, the
several Underwriters shall offer the Firm Shares for sale to the public upon
the terms set forth in the Prospectus. The Representatives may from time to
time thereafter change the public offering prices and other selling terms.
If the option set forth in Section 3.2 of this Agreement is exercised, then
upon the Company's authorization of the release of the Option Shares the
several Underwriters shall offer such Shares for sale to the public upon the
foregoing terms.
SECTION 5.
COVENANTS OF THE COMPANY
Except as otherwise stated below, the Company covenants and agrees with
each of the Underwriters that:
5.1 COMPANY'S BEST EFFORTS TO CAUSE REGISTRATION STATEMENT TO BECOME
EFFECTIVE. The Company will use its best efforts to cause the Registration
Statement, if not effective at the time of execution of this Agreement, and
any amendments thereto, to become effective as promptly as possible. If
required, the Company will file the Prospectus and any amendment or
supplement thereto with the Commission in the manner and within the time
period required by Rule 424(b) under the Act. During any time when a
prospectus relating to the Common Stock is required to be delivered under the
Act, the Company (a) will comply with all requirements imposed upon it by the
Act and the Rules and Regulations to the extent necessary to permit the
continuance of sales of or dealings in the Common Stock in accordance with
the provisions hereof and of the Prospectus, as then amended or supplemented,
and (b) will not file with the Commission the prospectus or the amendment
referred to in the second sentence of Section 2.1 hereof, any amendment or
supplement to such prospectus or any amendment to the Registration Statement
unless and until the Representatives have been advised of such proposed
filing, has been furnished with a copy for a reasonable period of time prior
to the proposed filing, and has given its consent to such filing, which shall
not be unreasonably withheld or delayed.
5.2 PREPARATION AND FILING OF AMENDMENTS AND SUPPLEMENTS. The Company
will prepare and file with the Commission, in accordance with the Rules and
Regulations of the Commission, promptly upon written request by the
Representatives or counsel for the Representatives, any amendments to the
Registration Statement or amendments or supplements to the Prospectus that
may be reasonably necessary or advisable in connection with the distribution
of the Shares by the several Underwriters, and the Company will use its best
efforts to cause any such
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amendment to the Registration Statement to be declared effective by the
Commission as promptly as possible. The Company will advise the
Representatives, promptly after receiving notice thereof, of the time when
the Registration Statement or any amendment thereto has been filed or
declared effective or the Prospectus or any amendment or supplement thereto
has been filed and will provide evidence satisfactory to the Representatives
of each such filing or effectiveness.
5.3 NOTICE OF STOP ORDERS. The Company will advise the Representatives
promptly after receiving notice or obtaining knowledge of: (a) the issuance
by the Commission of any stop order suspending the effectiveness of the
Registration Statement or any amendment thereto, or any order preventing or
suspending the use of any Preliminary Prospectus of the Prospectus or any
amendment or supplement thereto; (b) the suspension of the qualification of
the Shares for offering or sale in any jurisdiction; (c) the institution,
threatening or contemplation of any proceeding for any such purpose; or (d)
any request made by the Commission for amending the Registration Statement,
for amending or supplementing the Prospectus or for additional information.
The Company will use its best efforts to prevent the issuance of any such
stop order and, if any such stop order is issued to obtain the withdrawal
thereof as promptly as possible.
5.4 BLUE SKY QUALIFICATION. The Company will arrange and cooperate
with counsel to the Representatives for the qualification of the Shares for
offering and sale under the securities or blue sky laws of such jurisdictions
as the Representatives may designate and will continue such qualifications in
effect for as long as may be necessary to complete the distribution of the
Shares; provided, however, that in connection therewith the Company shall not
be required to qualify as a foreign corporation or to execute a general
consent to service of process in any jurisdiction.
5.5 POST-EFFECTIVE AMENDMENTS. If, at any time when a prospectus
relating to the Shares is required to be delivered under the Act, any event
occurs as a result of which the Prospectus, as then amended or supplemented,
would include any untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements therein not
misleading, in the light of the circumstances under which they were made, or
if for any other reason it is necessary at any time to amend or supplement
the Prospectus to comply with the Act or the Rules or Regulations, the
Company will promptly notify the Representatives thereof and, subject to
Section 3 hereof, will prepare and file with the Commission, at the Company's
expense, an amendment to the Registration Statement or an amendment or
supplement to the Prospectus that corrects such statement or omission or
effects such compliance.
5.6 DELIVERY OF PROSPECTUSES. The Company will, without charge,
provide (a) to the Representatives and to counsel for the Representatives a
signed copy of the Registration Statement originally filed with respect to
the Shares and each amendment thereto (in each case including exhibits
thereto), (b) to each other Underwriter so requesting in writing, a conformed
copy of such Registration Statement and each amendment thereto (in each case
without exhibits thereto) and (c) so long as a prospectus relating to the
Shares is required to be delivered under the Act, as
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many copies of each Preliminary Prospectus or the Prospectus or any amendment
or supplement thereto as the Representatives may reasonably request.
5.7 SECTION 11(a) FINANCIALS. The Company will, as soon as practicable
but in any event not later than 90 days after the period covered thereby,
make generally available to its security holders and to the Representatives a
consolidated earnings statement of the Company and its subsidiaries that
satisfies the provisions of Section 11(a) of the Act and Rule 158 thereunder
covering a twelve-month period beginning not later than the first day of the
Company's fiscal quarter next following the effective date of the
Registration Statement.
5.8 APPLICATION OF PROCEEDS. The Company will apply the net proceeds
from the sale of the Shares as set forth in the Prospectus and Registration
Statement and will not take any action that would cause it to become an
investment company under the Investment Company Act of 1940, as amended.
5.9 SALES OR PURCHASES OF SECURITIES. The Company will not, directly
or indirectly, without the prior written consent of the Representatives,
offer, sell, grant any option or warrant to purchase or otherwise dispose (or
announce any offer, sale, grant of any option to purchase or other
disposition) of any shares of Common Stock or any securities convertible
into, or exchangeable or exercisable for, shares of Common Stock for a period
of one year after the date hereof, except (a) to the Underwriters pursuant to
this Agreement and (b) options to any person pursuant to and in accordance
with the Company's 1995 Incentive Stock Option Plan, as such plan is in
effect on the date hereof, and provided that (i) such options have an
exercise price equal to the fair market value of the Common Stock, and (ii)
such person has delivered to the Representatives the agreement described in
Section 7.8 of this Agreement. The Company will not, directly or indirectly,
without the prior written consent of the Representatives purchase any Common
Stock or any securities convertible into, or exercisable for, shares of
Common Stock for a period of one year after the date hereof.
5.10 APPLICATION TO NASDAQ SMALLCAP MARKET. The Company will cause the
Common Stock and Warrants to be duly included for quotation on the Nasdaq
SmallCap Market prior to the Closing Date. If requested by the
Representatives, the Company will also cause the Common Stock to be duly
included for listing on the Pacific Stock Exchange. The Company will use its
best efforts to ensure that the Common Stock remains included for quotation
on the Nasdaq SmallCap Market and the Pacific Stock Exchange (if applicable)
following the Closing Date for a period of not less than three years.
5.11 REPORTS TO SHAREHOLDERS. So long as any Common Stock is
outstanding until five years after the Closing Date, the Company will furnish
to the Representatives (a) as soon as available a copy of each report of the
Company mailed to shareholders and filed with the Commission and (b) from
time to time such other information concerning the Company as the
Representatives may reasonably request.
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5.12 DELIVERY OF DOCUMENTS. At or prior to the Closing, the Company
will deliver to the Representatives true and correct copies of the articles
of incorporation of the Company and all amendments thereto, all such copies
to be certified by the Secretary of State of the State of California, a good
standing certificate from the Secretary of State of California, dated no more
than five business days prior to the Closing Date; true and correct copies of
the bylaws of the Company, as amended, certified by the Secretary of the
Company and true and correct copies of the minutes of all meetings of the
directors and shareholders of the Company held prior to the Closing Date
which in any way relate to the subject matter of this Agreement.
5.13 UNDERWRITERS' WARRANT. On or prior to the Closing Date, the
Company shall deliver to the Representatives warrants (the "Underwriter's
Warrants"), at an aggregate purchase price of $100, to purchase Shares equal
to 10% of the Firm Shares sold in the Offering, which Underwriter's Warrants
shall be exercisable for a per Share exercise price equal to 120% of the per
Share public offering price of the Firm Shares.
5.14 COOPERATION WITH REPRESENTATIVES' DUE DILIGENCE. At all times
prior to the Closing Date, the Company will cooperate with the Representatives
in such investigation as the Representatives may make or cause to be made of all
the properties, business and operations of the Company in connection with the
purchase and public offering of the Shares and the Company will make available
to the Representatives in connection therewith such information in its
possession as the Representatives may reasonably request.
5.15 STOCK TRANSFER AGENT. The Company has appointed Corporate Stock
Transfer, Inc., Denver, Colorado, as Transfer Agent for the Common Stock.
The Company will not change or terminate such appointment for a period of
two years from the effective date without first obtaining the written consent
of the Representatives, which consent shall not be unreasonably withheld.
5.16 PUBLICITY. Prior to the Firm Closing Date, or the Option Closing
Date, as the case may be, the Company shall not issue any press release or
other communication directly or indirectly and shall hold no press conference
with respect to the Company, its financial condition, results of operations,
business, properties, assets, liabilities and any of them, or this offering,
without the prior written consent of the Representatives. If at any time
during the 90 day period after the Registration Statement becomes effective,
any rumor, publication or event relating to or affecting the Company shall
occur as a result of which in the opinion of the Representatives the market
price of the Common Stock has been or is likely to be materially affected,
regardless of whether such rumor, publication or event necessitates a
supplement to or amendment of the Prospectus, the Company will, after written
notice from the Representatives, evaluate the propriety of disseminating a
press release or other public statement reasonably acceptable to the
Representatives and their counsel, commenting on such rumor, publication or
event.
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5.17 FORECASTS AND PROJECTIONS. For a period of two years from the
effective date of the Registration Statement, the Company shall provide the
Representatives with routine internal forecasts if any such reports are
prepared by the Company for dissemination to the public.
5.18 KEY MAN INSURANCE; DIRECTOR AND OFFICER LIABILITY INSURANCE. The
Company will maintain for a period of at least five (5) years, Key Man
Insurance on Floyd Hill in the amount of $1,000,000. The Company will also
maintain for a period of at least five (5) years, Director and Officer
Liability insurance in the amount of at least $5,000,000. The Representatives
reserve the right to write the above policies at the next renewal date
thereof providing it can do so on terms no less favorable to the Company.
5.19 COMPANY'S BOARD OF DIRECTORS. The Company will maintain a
professional board of directors that will at all times include at least two
outside directors. The Company shall appoint two individuals recommended by
Representatives to the Company's Board of Directors which recommendation
shall be made by Representatives after the Closing Date.
SECTION 6.
EXPENSES
6.1 OFFERING EXPENSES. The Company will pay upon demand all costs and
expenses incident to the performance of the Company's obligations under this
Agreement, whether or not the transactions contemplated herein are
consummated or this Agreement is terminated pursuant to Section 11 hereof,
including all costs and expenses incident to (a) the printing or other
production of documents with respect to the transactions, including any costs
of printing the Registration Statement originally filed with respect to the
Shares and any amendment thereto, any Preliminary Prospectus and the
Prospectus and any amendment or supplement thereto, this Agreement, the
Agreement Among Underwriters, the Selected Dealer Agreement, and any blue sky
memoranda, (b) all arrangements relating to the delivery to the Underwriters
of copies of the foregoing documents, (c) the fees and disbursements of
counsel, accountants and any other experts or advisors retained by the
Company, (d) preparation, issuance and delivery to the Underwriters of any
certificates evidencing the Common Stock, including transfer agent's and
registrar's fees, (e) the qualification of the Shares under state securities
and blue sky laws, including filing fees and fees and disbursements of
counsel for the Representatives relating thereto, (f) the filing fees of the
Commission and the National Association of Securities Dealers, Inc. relating
to the Shares, (g) any listing fees for the quotation of the Common Stock on
the Nasdaq SmallCap Market, (h) the entire cost of one "tombstone
advertisement" in a national business newspaper and one-half the cost of
placing any additional "tombstone advertisements" in any publications which
may be selected by the Representatives (provided that any such cost in excess
of $5,000 shall require the consent of both the Company and the
Representatives), (i) all other advertising that has been approved in advance
by the Company relating to the offering of the Shares (other than as shall
have been specifically approved in writing by the Representatives to be paid
for by the Underwriters), and (j) road shows conducted by the Company. In
addition to the foregoing, the Company agrees to pay to the Representatives a
non-accountable expense allowance of 3% of the gross amount to be raised from
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the sale of the Shares hereunder, payable at the Closing(s), of which $50,000
has already been paid by the Company in connection with this offering. If
the sale of the Shares provided for herein is not consummated because any
condition to the obligations of the Underwriters set forth in Section 7
(other than Section 7.6) hereof is not satisfied, because this Agreement is
terminated pursuant to Section 11 hereof or because of any failure, refusal
or inability on the part of the Company to perform all obligations and
satisfy all conditions on its part to be performed or satisfied hereunder
other than by reason of a default by any of the Underwriters, the Company
will reimburse the Underwriters severally upon demand for all out-of-pocket
expenses (including counsel fees and disbursements) that shall have been
reasonably incurred by them in connection with the proposed purchase and sale
of the Shares. The Company shall in no event be liable to any of the
Underwriters for the loss of anticipated profits from the transactions
covered by this Agreement.
6.2 INTERIM INDEMNIFICATION. The Company agrees that as an interim
measure during the pendency of any claim, action, investigation, inquiry or
other proceeding described in Section 8.1 hereof, it will reimburse the
Underwriters on a monthly basis for all reasonable legal or other expenses
incurred in connection with investigating or defending any such claim,
action, investigation, inquiry or other proceeding, notwithstanding the
absence of a judicial determination as to the propriety and enforceability of
the Company's obligation to reimburse the Underwriters for such expenses and
the possibility that such payments might later be held to have been improper
by a court of competent jurisdiction. To the extent that any such interim
reimbursement payment is so held to have been improper, the Underwriters
shall promptly return such payment to the Company together with interest,
compounded daily, determined on the basis of the prime rate (or other
commercial lending rate for borrowers of the highest credit standing) listed
from time to time in THE WALL STREET JOURNAL which represents the base rate
on corporate loans posted by a substantial majority of the nation's thirty
(30) largest banks (the "Prime Rate"). Any such interim reimbursement
payments which are not made to the Underwriters within thirty (30) days of a
request for reimbursement shall bear interest at the Prime Rate from the date
of such request.
The Underwriters severally and not jointly agree that, as an interim
measure during the pendency of any claim, action, investigation, inquiry or
other proceeding described in Section 8.2 hereof, they will reimburse the
Company on a monthly basis for all reasonable legal or other expenses
incurred in connection with investigating or defending any such claim,
action, investigation, inquiry or other proceeding, notwithstanding the
absence of a judicial determination as to the propriety and enforceability of
the Underwriters' obligation to reimburse the Company for such expenses and
the possibility that such payments might later be held to have been improper
by a court of competent jurisdiction. To the extent that any such interim
reimbursement payment is so held to have been improper, the Company shall
promptly return such payment to the Underwriters together with interest,
compounded daily, determined on the basis of the Prime Rate. Any such
interim reimbursement payments which are not made to the Company within
thirty (30) days of a request for reimbursement shall bear interest at the
Prime Rate from the date of such request.
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SECTION 7.
CONDITIONS OF THE UNDERWRITERS' OBLIGATIONS
The obligations of the several Underwriters to purchase and pay for the
Firm Shares shall be subject, unless waived by the Representatives in its
sole discretion, to the accuracy of the representations and warranties of the
Company contained herein as of the date hereof and as of the Firm Closing
Date as if made on and as of the Firm Closing Date, to the accuracy of the
statements of the Company's officers made pursuant to the provisions hereof,
to the performance by the Company of its covenants and agreements hereunder
and to the following additional conditions:
7.1 EFFECTIVENESS OF REGISTRATION STATEMENT. If the Registration
Statement or any amendment thereto filed prior to the Firm Closing Date has
not been declared effective as of the time of execution hereof, the
Registration Statement or such amendment shall have been declared effective
not later than 11 a.m., California time, on the date on which the amendment
to the Registration Statement originally filed with respect to the Shares or
to the Registration Statement, as the case may be, containing information
regarding the initial public offering price of the Shares has been filed with
the Commission, or such later time and date as shall have been consented to
by the Representatives; if required, the Prospectus and any amendment or
supplement thereto shall have been filed with the Commission in the manner
and within the time period required by Rule 424(b) under the Act; no stop
order suspending the effectiveness of the Registration Statement or any
amendment thereto shall have been issued, and no proceedings for that purpose
shall have been instituted or threatened or, to the knowledge of the Company
or the Representatives, shall be contemplated by the Commission; and the
Company shall have complied with any request of the Commission for additional
information (to be included in the Registration Statement or the Prospectus
or otherwise) to the reasonable satisfaction of counsel for the underwriters.
7.2 OPINION OF COUNSEL. The Representatives shall have received an
opinion, dated the Firm Closing Date, of Carr, McClellan, Ingersoll, Thompson
& Horn, counsel for the Company, to the effect that:
(a) the Company has been duly organized and is validly existing as
a corporation in good standing under the laws of the State of California, and
duly qualified to transact business as a foreign corporation and is in good
standing under the laws of all other jurisdictions where the ownership or
leasing of its properties or the conduct of its business requires such
qualification, except where the failure to be so qualified would not have a
material adverse effect on the Company;
(b) the Company has the corporate power to own or lease its
properties; to conduct its business as described in the Registration
Statement and the Prospectus; to enter into this Agreement and to carry out
all of the terms and provisions hereof to be carried out by it;
(c) the Company has an authorized capital stock as set forth under
the heading "CAPITALIZATION" in the Prospectus; effective upon the Closing
Date all of the
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Company's shares have been duly authorized and validly issued and are fully
paid and nonassessable; the shares have been duly authorized by all necessary
corporate action of the Company, and, when issued and delivered to and paid
for pursuant to this Agreement, will be validly issued, fully paid and
nonassessable; the shares have been duly authorized for quotation on the
Nasdaq SmallCap Market; no holders of outstanding shares of capital stock of
the Company are entitled as such to any preemptive or other rights to
subscribe for any of the Shares; and no holders of securities of the Company
are entitled to have such securities registered under the Registration
Statement;
(d) the execution and delivery of this Agreement have been duly
authorized by all necessary corporate action of the Company and this
Agreement is a valid and binding obligation of the Company except as rights
to indemnity and contribution thereunder may be limited by applicable federal
or state securities laws and except as such enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium or similar laws affecting
the enforceability of creditors' rights generally and subject to general
principles of equity;
(e) no legal or governmental proceedings are pending to which the
Company is a party or to which the property of the Company is subject that
are required to be described in the Registration Statement or the Prospectus
and are not described therein, and, to the best knowledge of such counsel, no
such proceedings have been threatened against the Company or with respect to
any of its properties that can reasonably be expected to, or, if determined
adversely to the Company, would, in any individual case or in the aggregate,
result in any material adverse change in the business, financial condition or
results of operations of the Company;
(f) no contract or other document is required to be described in
the Registration Statement or the Prospectus or to be filed as an exhibit to
the Registration Statement that is not described therein or filed as required;
(g) the issuance, offering and sale of the Shares by the Company
pursuant to this Agreement, the compliance by the Company with the other
provisions of this Agreement and the consummation of the other transactions
herein contemplated do not require the consent, approval, authorization,
registration or qualification of or with any governmental authority, except
such as have been obtained and such as may be required under state securities
or blue sky laws, or conflict with or result in a breach or violation of any
of the terms and provisions of, or constitute a default under, any indenture,
mortgage, deed of trust, lease or other agreement or instrument, known to
such counsel, to which the Company is a party or by which the Company or any
of its properties are bound, or the Articles of Incorporation or Bylaws of
the Company, or any statute or any judgment, decree, order, rule or
regulation of any court or other governmental authority or any arbitrator
known to such counsel and applicable to the Company;
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The Representatives shall have received an opinion, dated the Firm
Closing Date, of Gary A. Agron, Esq., counsel for the Company, to the effect
that:
(a) the Company has an authorized capital stock as set forth under
the heading "CAPITALIZATION" in the Prospectus; effective upon the Closing
Date all of the Company's shares have been duly authorized and validly issued
and are fully paid and nonassessable; the shares have been duly authorized by
all necessary corporate action of the Company, and, when issued and delivered
to and paid for pursuant to this Agreement, will be validly issued, fully
paid and nonassessable; the shares have been duly authorized for quotation on
the Nasdaq SmallCap Market; no holders of outstanding shares of capital stock
of the Company are entitled as such to any preemptive or other rights to
subscribe for any of the Shares; and no holders of securities of the Company
are entitled to have such securities registered under the Registration
Statement;
(b) the capital stock of the Company conforms, as to legal
matters, to the statements set forth under the heading "DESCRIPTION OF
SECURITIES" in the Prospectus in all material respects;
(c) no legal or governmental proceedings are pending to which the
Company is a party or to which the property of the Company is subject that
are required to be described in the Registration Statement or the Prospectus
and are not described therein, and, to the best knowledge of such counsel, no
such proceedings have been threatened against the Company or with respect to
any of its properties that can reasonably be expected to, or, if determined
adversely to the Company, would, in any individual case or in the aggregate,
result in any material adverse change in the business, financial condition or
results of operations of the Company;
(d) no contract or other document is required to be described in
the Registration Statement or the Prospectus or to be filed as an exhibit to
the Registration Statement that is not described therein or filed as required;
(e) the issuance, offering and sale of the Shares by the Company
pursuant to this Agreement, the compliance by the Company with the other
provisions of this Agreement and the consummation of the other transactions
herein contemplated do not require the consent, approval, authorization,
registration or qualification of or with any governmental authority, except
such as have been obtained and such as may be required under state securities
or blue sky laws, or conflict with or result in a breach or violation of any
of the terms and provisions of, or constitute a default under, any indenture,
mortgage, deed of trust, lease or other agreement or instrument, known to
such counsel, to which the Company is a party or by which the Company or any
of its properties are bound, or the Articles of Incorporation or Bylaws of
the Company, or any statute or any judgment, decree, order, rule or
regulation of any court or other governmental authority or any arbitrator
known to such counsel and applicable to the Company;
(f) the Registration Statement is effective under the Act; any
required filing of the Prospectus pursuant to Rule 424(b) has been made in
the manner and within the time
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period required by Rule 424(b); and no stop order suspending the effectiveness
of the Registration Statement or any amendment thereto has been issued by the
Commission, and no proceedings for that purpose have been instituted or, to the
knowledge of such counsel, are threatened or contemplated by the Commission;
(g) the Registration Statement and the Prospectus and each amendment
or supplement thereto (in each case, other than the financial statements and
other financial and statistical information contained therein, as to which such
counsel need express no opinion) comply as to form in all material respects with
the applicable requirements of the Act and the Rules and Regulations;
(h) the Company is not required, and, if the Company uses the
proceeds of the sale of the Firm Shares and the Option Shares solely as
described in the Prospectus, will not be required as a result of the sale of
such Shares to be registered as an investment company within the meaning of
the Investment Company Act of 1940, as amended; and
(i) such counsel shall also state that they have no reason to
believe that the Registration Statement, as of its effective date, contained
any untrue statement of a material fact or omitted to state any material fact
required to be stated therein or necessary to make the statements therein not
misleading or that the Prospectus, as of its date or the date of such
opinion, included or includes any untrue statement of a material fact or
omitted or omits to state a material fact necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading; provided that in each case such counsel need not express any
opinion as to the financial statements and other financial and statistical
information contained therein.
In rendering any such opinion, such counsel may rely as to matters of fact,
to the extent such counsel deems proper, on certificates of responsible
officers of the Company and public officials. The foregoing opinion may be
limited to the laws of the United States and the General Corporation Law of
the State of California. References to the Registration Statement and the
Prospectus in this Section 7.2 shall include any amendment or supplement
thereto at the date of such opinion. Such counsel shall permit Luce,
Forward, Hamilton & Scripps LLP to rely upon such opinion in rendering its
opinion in Section 7.3.
7.3 REVIEW BY AND OPINION OF REPRESENTATIVES' COUNSEL. The
Representatives shall have received an opinion, dated as of the Firm Closing
Date, of Luce, Forward, Hamilton & Scripps LLP, counsel for the
Representatives, with respect to certain matters as the Representatives may
reasonably require, and the Company shall have furnished to such counsel such
documents and certificates as they may reasonably request for the purpose of
enabling them to opine upon such matters.
7.4 ACCOUNTANT'S LETTER. The Representatives shall have received from
Semple & Cooper a letter or letters dated, respectively, the date hereof and
the Closing Date, in form and substance satisfactory to the Representatives,
to the effect that:
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(a) they are independent accountants with respect to the Company
within the meaning of the Act and the Rules and Regulations;
(b) in their opinion, the financial statements audited by them and
included in the Registration Statement and the Prospectus comply in form in
all material respects with the applicable accounting requirements of the Act
and the related published rules and regulations;
(c) on the basis of a reading of the audited financial statements
of the Company, for the years ended June 30, 1995 and June 30, 1996, and the
unaudited financial statements of the Company for the period ended March 31,
1997, and the notes thereto, carrying out certain specified procedures (which
do not constitute an audit made in accordance with generally accepted
auditing standards) that would not necessarily reveal matters of significance
with respect to the comments set forth in this paragraph, a reading of the
minute books of the shareholders, the board of directors and any committees
thereof of the Company, and inquiries of certain officials of the Company who
have responsibility for financial and accounting matters, nothing came to
their attention that caused them to believe that:
(i) the unaudited condensed financial statements of the
Company included in the Registration Statement and the Prospectus do not
comply in form in all material respects with the applicable accounting
requirements of the Act and the related published rules and regulations
thereunder or are not in conformity with generally accepted accounting
principles applied on a basis substantially consistent with that of the
audited financial statements included in the Registration Statement and the
Prospectus; and
(ii) at a specific date not more than five business days
prior to the date of such letter, there were any changes in the capital stock
or long-term debt of the Company or any decreases in net current assets or
stockholders' equity of the Company, in each case compared with amounts shown
on the March 31, 1997 balance sheet included in the Registration Statement
and the Prospectus, or for the period from March 31, 1997 to such specified
date there were any decreases, as compared with the corresponding period in
the preceding year, in net sales, gross profit, selling, general and
administrative expenses, employee plans and bonuses, income (loss) from
operations, interest expenses, income (loss) before income taxes, provision
(benefit) for income taxes, net income (loss) or net income (loss) per share
of the Company, except in all instances for changes, decreases or increases
set forth in such letter; and
(d) they have carried out certain specified procedures, not
constituting an audit, with respect to certain amounts, percentages and
financial information that are derived from the general accounting records of
the Company and are included in the Registration Statement and the
Prospectus, and have compared such amounts, percentages and financial
information with such records of the Company and with information derived
from such records and have found them to be in agreement, excluding any
questions of legal interpretation.
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In the event that the letters referred to above set forth any such
changes, decreases or increases, it shall be a further condition to the
obligations of the Underwriters that such letters shall be accompanied by a
written explanation of the Company as to the significance thereof, unless the
Representatives deems such explanation unnecessary, and such changes,
decreases or increases do not, in the sole judgment of the Representatives,
make it impractical or inadvisable to proceed with the purchase and delivery
of the Shares as contemplated by the Registration Statement, as amended as of
the date hereof.
References to the Registration Statement and the Prospectus in this
Section 7.4 with respect to either letter referred to above shall include any
amendment or supplement thereto at the date of such letter.
7.5 OFFICER'S CERTIFICATE. The Representatives shall have received a
certificate, dated the Firm Closing Date, of the president and the principal
financial or accounting officer of the Company to the effect that:
(a) the representations and warranties of the Company in this
Agreement are true and correct as if made on and as of the Firm Closing Date;
the Registration Statement, as amended as of the Firm Closing Date, does not
include any untrue statement of a material fact or omit to state any material
fact necessary to make the statements therein not misleading, in light of the
circumstances in which they were made and the Prospectus, as amended or
supplemented as of the Firm Closing Date, does not include any untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements therein not misleading, in the light of the
circumstances under which they were made; and the Company has in all material
respects performed all covenants and agreements and satisfied all conditions
on its part to be performed or satisfied at or prior to the Firm Closing Date;
(b) no stop order suspending the effectiveness of the Registration
Statement or any amendment thereto has been issued, and no proceedings for
that purpose have been instituted or threatened or, to the best of their
knowledge, are contemplated by the Commission; and
(c) subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, the Company has not
sustained any material loss or interference with its business or properties
from fire, flood, hurricane, accident or other calamity, whether or not
covered by insurance, or from any labor dispute or any legal or governmental
proceeding, and there has not been any material adverse change, or any
development involving a prospective material adverse change, in the condition
(financial or otherwise), business prospects, net worth or results of
operations of the Company, except in each case as described in or
contemplated by the Prospectus (exclusive of any amendment or supplement
thereto).
7.6 NASD REVIEW. The NASD, upon review of the terms of the public
offering of the Firm Shares and Option Shares, shall not have objected to the
Underwriters' participation in such offering.
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7.7 LOCKUPS. The Representatives shall have received from each
officer, director and person who owns more than five percent (5%) of the
Company's Common Stock, or securities convertible into Common Stock, an
agreement to the effect that such person will not, directly or indirectly,
without the prior written consent of the Representatives, offer, sell or
grant any option to purchase or otherwise dispose (or announce any offer,
sale, grant of an option to purchase or other disposition) of any shares of
Common Stock or any securities convertible into, or exchangeable for, shares
of Common Stock for a period of twelve months.
7.8 DUE DILIGENCE EXAMINATION. The counsel to the
Representatives and other persons retained by the Representatives to conduct
a due diligence investigation with respect to the offering, shall be
reasonably satisfied with the results of their respective due diligence
investigations.
7.9 BLUE SKY QUALIFICATION. The Shares shall be qualified in such
states as the Representatives may reasonably request pursuant to Section 5.4,
and each such qualification shall be in effect and not subject to any stop
order or other proceeding on the Closing Date or Option Closing Date, as the
case may be.
7.10 OTHER DOCUMENTS. On or before the Firm Closing Date, the
Representatives and counsel for the Representatives shall have received such
further certificates, documents or other information as they may have
reasonably requested from the Company.
All opinions, certificates, letters and documents delivered pursuant to
this Agreement will comply with the provisions hereof only if they are
reasonably satisfactory in all material respects to the Representatives. The
Company shall furnish to the Representatives such conformed copies of such
opinions, certificates, letters and documents in such quantities as the
Representatives and the counsel to the Representatives shall reasonably
request.
The respective obligations of the several Underwriters to purchase and
pay for any Option Shares shall be subject, in the Representatives'
discretion, to each of the foregoing conditions to purchase the Firm Shares,
except that all references to the Firm Shares and the Firm Closing Date shall
be deemed to refer to such Option Shares and the related Option Closing Date,
respectively.
SECTION 8.
INDEMNIFICATION AND CONTRIBUTION
8.1 INDEMNIFICATION BY COMPANY. The Company agrees to indemnify
and hold harmless each Underwriter and each person, if any, who controls any
Underwriter within the meaning of Section 15 of the Act or Section 20 of the
Securities Exchange Act of 1934 (the "Exchange Act") against any losses,
claims, damages or liabilities, joint or several, to which such Underwriter
or such controlling person may become subject under the Act, the Exchange Act
or otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon:
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(a) any untrue statement or alleged untrue statement made by
the Company in Section 2 of this Agreement;
(b) any untrue statement or alleged untrue statement of any
material fact contained in (i) the Registration Statement or any amendment
thereto or any Preliminary Prospectus or the Prospectus or any amendment or
supplement thereto, or (ii) any application or other document, or any
amendment or supplement thereto, executed by the Company and based upon
written information furnished by or on behalf of the Company filed in any
jurisdiction in order to qualify the Shares under the securities or blue sky
laws thereof or filed with the Commission or any securities association or
securities exchange (each an "Application"); or
(c) the omission or alleged omission to state in the
Registration Statement or any amendment thereto, any Preliminary Prospectus
or the Prospectus or any amendment or supplement thereto, or any Application
a material fact required to be stated therein or necessary to make the
statements therein not misleading in light of the circumstances in which they
are made, and will reimburse, as incurred, each Underwriter and each such
controlling person for any legal or other expenses reasonably incurred by
such Underwriter or such controlling person in connection with investigating,
defending against or appearing as a third-party witness in connection with
any such loss, claim, damage, liability or action; provided, however, that
the Company will not be liable in any such case to the extent that any such
loss, claim, damage or liability arises out of or is based upon any untrue
statement or alleged untrue statement or omission or alleged omission made in
such registration statement or any amendment thereto, any Preliminary
Prospectus or the Prospectus or any amendment or supplement thereto, or any
Application in reliance upon and in conformity with written information
furnished to the Company by any Underwriter through the Representatives
specifically for use therein; and provided further, that the Company will not
be liable to any Underwriter or any person controlling such Underwriter with
respect to any such untrue statement or omission made in any Preliminary
Prospectus that is corrected in the Prospectus (or any amendment or
supplement thereto) if the person asserting any such loss, claim, damage or
liability purchased Shares from such Underwriter but was not sent or given a
copy of the Prospectus (as amended or supplemented), other than the documents
incorporated by reference therein at or prior to the written confirmation of
the sale of such Shares to such person in any case where such delivery of the
Prospectus (as amended or supplemented) is required by the Act, unless such
failure to deliver the Prospectus (as amended or supplemented) was a result
of noncompliance by the Company with Section 5.5 of this Agreement. This
indemnity agreement will be in addition to any liability which the Company
may otherwise have. The Company will not, without the prior written consent
of each Underwriter, settle or compromise or consent to the entry of any
judgment in any pending or threatened claim, action, suit or proceeding in
respect of which indemnification may be sought hereunder (whether or not such
Underwriter or any person who controls such Underwriter within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act is a party to such
claim, action, suit or proceeding), unless such settlement, compromise or
consent includes an unconditional release of such Underwriter and each such
controlling person from all liability arising out of such claim, action, suit
or proceeding.
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8.2 INDEMNIFICATION BY UNDERWRITERS. Each Underwriter will
indemnify and hold harmless the Company, each of its directors, each of its
officers who signed the Registration Statement and each person, if any, who
controls the Company within the meaning of Section 15 of the Act or Section
20 of the Exchange Act against any losses, claims, damages or liabilities to
which the Company, any such director or officer of the Company or any such
controlling person of the Company may become subject under the Act, the
Exchange Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon
(a) any untrue statement or alleged untrue statement of any material fact
contained in the Registration Statement or any amendment thereto, any
Preliminary Prospectus or the Prospectus or any amendment or supplement
thereto, or any Application or (b) the omission or the alleged omission to
state therein a material fact required to be stated in the Registration
Statement or any amendment thereto, any Preliminary Prospectus or the
Prospectus or any amendment or supplement thereto, or any Application or
necessary to make the statements therein not misleading in light of the
circumstances in which they are made, in each case to the extent, but only to
the extent, that such untrue statement or alleged untrue statement or
omission or alleged omission was made in reliance upon and in conformity with
written information furnished to the Company by any Underwriter through the
Representatives specifically for use therein; and, subject to the limitation
set forth immediately preceding this clause, will reimburse, as incurred, any
legal or other expenses reasonably incurred by the Company or any director,
officer or controlling person of the Company in connection with investigation
or defending against or appearing as a third-party witness in connection with
any such loss, claim, damage, liability or any action in respect thereof.
This indemnity agreement will be in addition to any liability which such
Underwriter may otherwise have. No Underwriter will, without the prior
written consent of the Company, settle or compromise or consent to the entry
of any judgment in any pending or threatened claim, action, suit or
proceeding in respect of which indemnification may be sought hereunder
(whether or not the Company, any of its directors, any of its officers who
signed the Registration Statement or any person who controls the Company
within the meaning of Section 15 of the Act or Section 20 of the Exchange Act
is a party to such claim, action, suit or proceeding), unless such
settlement, compromise or consent includes an unconditional release of the
Company and each such director, officer and controlling person from all
liability arising out of such claim, action, suit or proceeding.
8.3 NOTICE OF DEFENSE. Promptly after receipt by an indemnified
party under this Section 8 of notice of the commencement of any action, such
indemnified party will, if a claim in respect thereof is to be made against
the indemnifying party under this Section 8, notify the indemnifying party of
the commencement thereof; but the omission so to notify the indemnifying
party will not relieve it from any liability which it may have to any
indemnified party otherwise than under this Section 8. In case any such
action is brought against any indemnified party, and it notifies the
indemnifying party of the commencement thereof, the indemnifying party will
be entitled to participate therein and, to the extent that it may wish,
jointly with any other indemnifying party and the indemnified party shall
have reasonably concluded that there may be one or more legal defenses
available to it and/or other indemnified parties which are different from or
additional to those available to the indemnifying party, the indemnifying
party shall not have the right to direct the defense of such action on behalf
of such indemnified party or parties and such indemnified party or
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parties shall have the right to select separate counsel to defend such action
on behalf of such indemnified party or parties. After notice from the
indemnifying party to such indemnified party of its election so to assume the
defense thereof and approval by such indemnified party of counsel appointed
to defend such action, the indemnifying party will not be liable to such
indemnified party (which may not be unreasonably withheld or delayed) under
this Section 8 for any legal or other expenses, other than reasonable costs
of investigation, subsequently incurred by such indemnified party in
connection with the defense thereof, unless (a) the indemnified party shall
have employed separate counsel in accordance with the proviso to the next
preceding sentence (it being understood, however, that in connection with
such action the indemnifying party shall not be liable for the expenses of
more than one separate counsel at any one time in any one action or separate
but substantially similar actions in the same jurisdiction arising out of the
same general allegations or circumstances, designated by the Representatives
in the case of Section 8.1, representing the indemnified parties under such
Section 8.1 who are parties to such action or actions) or (b) the
indemnifying party has authorized the employment of counsel for the
indemnified party at the expense of the indemnifying party. After such
notice from the indemnifying party to such indemnified party, the
indemnifying party will not be liable for the costs and expenses of any
settlement of such action effected by such indemnified party without the
consent of the indemnifying party, unless such indemnified party waived its
rights under this Section 8 in which case the indemnified party may effect
such a settlement without such consent.
8.4 CONTRIBUTION. In circumstances in which the indemnity
agreement provided for in the preceding paragraphs of this Section 8 is
unavailable or insufficient to hold harmless an indemnified party in respect
of any losses, claims, damages or liability (or actions in respect thereof),
each indemnifying party, in order to provide for just and equitable
contribution, shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or liabilities
(or actions in respect thereof) in such proportion as is appropriate to
reflect (a) the relative benefits received by the indemnifying party or
parties on the one hand and the indemnified party on the other from the
offering of the Shares or (b) if the allocation provided by the foregoing
clause (a) is not permitted by applicable law, not only such relative
benefits but also the relative fault of the indemnifying party or parties on
the one hand and the indemnified party on the other in connection with the
statements or omissions or alleged statements or omissions that resulted in
such losses, claims, damages or liability (or action in respect thereof).
The relative benefits received by the Company on the one hand and the
Underwriters on the other shall be deemed to be in the same proportion as the
total proceeds from the offering (after deducting expenses) received by the
Company bear to the total underwriting discounts and commissions received by
the Underwriters. The relative fault of the parties shall be determined by
reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact relates to information supplied by the Company or the
Underwriters, the parties' relative intents, knowledge, access to information
and opportunity to correct or prevent such statement or omission, and any
other equitable considerations appropriate in the circumstances. The Company
and the Underwriters agree that it would not be equitable if the amount of
such contribution were determined by pro rata or per capita allocation (even
if the Underwriters were treated as one entity for such purpose) or by any
other method of allocation that does not take into account the equitable
25
<PAGE>
consideration referred to in the first sentence of this Section 8.4.
Notwithstanding any other provision of this Section 8.4, no Underwriter shall
be obligated to make contributions hereunder that in the aggregate exceed the
underwriter discount on the Shares purchased by such Underwriter under this
Agreement, less the aggregate amount of any damages that such Underwriter has
otherwise been required to pay in respect of the same or any substantially
similar claim, and no person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Act) shall be entitled to contribution
from any person who was not guilty of such fraudulent misrepresentation. The
Underwriters' obligations to contribute hereunder are several in proportion
to their respective underwriting obligations and not joint, and contributions
among Underwriters shall be governed by the provisions of the Agreement Among
Underwriters. For purposes of this Section 8.4, each person, if any, who
controls an Underwriter within the meaning of Section 15 of the Act or
Section 20 of the Exchange Act shall have the same rights to contribution as
such Underwriter, and each director of the Company, each officer of the
Company who signed the Registration Statement and each person, if any, who
controls the Company within the meaning of Section 15 of the Act or Section
20 of the Exchange Act, shall have the same right to contribution as the
Company as the case may be.
SECTION 9.
DEFAULT OF UNDERWRITERS
If one or more Underwriters default in their obligations to purchase
Firm Shares, or Option Shares hereunder and the aggregate number of such
Shares that such defaulting Underwriter or Underwriters agreed but failed to
purchase is ten percent or less of the aggregate number of Firm Shares or
Option Shares to be purchased by all of the Underwriters at such time
hereunder, the other Underwriters may make arrangements satisfactory to the
Representatives for the purchase of such Shares by other persons (who may
include one or more of the non-defaulting Underwriters, including the
Representatives), but if no such arrangements are made by the Firm Closing
Date or the related Option Closing Date, as the case may be, the other
Underwriters shall be obligated severally in proportion to their respective
commitments hereunder to purchase the Firm Shares, or Option Shares that such
defaulting Underwriter or Underwriters agreed but failed to purchase. In the
event of any default by one or more Underwriters as described in this Section
9, the Representatives shall have the right to postpone the Firm Closing Date
or the Option Closing Date, as the case may be, established as provided in
Section 3 hereof for not more than seven business days in order that any
necessary changes may be made in the arrangements or documents for the
purpose and delivery of the Firm Shares or Option Shares, as the case may be.
As used in this Agreement, the term "Underwriter" includes any persons
substituted for an Underwriter under this Section 9. Nothing herein shall
relieve any defaulting Underwriter from liability for its default.
26
<PAGE>
SECTION 10.
SURVIVAL
The respective representations, warranties, agreements, covenants,
indemnities and other statements of the Company, its officers and directors
and the several Underwriters set forth in this Agreement or made by or on
behalf of them, respectively, pursuant to this Agreement shall remain in full
force and effect, regardless of (a) any investigation made by or on behalf of
the Company, any of its officers or directors, any Underwriter or any
controlling person referred to in Section 8 hereof and (b) delivery of and
payment for the Shares. The respective agreements, covenants, indemnities
and other statements set forth in Sections 5 and 8 hereof shall remain in
full force and effect, regardless of any termination or cancellation this
Agreement.
SECTION 11.
TERMINATION
11.1 BY REPRESENTATIVES. This Agreement may be terminated with
respect to the Firm Shares or any Option Shares in the sole discretion of the
Representatives by notice to the Company given prior to the Firm Closing Date
or the related Option Closing Date, respectively, in the event that the
Company shall have failed, refused or been unable to perform all obligations
and satisfy all conditions on its part to be performed or satisfied hereunder
at or prior thereto or, if at or prior to the Firm Closing date or such
Option Closing Date, respectively:
(a) the Company shall have sustained any material loss or
interference with its business or properties from fire, flood, hurricane,
accident or other calamity, whether or not covered by insurance, or from any
labor dispute or any legal or governmental proceeding or there shall have
been any material adverse change, or any development involving a prospective
material adverse change (including financial or otherwise), in the business
prospects, net worth or results of operations of the Company, except in each
case as described in or contemplated by the Prospectus (exclusive of any
amendment or supplement thereto);
(b) trading in the Common Stock shall have been suspended by
the Commission or the National Association of Securities Dealers Automated
Quotation SmallCap Market or trading in securities generally on the New York
Stock Exchange or the American Stock Exchange shall have been suspended or
minimum or maximum prices shall have been established on any such exchange or
market system;
(c) a banking moratorium shall have been declared by New
York, California, or United States authorities; or
(d) there shall have been (i) an outbreak or escalation of
hostilities between the United States and any foreign power, (ii) an outbreak
or escalation of any other insurrection or armed conflict involving the
United States or (iii) any other calamity or crisis having an effect on the
financial markets that, in the reasonable judgment of the Representatives,
makes it
27
<PAGE>
impracticable or inadvisable to proceed with the public offering or the
delivery of the Shares as contemplated by the Registration Statement, as
amended as of the date hereof.
11.2 EFFECT OF TERMINATION HEREUNDER. Termination of this
Agreement pursuant to this Section 11 shall be without liability of any party
to any other party, except as provided in Section 10 hereof.
SECTION 12.
INFORMATION SUPPLIED BY UNDERWRITERS
The statements set forth in the last paragraph on the front cover page
and under the heading "Underwriting" in any Preliminary Prospectus or the
Prospectus, to the extent such statements relate to the Underwriters
constitute the only information furnished by any Underwriter through the
Representatives to the Company for the purposes of Section 8 and 10 hereof.
The Underwriters represent and warrant to the Company that such statements,
to such extent, are correct as of the date hereof and at each Closing Date.
SECTION 13.
NOTICES
All communications hereunder shall be in writing and, if sent to any of
the Underwriters, shall be mailed (certified or registered mail, postage
prepaid, return receipt requested) or delivered or sent by facsimile
transmission and confirmed in writing to Spelman & Co., Inc., 2355 Northside
Drive, Suite 200, San Diego, California 92108, Attention: Mr. Jason Rogers
(with a copy to Dennis J. Doucette, Esq., Luce, Forward, Hamilton & Scripps
LLP, 600 West Broadway, Suite 2600, San Diego, CA 92101), if sent to the
Company, shall be mailed (certified or registered mail, postage prepaid,
return receipt requested), delivered or sent by facsimile transmission and
confirmed in writing to the Company at 550 Monterey Highway, Morgan Hill,
California 95037 Attention: Floyd Hill, CEO, (with a copy to Gary A. Agron,
Esq., Law Offices of Gary A. Agron, 5445 DTC Parkway, Suite 520, Englewood,
Colorado 80111). Notices shall be effective if mailed, 48 hours after
deposit in the mail properly addressed, sent by facsimile, upon receipt and
in any other instance, when delivered.
SECTION 14.
SUCCESSORS
This Agreement shall inure to the benefit of and shall be binding upon
the several Underwriters, the Company and their respective successors and
legal representatives, and nothing expressed or mentioned in this Agreement
is intended or shall be construed to give any other person any legal or
equitable right, remedy or claim under or in respect of this Agreement, or
any provisions herein contained, this Agreement and all conditions and
provisions hereof being intended to be and being for the sole and exclusive
benefit of such persons and for the benefit of no other person except that
(a) the indemnities of the Company contained in Section 8 of this Agreement
shall also be for the benefit of any person or persons who control any
Underwriter within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act and (b) the indemnities of the Underwriters contained
28
<PAGE>
in Section 8 of this Agreement shall also be for the benefit of the directors
of the Company, the officers of the Company who have signed the Registration
Statement and any person or persons who control the Company within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act. No
purchaser of Shares from any Underwriter shall be deemed a successor because
of such purchase.
SECTION 15.
APPLICABLE LAW
The validity and interpretation of this Agreement, and the terms and
conditions set forth herein, shall be governed by and construed in accordance
with the laws of the State of California without giving effect to any
provisions relating to conflicts of laws.
SECTION 16.
COUNTERPARTS
This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
If the foregoing correctly sets forth our understanding, please indicate
your acceptance thereof in the space provided below for that purpose,
whereupon this letter shall constitute an agreement binding the Company, and
each of the several Underwriters.
Very truly yours,
ORGANIC FOOD PRODUCTS
By:
---------------------------------
Floyd Hill
Chief Executive Officer
The foregoing Agreement is hereby
confirmed and accepted as of the
date first above written.
Sentra Securities Corporation
Spelman & Co., Inc.
(As Representatives of the several
Underwriters named in Schedule 1 hereto)
By:
--------------------------------------
Richard P. Woltman, President
<PAGE>
SCHEDULE 1
UNDERWRITERS
Underwriter Number of Firm Shares
- ----------- to be purchased
---------------
Sentra Securities Corporation
Spelman & Co., Inc.
Total
---------------
<PAGE>
ORGANIC FOOD PRODUCTS
1,300,000 Shares
SELECTED DEALER AGREEMENT
__________________, 1997
Dear Sirs:
Sentra Securities Corporation, a California corporation, and Spelman &
Co., Inc., a California corporation, and the other Underwriters named in the
Prospectus relating to the above shares (the "Underwriters"), acting through
us as Representatives, is severally offering for sale an aggregate of
1,300,000 Shares (the "Firm Shares") of common stock ("Common Stock") of
Organic Food Products (the "Company") at a price of $4.00 per Share. In
addition, the several Underwriters have been granted an option to purchase
from the Company up to an additional 180,000 Shares (the "Option Shares") to
cover over-allotments in connection with the sale of the Firm Shares. The
Firm Shares and any Option Shares purchased are herein called the "Shares".
The Shares and the terms under which they are to be offered for sale by the
several Underwriters are more particularly described in the Prospectus.
The Underwriters are offering the Shares pursuant to a Registration
Statement (the "Registration Statement") under the Securities Act of 1933, as
amended, subject to the terms of (a) their Underwriting Agreement with the
Company, (b) this Agreement, and (c) the Representatives' instructions which
may be forwarded to the Selected Dealers from time to time. This invitation
is made by the Representatives only if the Shares may be lawfully offered by
dealers in your state. The terms and conditions of this invitation are as
follows:
1. OFFER TO SELECTED DEALERS. The Representatives are hereby soliciting
offers to buy, upon the terms and conditions hereof, a portion of the Shares
from Selected Dealers who are to act as principal. Shares are to be offered to
the public at a price of $4.00 per Share (the "Offering Price"). Selected
Dealers who are members of the National Association of Securities Dealers, Inc.
(the "NASD") will be allowed, on all Shares sold by them, a concession of
$______ payable as hereinafter provided. Selected Dealers may reallow other
dealers who are members of the NASD a portion of that concession up to the
amount of $_____ per Share with respect to Shares sold by or through them. No
NASD member may reallow commissions to any non-member broker-dealer including
foreign broker-dealers registered pursuant to the Securities Exchange Act of
1934. This offer is solicited subject to the Company's issuance and delivery of
certificates and other documents evidencing its Shares and the acceptance
thereof by the Representatives, to the approval of legal matters by counsel, and
to the terms and conditions set forth herein.
2. REVOCATION OF OFFER. The Selected Dealer's offer to purchase, if
made prior to the effective date of the Registration Statement, may be
revoked in whole or in part without obligation
<PAGE>
or commitment of any kind by it any time prior to acceptance and no offer may
be accepted by the Representatives and no sale can be made until after the
Registration Statement covering the Shares has become effective with the
Securities and Exchange Commission. Subject to the foregoing, upon execution
by the Selected Dealer of the Offer to Purchase below and the return of same
to the Representatives, the Selected Dealer shall be deemed to have offered
to purchase the number of Shares set forth in its offer on the basis set
forth in Section 1 above. Any oral offer to purchase made by the Selected
Dealer shall be deemed subject to this Agreement and shall be confirmed by
the Representatives by the subsequent execution and return of this Agreement.
Any oral notice by the Representatives of acceptance of the Selected
Dealer's offer shall be followed by written or telegraphic confirmation
preceded or accompanied by a copy of the Prospectus. If a contractual
commitment arises hereunder, all the terms of this Selected Dealer Agreement
shall be applicable. The Representatives may also make available to the
Selected Dealer an allotment to purchase Shares, but such allotment shall be
subject to modification or termination upon notice from the Representatives
any time prior to an exchange of confirmations reflecting completed
transactions. All references hereafter in this Agreement to the purchase and
sale of Shares assume and are applicable only if contractual commitments to
purchase are completed in accordance with the foregoing.
3. SELECTED DEALER SALES. Any Shares purchased by a Selected Dealer
under the terms of this Agreement may be immediately re-offered to the public
at the Offering Price in accordance with the terms of the offering thereof
set forth herein and in the Prospectus, subject to the securities or blue sky
laws of the various states or other jurisdictions. Shares shall not be
offered or sold by the Selected Dealers below the Offering Price. The
Selected Dealer agrees to advise the Representatives, upon request, of any
Shares purchased by it remaining unsold and, the Representatives have the
right to purchase all or a portion of such Shares, at the Public Offering
Price less the selling concession or such part thereof as the Representatives
shall determine.
4. PAYMENT FOR SHARES. Payment for Shares which the Selected Dealer
purchases hereunder shall be made by the Selected Dealer on or before three
(3) business days after the date of each confirmation by certified or bank
cashier's check payable to the Representatives. Certificates for the
securities shall be delivered as soon as practicable after delivery
instructions are received by the Representatives.
5. OPEN MARKET TRANSACTIONS; STABILIZATION.
5.1 For the purpose of stabilizing the market in the Shares, the
Representatives have been authorized to make purchases and sales of the
Company's Shares in the open market or otherwise, and, in arranging for sales,
to overallot. If, in connection with such stabilization, the Representatives
contract for or purchase in the open market any Shares sold to the Selected
Dealer hereunder and not effectively placed by the Selected Dealer, the
Representatives may charge the Selected Dealer for the accounts of the several
Underwriters an amount equal to the Selected Dealer concession on such Shares,
together with any applicable transfer taxes, and the Selected Dealer
2
<PAGE>
agrees to pay such amount to the Representatives on demand. Certificates for
Shares delivered on such repurchases need not be the identical certificates
originally purchased.
5.2 The Selected Dealer will not, until advised by the
Representatives that the entire offering has been distributed and closed, bid
for or purchase Shares in the open market or otherwise make a market in the
Shares or otherwise attempt to induce others to purchase Shares in the open
market. Nothing contained in this section shall prohibit the Selected Dealer
from acting as an agent in the execution of unsolicited orders of customers
in transactions effectuated for them through a market maker.
6. ALLOTMENTS. The Representatives reserve the right to reject all
subscriptions, in whole or in part, to make allotments and to close the
subscription books at any time without notice. If an order from a Selected
Dealer is rejected or if a payment is received which proves insufficient, any
compensation paid to the Selected Dealer shall be returned by the Selected
Dealer either in cash or by a charge against the account of the Selected
Dealer, as the Representatives may elect.
7. RELIANCE ON PROSPECTUS. The Selected Dealer agrees not to use any
supplemental sales literature of any kind without prior written approval of
the Representatives unless it is furnished by the Representatives for such
purpose. In offering and selling the Company's Shares, the Selected Dealer
will rely solely on the representations contained in the Prospectus.
Additional copies of the current Prospectus will be supplied by the
Representatives in reasonable quantities upon request.
8. REPRESENTATIONS OF SELECTED DEALER. By accepting this Agreement,
the Selected Dealer represents that it: (a) is registered as a broker-dealer
under the Securities Exchange Act of 1934, as amended; (b) is qualified to
act as a Dealer in the States or other jurisdictions in which it offers the
Shares; (c) is a member in good standing with the NASD; (d) will maintain all
such registrations, qualifications, and memberships throughout the term of
this Agreement; (e) will comply with all applicable Federal laws relating to
the offering, including, but not limited to, Rule 15c2-8 under the Securities
Exchange Act of 1934 and Release No. 4968 under the Securities Act of 1933
relating to delivery of preliminary and final prospectuses, and Regulation M
governing the activities of participants in a distribution of securities; (f)
will comply with the laws of the state or other jurisdictions concerned; (g)
will comply the rules and regulations of the NASD including, but not limited
to, full compliance with Rules 2100, 2730 2740, 2720 and 2750 of the Conduct
Rules of the NASD and the interpretations of such sections promulgated by the
Board of Governors of the NASD including an interpretation with respect to
"Free-Riding and Withholding" dated November 1, 1970, and as thereafter
amended; and (h) confirms that the purchase of the number of Shares it has
subscribed for and may be obligated to purchase will not cause it to violate
the net capital requirements of Rule 15c3-1 under the Exchange Act.
9. BLUE SKY QUALIFICATION. The Selected Dealer agrees that it will
offer to sell the Shares only (a) in states or jurisdictions in which it is
licensed as a broker-dealer under the laws of such states, and (b) in which
the Representatives have been advised by counsel that the Shares have been
3
<PAGE>
qualified for sale under the respective securities or Blue Sky laws of such
states. The Representatives assume no obligations or responsibilities as to
the right of any Selected Dealer to sell the Shares in any state or as to any
sale therein.
10. EXPENSES. No expenses will be charged to Selected Dealers. A
single transfer tax, if any, on the sale of the Shares by the Selected Dealer
to its customers will be paid when such Shares are delivered to the Selected
Dealer for delivery to its customers. However, the Selected Dealer will pay
its proportionate share of any transfer tax or any other tax (other than the
single transfer tax described above) if any such tax shall be from time to
time assessed against the Underwriters and other Selected Dealers.
11. NO JOINT VENTURE. No Selected Dealer is authorized to act as the
Underwriters' agent, or otherwise to act on our behalf, in the offering or
selling of Shares to the public or otherwise. Nothing contained herein will
constitute the Selected Dealers an association or other separate entity or
partners with the Underwriters, or with each other, but each Selected Dealer
will be responsible for its share of any liability or expense based on any
claim to the contrary.
12. COMMUNICATIONS. This Agreement and all communications to the
Underwriters shall be sent to the Representatives at the following address
or, if sent by facsimile, to the number set forth below:
Ms. Patty Allen
Sentra Securities Corporation
2355 Northside Drive, Ste. 200
San Diego, CA 92108
Fax No. (619) 584-7010
Any notice to the Selected Dealer shall be properly given if mailed,
telephoned, or transmitted by facsimile to the Selected Dealer at its address
or number set forth below its signature to this Agreement. All
communications and notices initially transmitted by facsimile shall be
confirmed in writing.
13. GOVERNING LAW. This Agreement shall be governed by and construed
according to the laws of the State of California.
14. REPRESENTATIVES' AUTHORITY AND OBLIGATIONS. The Representatives
shall have full authority to take such actions as may they deem advisable in
respect of all matters pertaining to the offering or arising thereunder. The
Representatives shall not be under any liability to the Selected Dealer,
except such as may be incurred under the Securities Act of 1933 and the rules
and regulations thereunder, except for lack of good faith and except for
obligations assumed by the Representatives in this Agreement, and no
obligation on their part shall be implied or inferred herefrom.
4
<PAGE>
15. ASSIGNMENT. This Agreement may not be assigned by the Selected
Dealer without the Representatives' prior written consent.
16. TERMINATION. The Selected Dealer will be governed by the terms and
conditions of this Agreement until it is terminated. This Agreement will
terminate upon the termination of the Offering.
17. COUNTERPARTS. This Agreement may be executed in counterparts, each
of which shall be deemed an original, and all of which together shall
constitute one instrument. A copy of an executed counterpart of this
Agreement may be sent via facsimile by any party to the other party, and the
other party may deem such facsimile copy of the executed counterpart to be an
original.
18. APPLICATION. If you desire to purchase any of the Shares, please
confirm your application by signing and returning to us your confirmation on
the duplicate copy of this letter, even though you may have previously
advised us thereof by telephone or telegraph. Our signature hereon may be by
facsimile.
SENTRA SECURITIES CORPORATION
Dated: _____________, 1997 By:
----------------------------------
Richard P. Woltman, President
Dated: _____________, 1997 ----------------------------------
By:
----------------------------------
5
<PAGE>
OFFER TO PURCHASE
The undersigned does hereby offer to purchase (subject to the right to
revoke set forth in Section 2) _______ Shares in accordance with the terms
and conditions set forth above.
----------------------------------
By:
---------------------------------
Its:
--------------------------------
Address:
Facsimile Number:
Telephone Number:
("Selected Dealer")
Date of Acceptance:
-----------------------
Accepted By:
------------------------------
IRS Employer Identification No.:
----------
Share Allocation:
-------------------------
6
<PAGE>
THESE SECURITIES MAY NOT BE PUBLICLY OFFERED OR SOLD UNLESS AT THE TIME OF SUCH
OFFER OR SALE, THE PERSON MAKING SUCH OFFER OR SALE DELIVERS A PROSPECTUS
MEETING THE REQUIREMENTS OF SECTION 10 OF THE SECURITIES ACT OF 1933 FORMING A
PART OF A REGISTRATION STATEMENT, OR POST-EFFECTIVE AMENDMENT THERETO, WHICH IS
EFFECTIVE UNDER SAID ACT, UNLESS IN THE OPINION OF COUNSEL TO THE COMPANY SUCH
OFFER AND SALE IS EXEMPT FROM THE PROVISIONS OF SECTION 5 OF SAID ACT.
WARRANT
For the Purchase of Shares of Common Stock
of
ORGANIC FOOD PRODUCTS
Void After 5 P.M. _______________, 2002
No. 1
Warrant to Purchase One Hundred Thirty Thousand (130,000) Shares of Common
Stock
THIS IS TO CERTIFY, that, for value received, Sentra Securities Corporation
(the "Underwriter") or registered assigns, is entitled, subject to the terms and
conditions hereinafter set forth, on or after ____________, 1998 and at any time
prior to 5 P.M., Pacific Standard Time ("PST"), on _______________, 2002, but
not thereafter, to purchase such number of shares of Common Stock (the "Shares")
of Organic Food Products, a California corporation (the "Company"), from the
Company as is set forth above and upon payment to the Company of $4.80 per Share
(the "Purchase Price"), if and to the extent this Warrant is exercised, in whole
or in part, during the period this Warrant remains in force, subject in all
cases to adjustment as provided in Section 2 hereof, and to receive a
certificate or certificates representing the Shares so purchased, upon
presentation and surrender to the Company of this Warrant, with the form of
subscription attached hereto, including changes thereto reasonably requested by
the Company, duly executed, and accompanied by payment of the Purchase Price of
each Share.
SECTION 1.
TERMS OF THIS WARRANT
1.1 TIME OF EXERCISE. Subject to the provisions of Sections 1.5 and 3.1
hereof, this Warrant may be exercised at any time and from time to time after
9:00 A.M., PST, on __________, 1998 (the "Exercise Commencement Date"), but no
later than 5:00 P.M., _________, 2002 (the "Expiration Time") at which it shall
become void, and all rights hereunder shall thereupon cease.
<PAGE>
1.2 MANNER OF EXERCISE.
1.2.1 The holder of this Warrant (the "Holder") may exercise this
Warrant, in whole or in part, upon surrender of this Warrant with the form of
subscription attached hereto duly executed, to the Company at its corporate
office in Morgan Hill, California, together with the full Purchase Price for
each Share to be purchased in lawful money of the United States, or by certified
check, bank draft or postal or express money order payable in United States
dollars to the order of the Company, and upon compliance with and subject to the
conditions set forth herein.
1.2.2 Upon receipt of this Warrant with the form of subscription
duly executed and accompanied by payment of the aggregate Purchase Price for the
Shares for which this Warrant is then being exercised, the Company shall cause
to be issued certificates for the total number of whole Shares for which this
Warrant is being exercised in such denominations as are required for delivery to
the Holder, and the Company shall thereupon deliver such certificates to the
Holder or its nominee.
1.2.3 In case the Holder shall exercise this Warrant with respect
to less than all of the Shares that may be purchased under this Warrant, the
Company shall execute a new Warrant for the balance of the Shares that may be
purchased upon exercise of this Warrant and deliver such new Warrant to the
Holder.
1.2.4 The Company covenants and agrees that it will pay when due
and payable any and all taxes which may be payable in respect of the issue of
this Warrant, or the issue of any Shares upon the exercise of this Warrant. The
Company shall not, however, be required to pay any tax which may be payable in
respect of any transfer involved in the issuance or delivery of this Warrant or
of the Shares in a name other than that of the Holder at the time of surrender,
and until the payment of such tax the Company shall not be required to issue
such Shares.
1.3 EXCHANGE OF WARRANT. This Warrant may be split-up, combined or
exchanged for another Warrant or Warrants of like tenor to purchase a like
aggregate number of Shares. If the Holder desires to split-up, combine or
exchange this Warrant, he shall make such request in writing delivered to the
Company at its corporate office and shall surrender this Warrant and any other
Warrants to be so split-up, combined or exchanged, the Company shall execute and
deliver to the person entitled thereto a Warrant or Warrants, as the case may
be, as so requested. The Company shall not be required to effect any split-up,
combination or exchange which will result in the issuance of a Warrant entitling
the Holder to purchase upon exercise a fraction of a Share. The Company may
require the Holder to pay a sum sufficient to cover any tax or governmental
charge that may be imposed in connection with any split-up, combination or
exchange of Warrants.
2
<PAGE>
1.4 HOLDER AS OWNER. Prior to due presentment for registration of
transfer of this Warrant, the Company may deem and treat the Holder as the
absolute owner of this Warrant (notwithstanding any notation of ownership or
other writing hereon) for the purpose of any exercise hereof and for all other
purposes, and the Company shall not be affected by any notice to the contrary.
1.5 TRANSFER AND ASSIGNMENT. Prior to one year from the date hereof, this
Warrant may not be sold, hypothecated, exercised, assigned or transferred,
except to individuals who are officers of the Underwriter or any successor to
its business or pursuant to the laws of descent and distribution, and thereafter
and until its expiration shall be assignable and transferable in accordance with
and subject to the provisions of the Securities Act of 1933 and applicable state
securities laws; provided, however, that if not exercised immediately upon such
transfer, this Warrant shall lapse.
1.6 METHOD OF ASSIGNMENT. Any assignment permitted hereunder shall be
made by surrender of this Warrant to the Company at its principal office with
the form of assignment attached hereto duly executed and funds sufficient to pay
any transfer tax. In such event, the Company shall, without charge, execute and
deliver a new Warrant in the name of the assignee named in such instrument of
assignment and this Warrant shall promptly be canceled. This Warrant may be
divided or combined with other Warrants which carry the same rights upon
presentation thereof at the corporate office of the Company together with a
written notice signed by the Holder, specifying the names and denominations in
which such new Warrants are to be issued.
1.7 RIGHTS OF HOLDER. Nothing contained in this Warrant shall be
construed as conferring upon the Holder the right to vote or to consent or to
receive notice as a shareholder in respect of any meetings of shareholders for
the election of directors or any other matter, or as having any rights
whatsoever as a shareholder of the Company. If, however, at any time prior to
the expiration of this Warrant and prior to its exercise, any of the following
shall occur:
(a) the Company shall take a record of the holders of its shares
of Common Stock for the purpose of entitling them to receive a dividend or
distribution payable otherwise than in cash, or a cash dividend or distribution
payable otherwise than out of current or retained earnings; as indicated by the
accounting treatment of such dividend or distribution on the books of the
Company; or
(b) the Company shall offer to the holders of its Common Stock
any additional shares of capital stock of the Company or securities convertible
into or exchangeable for shares of capital stock of the Company, or any option,
right or warrant to subscribe therefor; or
(c) there shall be proposed any capital reorganization or
reclassification of the Common Stock, or a sale of all or substantially all of
the assets of the Company, or a consolidation or merger of the Company with
another entity; or
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(d) there shall be proposed a voluntary or involuntary
dissolution, liquidation or winding up of the Company;
then, in any one or more of said cases, the Company shall cause to be mailed to
the Holder, at the earliest practicable time (and, in any event, not less than
twenty (20) days before any record date or other date set for definitive
action), written notice of the date on which the books of the Company shall
close or a record shall be taken to determine the shareholders entitled to such
dividend, distribution, convertible or exchangeable securities or subscription
rights, or entitled to vote on such reorganization, reclassification, sale,
consolidation, merger, dissolution, liquidation or winding up, as the case may
be. Such notice shall also set forth such facts as shall indicate the effect of
such action (to the extent such effect may be known at the date of such notice)
on the Purchase Price and the kind and amount of the Shares and other securities
and property deliverable upon exercise of this Warrant. Such notice shall also
specify the date as of which the holders of the Common Stock of record shall
participate in said distribution or subscription rights or shall be entitled to
exchange their Common Stock for securities or other property deliverable upon
such reorganization, reclassification, sale, consolidation, merger, dissolution,
liquidation or winding up, as the case may be (on which date, in the event of
voluntary or involuntary dissolution, liquidation or winding up of the Company,
the right to exercise this Warrant shall terminate).
Without limiting the obligation of the Company to provide notice to the
holder of actions hereunder, it is agreed that failure of the Company to give
notice shall not invalidate such action of the Company.
1.8 LOST CERTIFICATES. If this Warrant is lost, stolen, mutilated or
destroyed, the Company shall, on such reasonable terms as to indemnity or
otherwise as it may impose (which shall, in the case of a mutilated Warrant,
include the surrender thereof), issue a new Warrant of like denomination and
tenor as, and in substitution for, this Warrant, which shall thereupon become
void. Any such new Warrant shall constitute an additional contractual
obligation of the Company, whether or not the Warrant so lost, stolen, destroyed
or mutilated shall be at any time enforceable by anyone.
1.9 COVENANTS OF THE COMPANY. The Company covenants and agrees as
follows:
1.9.1 At all times it shall reserve and keep available for the
exercise of this Warrant such number of authorized shares of Common Stock as are
sufficient to permit the exercise in full of this Warrant.
1.9.2 Prior to the issuance of any Shares upon exercise of this
Warrant, the Company shall secure the listing of such Shares upon any securities
exchange or automated quotation system upon which the Company's Common Stock is
listed for trading.
1.9.3 The Company covenants that all Shares when issued upon the
exercise of this Warrant will be validly issued, fully paid, non-assessable and
free of preemptive rights.
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SECTION 2.
ADJUSTMENT OF PURCHASE PRICE
AND NUMBER OF SHARES PURCHASABLE UPON EXERCISE
2.1 STOCK SPLITS. If the Company at any time or from time to time after
the issuance date of this Warrant effects a subdivision of the outstanding
Common Stock, the Purchase Price then in effect immediately before that
subdivision shall be proportionately decreased, and conversely, if the Company
at any time or from time to time after the issuance date of this Warrant
combines the outstanding shares of Common Stock, the Purchase Price then in
effect immediately before the combination shall be proportionately increased.
Any adjustment under this subsection 2.1 shall become effective at the close of
business on the date the subdivision or combination becomes effective.
2.2 DIVIDENDS AND DISTRIBUTIONS. In the event the Company at any time, or
from time to time after the issuance date of this Warrant makes, or fixes a
record date for the determination of holders of Common Stock entitled to
receive, a dividend or other distribution payable in additional shares of Common
Stock, then and in each such event the Purchase Price then in effect shall be
decreased as of the time of such issuance or, in the event such a record date is
fixed, as of the close of business on such record date, by multiplying the
Purchase Price then in effect by a fraction (i) the numerator of which is the
total number of shares of Common Stock issued and outstanding immediately prior
to the time of such issuance or the close of business on such record date, and
(ii) the denominator of which shall be the total number of shares of Common
Stock issued and outstanding immediately prior to the time of such issuance or
the close of business on such record date plus the number of shares of Common
Stock issuable in payment of such dividend or distribution; provided, however,
that if such record date is fixed and such dividend is not fully paid or if such
distribution is not fully made on the date fixed therefor, the Purchase Price
shall be recomputed accordingly as of the close of business on such record date
and thereafter the Purchase Price shall be adjusted pursuant to this subsection
2.2 as of the time of actual payment of such dividends or distributions.
2.3 RECAPITALIZATION OR RECLASSIFICATION. If the Shares issuable upon the
exercise of the Warrant are changed into the same or a different number of
shares of any class or classes of stock, whether by recapitalization,
reclassification or otherwise (other than a subdivision or combination of shares
or stock dividend or a reorganization, merger, consolidation or sale of assets,
provided for elsewhere in this Section 2, then and in any such event each holder
of Warrants shall have the right thereafter to exercise such Warrant as to the
kind and amount of stock and/or other securities and property receivable upon
such reclassification or other change, by the holder of the number of shares of
Shares as to which such Warrant might have been exercised immediately prior to
such reclassification or exchange, all subject to further adjustment as provided
herein.
2.4 SALE OF THE COMPANY. If at any time or from time to time there is a
capital reorganization of the Common Stock (other than a recapitalization,
subdivision, combination, reclassification or exchange of shares provided for
elsewhere in this Section 2 or a merger or
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consolidation of the Company with or into another Company, or the sale of all
or substantially all of the Company's properties and assets to any other
person, then, as a part of such reorganization, merger, consolidation or sale,
provision shall be made so that the holders of the Warrants shall thereafter
be entitled to receive upon exercise of the Warrants, the number of shares of
stock or other securities or property of the Company, or of the successor
Company resulting from such merger or consolidation or sale, to which a holder
of Shares deliverable upon exercise would have been entitled on such capital
reorganization, merger, consolidation, or sale. In any such case, appropriate
adjustment shall be made in the application of the provisions of this Section
2 with respect to the rights of the holders of the Warrants after the
reorganization, merger, consolidation or sale to the end that the provisions
of this Section (including adjustment of the Purchase Price then in effect and
number of shares purchasable upon exercise of the Warrants) shall be
applicable after that event and be as nearly equivalent to the provisions
hereof as may be practicable.
2.5 OBSERVANCE OF DUTIES. The Company will not, by amendment of its
Certificate of Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed hereunder by the Company but will at all
times in good faith assist in the carrying out of all the provisions of this
section 2 and in the taking of all such action as may be necessary or
appropriate in order to protect the Exercise Rights of the holders of the
Warrants against dilution or other impairment.
SECTION 3.
REGISTRATION UNDER THE SECURITIES ACT OF 1933
3.1 REGISTRATION AND LEGENDS. This Warrant and the Shares issuable upon
exercise of this Warrant have not been registered under the Securities Act of
1933, as amended ("the Act"). Upon exercise, in part or in whole, of this
Warrant, the certificates representing the Shares shall bear the following
legend:
THIS SECURITY HAS NOT BEEN REGISTERED OR QUALIFIED UNDER THE SECURITIES
ACT OF 1933 ("ACT") OR THE SECURITIES OR BLUE SKY LAWS OF ANY STATE AND
MAY NOT BE OFFERED AND SOLD UNLESS REGISTERED AND/OR QUALIFIED PURSUANT
TO THE RELEVANT PROVISIONS OF FEDERAL AND STATE SECURITIES OR BLUE SKY
LAWS OR AN EXEMPTION FROM SUCH REGISTRATION OR QUALIFICATION APPLICABLE.
THEREFORE, NO SALE OR TRANSFER OF THIS SECURITY SHALL BE MADE, NO
ATTEMPTED SALE OR TRANSFER SHALL BE VALID, AND THE ISSUER SHALL NOT BE
REQUIRED TO GIVE ANY EFFECT TO ANY SUCH TRANSACTION UNLESS (A) SUCH
TRANSACTION SHALL HAVE BEEN DULY REGISTERED UNDER THE ACT AND QUALIFIED
OR APPROVED UNDER APPROPRIATE STATE OR BLUE SKY LAWS, OR (B) THE ISSUER
SHALL HAVE FIRST RECEIVED AN OPINION OF COUNSEL
6
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SATISFACTORY TO IT THAT SUCH REGISTRATION, QUALIFICATION OR APPROVAL IS
NOT REQUIRED.
3.2 NO ACTION LETTER. The Company agrees that it shall be satisfied that
no post-effective amendment or new registration is required for the public sale
of the Shares if it shall be presented with a letter from the Staff of the
Securities and Exchange Commission (the "Commission") stating in effect that,
based upon stated facts which the Company shall have no reason to believe are
not true in any material respect, the Staff will not recommend any action to the
Commission if such shares are offered and sold without delivery of a
prospectus, and that, therefore, no post-effective amendment to the Registration
Statement under which such Shares are to be registered or new registration
statement is required to be filed.
3.3 DEMAND REGISTRATION RIGHTS. On one occasion at any time after the
Exercise Commencement Date and before the Expiration Time, the Company shall,
upon the demand of the holders of a majority of the Shares, register the Shares,
file a new Registration Statement, and file all necessary undertakings with the
Commission so as to permit the Underwriter, or any assignee of the Underwriter,
the right to sell publicly the Shares issued on exercise of this Warrant. The
Company will bear all expenses attendant to registering the securities (subject
to Section 3.5(e)).
3.4 PIGGYBACK REGISTRATION RIGHTS. In the event that the Underwriter does
not exercise its right to demand that the Shares be registered, the Company
agrees to include any appropriate Shares issuable upon exercise of the Warrants
in any Registration Statement filed by the Company at any time within five (5)
years from the effective date of the Company's first Registration Statement as
filed in 1997 (except for any registration on Forms S-4 or S-8 or similar
forms).
3.5 COVENANTS REGARDING REGISTRATION. In connection with any registration
under Section 3.3 or 3.4 hereof, the Company covenants and agrees as follows:
(a) The Company will, within twenty days after written request
from the Representative, take all steps necessary to effectuate preparation and
filing with the Securities and Exchange Commission of the registration statement
as required by and in compliance with the Act.
(b) The Company shall keep such registration statement effective
for the lesser of (i) one hundred twenty (120) days, or (ii) the period of time
in which the Holders of such securities have effected the distribution of their
Shares. During such period the Company shall prepare and file with the SEC such
amendments and supplements to such registration statement and the prospectus
used in connection with such registration statement as may be necessary to
comply with the provisions of the Act with respect to the disposition of all
securities covered by such registration statement.
(c) The Company shall notify each Holder of Shares covered by
such registration statement at any time when a prospectus relating thereto is
required to be delivered under the Act of the happening of any event as a result
of which the prospectus included in such
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<PAGE>
registration statement, as then in effect, includes an untrue statement of a
material fact or omits to state a material fact required to be stated therein
or necessary to make the statements therein not misleading in light of the
circumstances then existing.
(d) The Company shall furnish to the Holders such numbers of
copies of a prospectus, including a preliminary prospectus, in conformity with
the requirements of the Act, and such other documents as they may reasonably
request in order to facilitate the disposition of the Shares owned by them.
(e) The Company shall pay all costs, fees, and expenses in
connection with new registration statements under Section 3.3 (excluding the
costs attendant to a second demand registration) and Section 3.4 hereof
including, without limitation, the Company's legal and accounting fees, printing
expenses, blue sky fees and expenses, except that the Company shall not pay for
any of the following costs and expenses: (i) underwriting discounts and
commissions allocable to the Shares, (ii) state transfer taxes, (iii) brokerage
commissions, (iv) fees and expenses of counsel and accountants for the holders
of this Warrant or the Shares.
(f) The Company will take all necessary action which may be
required in qualifying or registering the Shares included in any Registration
Statement or post-effective amendment or new registration statement for offering
and sale under the securities or blue sky laws of such states as are reasonably
requested by the holders of such Shares, provided that the Company shall not be
obligated to execute or file any general consent to service or process or to
qualify as a foreign corporation to do business under the laws of any such
jurisdiction.
(g) The Holder shall be entitled to pay the Purchase Price for
the Shares purchasable upon the exercise of this Warrant out of the proceeds of
any sale of the Shares purchasable upon its exercise.
3.6 INDEMNITY.
3.6.1 The Company shall indemnify and hold harmless each person
registering securities pursuant to this Section (the "Seller") and each
underwriter, within the meaning of the Act, who may purchase from or sell for
any Seller any of the Common Stock from and against any and all losses, claims,
damages, and liabilities caused by any untrue statement or alleged untrue
statement of a material fact contained in any new registration statement or any
supplemented prospectus under the Act included therein required to be filed or
furnished by reason of this Section, or caused by any omission or alleged
omission to state therein or necessary to make the statements therein not
misleading, except insofar as such losses, claims, damages or liabilities are
caused by any untrue statement or alleged untrue statement or omission or
alleged omission based upon information furnished or required to be furnished in
writing to the Company by such Seller or underwriter within the meaning of such
Act; provided, however, that the indemnity agreement set forth in this Section
3.6 with respect to any prospectus which shall be subsequently amended prior to
the written confirmation of sale of any Shares shall not inure to the benefit of
any Seller or underwriter from whom the person asserting any such losses,
claims, damages or liabilities purchased such Shares
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<PAGE>
which are the subject thereof (or to the benefit of any person controlling
such Seller or underwriter), if such Seller or underwriter failed to send or
give a copy of the prospectus as amended to such person at or prior to the
written confirmation of the sale of such Shares and if such amended prospectus
did not contain any untrue statement or alleged untrue statement or omission
or alleged omission giving rise to such cause, claim, damage, or liability.
3.6.2 Each Seller which avails itself of the procedures under this
Section 3 shall indemnify and secure the agreement of any underwriter which the
Seller employs to indemnify the Company, its directors, each officer signing the
related post-effective amendment or registration statement and each person, if
any, who controls the Company, within the meaning of the Act from and against
any losses, claims, damages, and liabilities caused by any untrue statement or
alleged untrue statement of a material fact contained in any post-effective
amendment or registration statement or any prospectus required to be filed or
furnished by reason of this Section 3 or caused by any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, insofar as such losses,
claims, damages, or liabilities are caused by any untrue statement or alleged
untrue statement or omission or alleged omission based upon information
furnished in writing to the Company by any such Seller or underwriter expressly
for use therein.
3.7 SURVIVAL OF OBLIGATIONS. The agreements in this Section 3 shall
continue in effect regardless of the exercise and surrender of this Warrant.
SECTION 4.
OTHER MATTERS
4.1 PAYMENT OF TAXES. The Company will from time to time promptly pay,
subject to the provisions of paragraph (4) of Section 1.2 hereof, all taxes and
charges that may be imposed upon the Company in respect of the issuance or
delivery of this Warrant or the Shares purchasable upon the exercise of this
Warrant.
4.2 BINDING EFFECT. All the covenants and provisions of this Warrant by
or for the benefit of the Company shall bind and inure to the benefit of its
successors and assigns hereunder.
4.3 NOTICES. Notices or demands pursuant to this Warrant to be given or
made by the Holder to or on the Company shall be sufficiently given or made if
sent by certified or registered mail, return receipt requested, postage prepaid,
or facsimile and addressed, until another address is designated in writing by
the Company, as follows:
Organic Food Products
550 Monterey Highway
Morgan Hill, California 95037
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Notices to the Holder provided for in this Warrant shall be deemed given or
made by the Company if sent by certified or registered mail, return receipt
requested, postage prepaid, and addressed to the Holder at his last known
address as it shall appear on the books of the Company.
4.4 GOVERNING LAW. The validity, interpretation and performance of this
Warrant shall be governed by the laws of the State of California.
4.5 PARTIES BOUND AND BENEFITTED. Nothing in this Warrant expressed and
nothing that may be implied from any of the provisions hereof is intended, or
shall be construed, to confer upon, or give to, any person or corporation other
than the Company and the Holder any right, remedy or claim under promise or
agreement hereof, and all covenants, conditions, stipulations, promises and
agreements contained in this Warrant shall be for the sole and exclusive benefit
of the Company and its successors and of the Holder, its successors and, if
permitted, its assignees.
4.6 HEADINGS. The Section headings herein are for convenience only and
are not part of this Warrant and shall not affect the interpretation thereof.
IN WITNESS WHEREOF, this Warrant has been duly executed by the Company
under its corporate seal as of the ___ day of ________, 1997.
ORGANIC FOOD PRODUCTS
By:
-----------------------------------
Floyd Hill, Chief Executive Officer
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<PAGE>
ORGANIC FOOD PRODUCTS
ASSIGNMENT OF WARRANT
FOR VALUE RECEIVED, Sentra Securities Corporation hereby sells, assigns and
transfers unto ____________________________________________ the within Warrant
and the rights represented thereby, and does hereby irrevocably constitute and
appoint _______________________________ Attorney, to transfer said Warrant on
the books of the Company, with full power of substitution.
Dated:
---------------------------
Signed:
-----------------------------
Signature guaranteed:
- ---------------------------------
11
<PAGE>
ORGANIC FOOD PRODUCTS
550 Monterey Highway
Morgan Hill, California 95037
Subscription Agreement for the Exercise of Warrants
The undersigned hereby irrevocably subscribes for the purchase of
_____________ Shares pursuant to and in accordance with the terms and conditions
of this Warrant, and herewith makes payment, covering such Shares which should
be delivered to the undersigned at the address stated below, and, if said number
of Shares shall not be all of the Shares purchasable hereunder, that a new
Warrant of like tenor for the balance of the remaining Shares purchasable
hereunder be delivered to the undersigned at the address stated below.
The undersigned agrees that: (1) the undersigned will not offer, sell,
transfer or otherwise dispose of any Shares unless either (a) a registration
statement, or post-effective amendment thereto, covering the Shares has been
filed with the Securities and Exchange Commission pursuant to the Securities Act
of 1933, as amended (the "Act"), such sale, transfer or other disposition is
accompanied by a prospectus meeting the requirements of Section 10 of the Act
forming a part of such registration statement, or post-effective amendment
thereto, which is in effect under the Act covering the Shares to be so sold,
transferred or otherwise disposed of, and all applicable state securities laws
have been complied with, or (b) counsel to Organic Food Products satisfactory to
the undersigned has rendered an opinion in writing and addressed to Organic Food
Products that such proposed offer, sale, transfer or other disposition of the
Shares is exempt from the provisions of Section 5 of the Act in view of the
circumstances of such proposed offer, sale, transfer or other disposition; (2)
Organic Food Products may notify the transfer agent for the Shares that the
certificates for the Shares acquired by the undersigned are not to be
transferred unless the transfer agent receives advice from Organic Food Products
that one or both of the conditions referred to in (1)(a) and (1)(b) above have
been satisfied; and (3) Organic Food Products may affix the legend set forth in
Section 3.1 of this Warrant to the certificates for the Shares hereby subscribed
for, if such legend is applicable.
Dated: Signed:
----------------------- -----------------------------
Signature guaranteed: Address:
----------------------------
- ---------------------------------
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LOCK-UP AGREEMENT
FOR DIRECTORS AND OFFICERS
This Lock-Up Agreement ("Agreement") is effective as of ____________,
1997 by and among Organic Food Products, Inc., a California corporation (the
"Company"), ______________, a director and/or officer of the Company (the
"Executive"), and _____________, a California corporation (the
"Underwriter"). The parties hereto agree as follows:
1. LOCK-UP. The Company has filed a registration statement on Form
SB-2 (the "Registration Statement") with the Securities and Exchange
Commission which will register certain shares of the Company's common stock
to be sold by the Underwriter on a "firm commitment" basis. To satisfy
Section 7.7 of the Underwriting Agreement (the "Underwriting Agreement") to
be entered into between the Company and the Underwriter as representative of
the several underwriters named in Schedule I thereto, and in order to induce
the Underwriter to undertake the firm commitment public offering of the
Company's common stock, the Executive agrees that it will not, directly or
indirectly, without the Underwriter's prior written consent, offer, sell,
contract to sell, grant any option to purchase, pledge, or otherwise dispose
(or announce any offer, sale, grant of an option to purchase or other
disposition) of, any shares of the Company's common stock or any security or
other instrument which by its terms is convertible into, exercisable for, or
exchangeable for shares of the Company's common stock for a period of twelve
(12) months from the effective date of the Registration Statement.
2. SUCCESSORS. The provisions of this Agreement shall be deemed to
obligate, extend to and inure to the benefit of the successors, assigns,
transferees, grantees, and indemnitees of each of the parties to this
Agreement.
3. ATTORNEYS FEES. In the event of a dispute between the parties
concerning the enforcement or interpretation of this Agreement, the
prevailing party in such dispute, whether by legal proceedings or otherwise,
shall be reimbursed immediately for the reasonably incurred attorney's fees
and other costs and expenses by the other parties to the dispute.
4. CHOICE OF LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of California without reference to
its choice of law rules.
5. ARBITRATION. Any dispute or claim arising to or in any way related
to this Agreement shall be settled by arbitration in San Diego, California.
All arbitration shall be conducted in accordance with the rules and
regulations of the American Arbitration Association ("AAA"). AAA shall
designate an arbitrator from an approved list of arbitrators following both
parties' review and deletion of those arbitrators on the approved list having
conflict of interest with either party. Each party shall pay its own
expenses associated with such arbitration (except as set forth in Section 3
above). A demand for arbitration shall be made within reasonable time after
the claim, dispute or other matter has arisen and in no event shall such
demand be made after the date when institution of legal or equitable
proceedings based on such claim, dispute or other matter in question would be
barred by the applicable statutes of limitations. The decision of the
arbitrators shall be rendered
<PAGE>
within 60 days of submission of any claim or dispute, shall be in writing and
mailed to all parties included in the arbitration. The decision of the
arbitrator shall be binding upon the parties and judgment in accordance with
that decision may be entered in any court having jurisdiction thereof.
6. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which,
taken together, shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date set forth next to his or its signature.
ORGANIC FOOD PRODUCTS, INC.
By:
------------------------------------
Its:
-----------------------------------
EXECUTIVE
----------------------------------------
----------------
----------------
By:
------------------------------------
Its:
-----------------------------------
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LOAN AND INVESTMENT AGREEMENT
This LOAN AND INVESTMENT AGREEMENT is made and entered into as of
October 13, 1995, by and between S&D FOODS, INC., a California corporation
("Borrower"), and KENNETH A. STEEL ("Lender") with respect to the following
facts:
RECITALS
A. Borrower is engaged in the wholesale foods business and has need for
additional capital for purposes of financing its business in anticipation of
a private and subsequent public offering of its common stock.
B. Lender is willing, upon the terms and subject to the conditions set
forth in this Agreement, to make a loan to Borrower for the purposes
described above.
NOW, THEREFORE, in consideration of the foregoing premises and the
warranties, representations, covenants, agreements and undertakings contained
herein, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
ARTICLE I
DEFINITIONS AND ACCOUNTING TERMS
SECTION 1.1 CERTAIN DEFINED TERMS. As used in the Transaction
Documents or in any other documents made or delivered pursuant thereto,
unless otherwise defined therein or the context shall otherwise require, the
following terms shall have the following meanings (such meanings to be
equally applicable to both the singular and plural forms of the terms
defined):
"AGREEMENT" means this agreement and any amendments, supplements or
modifications thereto.
"BUSINESS DAY" means a day on which banks are open for business in San
Francisco, California.
"COLLATERAL" is defined in the Security Agreement.
"COLLATERAL DOCUMENTS" means all present and future documents delivered
and to be delivered hereunder to create, perfect or maintain a security
interest or lien on any property to secure payment of the Indebtedness under
the Transaction Documents, or otherwise granting a lien to the Lender
pursuant to the Transaction Documents, including the Security Agreement the
UCCs.
<PAGE>
"CONVERSION SHARES" means "Conversion Shares" as defined in the Note and
any other securities that may be issued or distributed therewith or with
respect thereto or in exchange or substitution therefor.
"CURRENT STOCKHOLDERS" means the persons shown as stockholders in
SCHEDULE 3.1.3.
"EFFECTIVE DATE" means the date of this Agreement.
"EVENT OF DEFAULT" is defined in Section 5.1.
"FINANCIAL STATEMENTS" means Borrower's Statements of Assets,
Liabilities and Equity as of June 30, 1995 and July 31, 1995 and Borrower's
Statements of Revenues, Expenses and Net Income for the Twelve months ended
June 30, 1995 and the one month ended July 31, 1995.
"INDEBTEDNESS" means, for any Person, (i) all indebtedness or other
obligations of such Person for borrowed money or for the deferred purchase
price of property or services, (ii) lease obligations direct, contingent or
otherwise, which have been or which in accordance with Statement of Financial
Accounting Standards No. 13, as from time to time amended, should be
capitalized, (iii) all indebtedness or other obligations of any other Person
for borrowed money or for the deferred purchase price of property or services
the payment or collection of which such Person has guaranteed (except by
reason of endorsement for collection in the ordinary course of business) or
in respect of which such Person is liable, contingently or otherwise,
including, without limitation, liability by way of agreement to purchase, to
provide funds for payment, to supply funds to or otherwise to invest in such
other Person, or otherwise to assure a creditor against loss, and (iv) all
indebtedness or other obligations of any other Person for borrowed money or
for the deferred purchase price of property or services secured by (or for
which the holder of such indebtedness has an existing right, contingent or
otherwise, to be secured by) any mortgage, deed of trust, pledge, lien
security interest or other charge or encumbrance upon or in property
(including, without limitation, accounts and contract rights) owned by such
person, whether or not such Person has assumed or become liable for the
payment of such indebtedness or obligations; PROVIDED, HOWEVER, that
Indebtedness shall not include trade accounts payable, accrued payroll and
other similar current liabilities incurred in the ordinary course of business.
"LIENS" means any deed of trust, mortgage, pledge, security interest,
encumbrance, lien or charge of any kind.
"NOTE" means the Convertible Promissory Note of Borrower to Lender in
the form of Exhibit A hereto, and any extensions, amendments, supplements or
modifications thereof.
"OBLIGATIONS" means all obligations of every nature of the Borrower from
time to time owed to the Lender under the Transaction Documents.
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"PAYMENT SHARES" means "Payment Shares" as defined in the Note and any
other securities that may be issued or distributed therewith or with respect
thereto or in exchange or substitution therefor.
"PERSON" means an individual, corporation, partnership, joint venture,
trust, or unincorporated organization, or a government or any agency or
political subdivision thereof.
"SECURITIES ACT" means the Securities Act of 1933, as amended, and the
rules and regulations promulgated thereunder.
"SECURITY AGREEMENT" means the Security Agreement of the Borrower in
the form of Exhibit B hereof, and any amendments, supplements and
modifications thereof.
"STOCKHOLDERS AGREEMENT" means the Stockholders Agreement among
Borrower, the Current Stockholders, and Lender in the form of Exhibit C
hereto, and any amendments, supplements and modifications thereof.
"SECURITIES" means the Note, the Conversion Shares, the Payment Shares
and the Warrant Shares.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"TRANSACTION DOCUMENTS" means this Agreement, the Note, the Security
Agreement, the Stockholders Agreement, the UCCs, the Warrant, and any other
documents to be executed and/or delivered under this Agreement or in
connection with the transactions contemplated hereby.
"WARRANT" means the warrant to Purchase Stock of Borrower to Lender in
the form of Exhibit D hereto, and any amendments, supplements and
modifications thereof, and any warrant issued in replacement thereof or in
exchange or substitution therefor.
"WARRANT SHARES" means "Warrant Shares" as defined in the Warrant and
any other securities that may be issued or distributed therewith or with
respect thereto or in exchange or substitution therefor.
SECTION 1.2 ACCOUNTING TERMS. All accounting terms, unless otherwise
specifically defined herein, shall be construed in accordance with generally
accepted accounting principles consistently applied, and all financial data
submitted pursuant to this Agreement shall be prepared in accordance with
such principles.
ARTICLE II
AMOUNT AND TERMS OF LOAN
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SECTION 2.1 LOAN. Subject to the terms and conditions of this
Agreement, Lender agrees to make a loan (the "Loan") to Borrower in the
amount of Five Hundred Thousand Dollars ($500,000.00) on the Effective Date.
SECTION 2.2 NOTE. The obligation of Borrower to repay the Loan made by
Lender shall be evidenced by, and the Loan shall be payable in accordance
with the terms of, the Note.
SECTION 2.3 OTHER TRANSACTION DOCUMENTS. To induce Lender to enter
into this Agreement and make this Loan, (i) Borrower shall execute and
deliver to Lender, on the Effective Date, concurrently with the execution and
delivery of this Agreement, the Note, the Security Agreement, the UCC'S, and
the Warrant, and (ii) Borrower and the Current Stockholders shall execute and
deliver to Lender, on the Effective Date, concurrently with the execution and
delivery of this Agreement, the Stockholders Agreement.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
SECTION 3.1 REPRESENTATIONS AND WARRANTIES BY BORROWER. In order to
induce Lender to enter into this Agreement and to make the Loan, Borrower
represents and warrants to Lender that:
3.1.1 ORGANIZATION AND QUALIFICATIONS. Borrower is a
corporation duly organized, validly existing and in good standing under the
laws of the State of California, and has all requisite authority and power
(corporate and other), all material governmental licenses, authorizations,
consents and approvals to carry on its business as presently conducted and as
contemplated to be conducted, to own, hold and operate its material
properties and assets as now owned, held and operated by it, to enter into
the Transaction Documents, to issue the Securities and to carry out the
provisions of the Transaction Documents and the Securities.
3.1.2 ARTICLES OF INCORPORATION AND BYLAWS. The copies of the
Articles of Incorporation ("Articles") and Bylaws of Borrower which have been
delivered to Lender prior to the execution of this Agreement, are true and
complete copies of such documents and have not been made or repealed.
Borrower is not in violation or breach of any of the provisions of the
Articles, the Bylaws or any of its other governing documents.
3.1.3 CAPITALIZATION AND RELATED MATTERS.
(a) As of the Effective Date and prior to giving effect to
the transactions contemplated in this Agreement, the authorized and issued
capital stock of Borrower and the options, warrants, calls, subscriptions,
rights (including any preemptive rights or rights of first refusal),
agreements or commitments of any character obligating Borrower to issue or
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register for sale under the Securities Act shares of capital stock or any
other equity security of Borrower consist solely of those described on
SCHEDULE 3.1.3.
(b) There are no outstanding contractual obligations
(contingent or otherwise) of Borrower to retire, repurchase, redeem or
otherwise acquire any outstanding shares of capital stock of, or other
ownership interests in, Borrower, or to provide funds to or make any
investment (in the form of a loan, capital contribution or otherwise) in any
other entity.
(c) The offer, issuance and sale of all outstanding
capital stock of Borrower were (i) exempt from the registration and
prospectus delivery requirements of the Securities Act, (ii) registered or
qualified (or exempt from registration or qualification) under the
registration or qualification requirements of all applicable state securities
laws, and (iii) accomplished in conformity with all other federal and
applicable state securities laws, rules and regulations.
(d) The issuance of the Securities has been duly
authorized and, upon delivery to Lender of a certificate or other instrument
evidencing any Securities, such Securities will have been validly issued,
will have the rights specified in the Transaction Documents, will be free of
preemptive rights, will be fully paid and non-assessable, and will be free
and clear of all Liens and restrictions, other than restrictions on transfer
imposed by the Transaction Documents.
(e) Borrower is not a participant in any joint venture,
partnership, joint operation or similar arrangement. Borrower does not own
or have any interest (by way of stock ownership or otherwise) in any firm,
corporation, association or business.
3.1.4 STOCKHOLDERS. SCHEDULE 3.1.3 contains a true and
complete list of the names and addresses of the record holders of all of the
outstanding equity securities of Borrower and of the holders of all outstanding
options or other rights to acquire equity securities of Borrower, such list
setting forth with respect to each holder the type and amount of the equity
securities beneficially owned or for which there exist acquisition rights. No
holder of any security of Borrower or any other Person is entitled to any
preemptive right, right of first refusal or similar right as a result of the
issuance of any Securities or otherwise. Except for this Stockholders
Agreement, there is no voting trust, agreement or arrangement among any of the
beneficial holders of the equity securities of Borrower affecting the exercise
of the voting rights of any such equity securities.
3.1.5 AUTHORIZATION AND VALIDITY OF TRANSACTION DOCUMENTS.
The execution, delivery and performance by Borrower of the Transaction Documents
and the offer, sale, issuance and delivery of the Securities, (a) are within
Borrower's corporate powers, (b) have been duly authorized by all necessary
corporate action, (c) do not require from the board of directors or shareholders
of Borrower any consent or approval that has not been validly and lawfully
obtained, (d) require no authorization, consent, approval, license, exemption of
or filing
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or registration with any court or governmental department, commission, board,
bureau, agency or instrumentality of government, except for post-sale filings
with the Securities and Exchange Commission and state securities commissions,
which filings shall be carried out in a timely fashion, (e) do not and will not
violate or contravene (i) any provision of law, (ii) any rule or regulation of
any agency or government, domestic or foreign, (iii) any order, writ, judgment,
induction, decree, determination or award, or (iv) any provision of the Articles
or Bylaws of Borrower, (f) do not and will not violate or be in conflict with,
result in a breach of or constitute (with or without notice or lapse of time or
both) a default under, or result in the termination of, or accelerate the
performance required by (or give any party any rights to terminate or accelerate
upon notice or lapse of time or both), any indenture, license, franchise, loan
or credit agreement, note, deed of trust, mortgage, security agreement or other
agreement, lease or instrument, commitment or arrangement to which Borrower is
a party or by which Borrower or its properties, assets or gifts is bound or
affected, (g) except as expressly provided in the Security Agreement, do not and
will not result in the creation of imposition of any Lien, (h) do not and will
not require the consent, approval or authorization of any other party to
agreements, licenses, leases, sales orders, permits, franchises, rights and
other obligations of Borrower, and (i) will not permit any governmental body to
impose any restrictions or limitations of any nature on Borrower or its
activities.
3.1.6 COMPLIANCE WITH LAWS. The business and operations of
Borrower has been and are being conducted in all material respects in accordance
with all applicable foreign, federal, state and local laws, rules and
regulations and all applicable orders, injunctions, decrees, writs, judgments,
determinations and awards of all courts and governmental agencies and
instrumentalities. Borrower is in compliance in all material respects with all
applicable federal and state securities laws, rules and regulations.
3.1.7 BINDING OBLIGATIONS. The Transaction Documents constitute
the legal, valid and binding obligations of Borrower and are and will be
enforceable against Borrower in accordance with their respective terms, and
the Stockholders Agreement constitute the legal, valid and binding obligation
of Borrower and the Current Stockholders and is and will be enforceable
against such parties in accordance with its terms.
3.1.8 SECURITIES LAWS. The offer, issue and sale of the
Securities are and will be (a) exempt from the registration and prospectus
delivery requirements of the Securities Act, (b) have been registered or
qualified (or are exempt from registration and qualification) under the
registration, permit or qualification requirements of all applicable state
securities laws and (c) accomplished in conformity with all applicable
federal and state securities laws, rules and regulations.
3.1.9 BROKERS OR FINDERS. No Person has, or as a result of the
transactions contemplated by the Transaction Documents, will have, any right
or claim against Borrower or Lender for any commission, fee or other
compensation as a finder, broker, or any similar capacity as a result of any
action by or on behalf of Borrower or any of its officers, directors,
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employees, agents or stockholders, except for Spelman & Co., Inc. whose fee
of $50,000 plus a $15,000 expense allowance will be paid by Borrower as
provided in the letter agreement between Spelman & Co., Inc. and Borrower
dated July 10, 1995 (the "Spelman Agreement"), which amount will be credited
against the fee payable in connection with the private placement offering
referred to in the Spelman Agreement, and Borrower will indemnify and hold
Lender harmless against any liability or expense arising out of, or in
connection with, any such right or claim.
3.1.10 FINANCIAL STATEMENTS. The Financial Statements (a) are
in accordance with the books and records of Borrower, (b) present fairly the
financial condition of Borrower at the dates therein specified and the
results of its operations and changes in financial condition for the periods
therein specified, and (c) have been prepared in accordance with generally
accepted accounting principles applied on a basis consistent with prior
accounting periods. Specifically, but not by way of limitation, the
financial statements disclose all of the debts, liabilities and obligations
of any nature (whether absolute, accrued, contingent or otherwise and whether
due or to become due) of Borrower as of each date which must be disclosed on
a balance sheet in accordance with generally accepted accounting principles.
Borrower maintains its books, record and accounts in accordance with good
business practice and in sufficient detail to reflect accurately and fairly
the transactions and disposition of its assets, liabilities and equities.
3.1.11 ABSENCE OF UNDISCLOSED LIABILITIES. Except as provided
in Schedule 3.1.11, there is not any material debt, obligation or liability
(whether accrued, absolute, contingent, liquidated or otherwise, whether due
or to become due, whether or not known to Borrower) arising out of any
transaction entered into at or prior to the Effective Date, or any act or
omission at or prior to the Effective Date, or any state of facts existing at
or prior to the Effective Date, including taxes with respect to or based upon
the transactions or events occurring at or prior to the Effective Date, and
including, without limitation, unfunded past service liabilities under any
pension, profit sharing or similar plan, except (a) to the extent set forth
on or reserved against in the Financial Statements, and (b) current
liabilities incurred and obligations under agreements entered into, in the
usual and ordinary course of business since the last date covered by the
financial statements contained therein, none of which (individually or in the
aggregate) materially and adversely affect the business, properties, finances
or prospects of Borrower.
3.1.12 CHANGES. Except as provided in Schedule 3.1.12, since
the last date covered by the Financial Statements, Borrower has not:
(a) Incurred any material debts, obligations or
liabilities, absolute, accrued, contingent or otherwise, whether due or to
become due, except current liabilities incurred in the usual and ordinary
course of business, none of which current liabilities (individually or in the
aggregate) materially and adversely affects the business, finances,
properties or prospects of Borrower.
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(b) entered into any transaction other than in the
usual and ordinary course of business, except for the Transaction Documents
and the transactions contemplated hereby;
(c) issued, granted or sold any shares of capital
stock or other equity securities of Borrower;
(d) declared, paid or set aside any dividends on or
made any other distributions with respect to, or purchased or redeemed,
any of its outstanding capital stock;
(e) suffered or experienced any change in, or
affecting, its condition (financial or otherwise), properties, assets,
liabilities, business, operations, results of operations or prospects other
than changes, events or conditions in the usual and ordinary course of its
business, none of which (either by itself or in conjunction with all such
other changes, events and conditions) has been materially adverse;
(f) made any loans to its employees, officers or
directors other than travel advances made in the ordinary course of business;
or
(g) suffered or experienced any change in the
relationship or course of dealings between it and any of its suppliers or
customers which has had or is likely to have an adverse effect on the results
of operations, conditions (financial or other), assets, liabilities, business
or prospects of Borrower.
3.1.13 TRADE NAMES, COPYRIGHTS, TRADEMARKS AND OTHER INTANGIBLE
ASSETS. Except as provided in Schedule 3.1.13, Borrower owns or has the
right to use all trademarks, trade names, service marks, copyrights, licenses
and patents and rights with respect to the foregoing used in or necessary for
the conduct of its business as now conducted or proposed to be conducted
without infringing upon or otherwise acting adversely to the right or claimed
right of any Person under or with respect to any of the foregoing (such
trademarks, trade names, service marks, copyrights, licenses and patents and
rights with respect thereto being herein referred to as the "Intellectual
Property").
3.1.14 TITLE TO PROPERTY AND ENCUMBRANCES. Except as provided in
Schedule 3.1.14, Borrower has good and marketable title to all of its
respective properties and assets, subject to no Lien, except those Liens, if
any, which are shown and described in the Financial Statements. The
consummation of the transactions contemplated by this Agreement will not have
any adverse effect on the title to any of Borrower's assets. Except for
changes in the ordinary course of business, Borrower currently owns all of
the assets shown on the latest balance sheet included in the Financial
Statements.
3.1.15 CONDITION OF PROPERTIES. All facilities, machinery,
equipment, fixtures, vehicles and other properties owned, leased or used by
Borrower are in good operating condition and repair, are reasonably fit and
usable for the purposes for which they are being used, are
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adequate and sufficient for borrower's business and conform in all material
respects with all applicable ordinances, regulations and laws.
3.1.16 INSURANCE COVERAGE. There is in full force and
effect one or more policies of insurance issued by insurers of recognized
responsibility, insuring Borrower and its properties and business against
such losses and risks, and in such amounts, as are customary in the case of
corporations of established reputation engaged in the same or similar
business and similarly situated and as required by any contract, agreement or
understanding to which Borrower is a party, or as required by any
governmental authority having jurisdiction over Borrower, its property or
business operations. Borrower has not been refused any insurance coverage
sought or applied for, and Borrower has no reason to believe that it will be
unable to renew its existing insurance coverage as and when the same shall
expire upon terms at least as favorable as those presently in effect, other
than possible increases in premiums that do not result from any act of
omission of Borrower. Borrower is not in default with respect to any material
provision contained in any insurance policy, and Borrower has not failed to
give any notice or present any presently existing claims under any insurance
policy in due and timely fashion.
3.1.17 LITIGATION. Except as provided in Schedule 3.1.17, there
is no legal action, suit arbitration or other legal, administrative or other
governmental litigation, inquiry or proceeding (whether federal, state,
local or foreign) pending or threatened against or affecting Borrower or its
properties, assets or business. Borrower (including without limitation
Borrower's respective properties, assets and business) is not subject to any
order, writ, judgment, injunction, decree, determination or award of any
court or of any governmental agency or instrumentality (whether federal,
state, local or foreign).
3.1.18 LICENSES. Borrower possesses from the appropriate
agency, commission, board, bureau, and governmental body and authority,
whether state, local, federal or foreign, all licenses, permits,
authorizations, approvals, franchises and rights which are necessary for
Borrower to engage in the businesses currently conducted and proposed to be
conducted by them, including without limitation the development, use, sale
and marketing of its existing and proposed products and services; and all
such certificates, licenses, permits, authorizations and rights have been
lawfully and validly issued, are in full force and effect, and to the
knowledge of Borrower will not be revoked, canceled, withdrawn, terminated or
suspended.
3.1.19 INTERESTED PARTY TRANSACTIONS. Except as disclosed in
SCHEDULE 3.1.19, no officer, director or stockholder owning 5% or more of any
class of securities of Borrower or any "affiliate" or "associate" (as such
terms are defined in Rule 405 promulgated under the Securities Act) of any
such Person has or had, either directly or indirectly, (a) an interest in any
Person which) (i) furnishes or sells services or products which are furnished
or sold or are proposed to be furnished or sold by Borrower, or (ii)
purchases from or sells or furnishes to, or proposes to purchase from, sell
to or furnish to, Borrower any goods or services, or (b) a beneficial
interest in any contract or agreement to which Borrower is a party or by
which it may be bound or affected.
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3.1.20 USE OF PROCEEDS. Borrower will use the proceeds from the
Loan exclusively for the purposes of sales, marketing, inventory, and
receivables.
3.1.21 DISCLOSURE. No representation or warranty contained in
this Agreement or information appearing in any writing furnished by Borrower to
Lender pursuant hereto or in connection herewith contains any untrue statement
of a material fact or facts or omits to state a material fact or facts necessary
to make the statements herein or therein not misleading. There is no fact which
Borrower has not disclosed to Lender in writing which materially and adversely
affects nor, insofar as Borrower can now foresee, will materially and adversely
affect, the properties, business, prospects, results of operations or condition
(financial or other) of Borrower or the ability of Borrower to perform this
Agreement.
SECTION 3.2. REPRESENTATIONS AND WARRANTIES BY LENDER. In order to
induce Borrower to enter into the Transaction Documents, Lender represents
and warrants to Borrower that:
3.2.1 NO REGISTRATION, ETC. Lender understands that (i) none
of the Securities have been registered under the Securities Act or
registered or qualified under any state securities law; (ii) none of
the Securities may be sold or otherwise transferred without either (A)
registration under the Securities Act and registration and/or
qualification under applicable state securities laws, or (B) an
exemption therefrom; (iii) except as provided in this Agreement,
Borrower will have no obligation to register any of the Securities
under the Securities Act or to register or qualify any of the
Securities under any state securities law, and Lender will not have
any right of any kind to require Borrower to register any of the
Securities under the Securities Act or to register or qualify any of
the Securities under any state securities laws.
3.2.2 OWN ACCOUNT. The Securities acquired by Lender are
being acquired, or will be acquired, by Lender solely for Lender's own
account (or, if Lender is a trustee, for the trust account for which
Lender is a trustee) for investment and not for resale or
distribution, and not with a view to or for sale in connection with
any distribution of the Securities.
3.2.3 KNOWLEDGE, ETC. Lender has sufficient knowledge and
experience in financial and business matters to be capable of
evaluating the risks and merits of investing in the Securities.
3.2.4 QUESTIONS, ETC . Lender, either individually or through
his investment and professional advisers, has had the opportunity to
ask questions of and receive answers from the Company concerning
Borrower and the Securities and has asked all questions and received
all answers as Lender deems necessary to invest in the Securities.
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3.2.5 ACCREDITED INVESTOR. Lender is an "accredited investor"
under the individual net worth and individual income tests of
Rule 501(a) of Regulation D under the Securities Act.
ARTICLE IV
COVENANTS OF BORROWER
SECTION 4.1 AFFIRMATIVE COVENANTS OF BORROWER. Borrower covenants and
agrees that, so long as the Note shall remain unpaid and any obligations
exist under any of the Transaction Documents, unless Lender shall otherwise
consent in writing, Borrower shall do all of the following:
4.1.1 PAYMENT OF INDEBTEDNESS, TAXES, ETC. Pay and perform its
Indebtedness and Obligations promptly and in accordance with normal terms and
pay and discharge all taxes, assessments and governmental charges or levies
imposed upon it or upon its income or profits, or upon any properties
belonging to it, prior to the date on which penalties attach thereto, and all
lawful claims which, if unpaid, might become liens or charges upon any
properties of Borrower, provided that Borrower shall not be required to pay
except as otherwise provided for in any Transaction Document, any such tax,
assessment, charge, levy or claim during the period when such is being
contested in good faith and by proper proceedings, and adequate reserves for
the accrual of any of the same are maintained, if required by generally
accepted accounting principles.
4.1.2 MAINTENANCE OF INSURANCE. Maintain insurance in such form
and in such amounts and covering such risks as is usually carried by
companies engaged in similar business and owning similar properties in the
same general areas in which Borrower operates.
4.1.3 DIRECTORS/OFFICERS. Take all actions (and cause its
directors and stockholders to take all actions) necessary to (i) elect Floyd
Hill as the Chief Operating Officer of Borrower and (ii) if and when
requested by Lender, elect a person designated by Lender as a director to
serve on the Board of Directors (and each committee thereof) of Borrower and
each subsidiary of Borrower and replace any such person with another person
designated by Lender. The obligations of Borrower under this Section 4.1.3
shall terminate at such time as any Conversion Shares, Payment Shares or
Warrant Shares are issued.
4.1.4 PRESERVATION OF CORPORATE EXISTENCE, AND RIGHTS. Preserve
and maintain its corporate existence, rights, franchises and privileges in
its jurisdictions of incorporation, and qualify and remain qualified as a
corporation in each jurisdiction in which such qualification is necessary in
view of its business and operations and the ownership of its properties.
4.1.5 PRIVATE PLACEMENT. Take all such actions necessary to
offer and sell not less than $2,140,000 of shares of Common Stock of Borrower
pursuant to the terms of the
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Spelman Agreement (the "Private Placement"). In connection with the Private
Placement, Lender and the Current Stockholders shall enter into an agreement
with the principal subscribers in the Private Placement (e.g., each person
who subscribe for an equity interest of 5% or more) pursuant to which such
parties shall agree that, if any one or more of such parties proposes to sell
any equity securities of Borrower in any transaction (or series of
transactions) in which 25% or more of the outstanding equity securities of
any class of equity securities of Borrower are to be sold, each of the other
such parties shall be given the opportunity to sell a pro rata amount of
their equity securities of Borrower of the same class (which pro rata amount
would be the percentage that the total number of equity securities of such
class then held by each such party represents of the total number of equity
securities of such class than held by all such parties).
4.1.6 COMPLIANCE WITH LAWS. Comply with the requirements of all
applicable laws, rules, regulations, ordinances, and orders of any
governmental authority , non-compliance with which might adversely affect its
business or credit, and comply with all provisions of its Articles of
Incorporation and Bylaws.
4.1.7 INSPECTION/AUDIT RIGHTS. Upon reasonable notice, at any
reasonable time and from time to time, permit Lender or any agents or
representatives thereof, to examine and make copies of and abstracts from and
to otherwise audit the records and books of account of, and (at Lender's
expense) visit its properties to discuss the affairs, finances and accounts
of Borrower and its subsidiaries with any of its officers or directors.
Borrower shall furnish and make available to Lender all such documents and
information relating to Borrower and any subsidiary of Borrower as Lender may
from time to time reasonably request, and Lender (or a representative of
Lender) shall have the right to attend or participate by telephone in all
meetings of the Board of Directors (and each committee thereof) of Borrower
and each subsidiary of Borrower.
4.1.8 KEEPING OF RECORDS AND BOOKS OF ACCOUNT. Maintain records
and books of account in accordance with generally accepted accounting
principles on a basis consistently applied; and to furnish the same to Lender
at no expense to Lender reflecting all financial transactions.
4.1.9 MAINTENANCE OF PROPERTIES, ETC. Maintain and preserve all
of its properties, necessary or useful in the proper conduct of its business,
in good working order and condition, ordinary wear and tear excepted.
4.1.10 MAINTENANCE OF LICENSES. Maintain and keep in
effect licensing, permits, approvals, know-how and similar agreements
necessary in the proper conduct of its business.
4.1.11 NOTICE OF CERTAIN EVENTS. Promptly notify Lender in
writing of the occurrence of (a) any Event of Default or of any event which
would become an Event of Default upon the giving of notice, the lapse of
time, or otherwise, which notice shall be accompanied by a written notice of
the action that Borrower proposes to take as a result of such Event of
Default;
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(b) change in the location of Borrower's chief executive office; (c) change
in the name or trade name of Borrower; (d) commencement of any litigation or
proceedings before any governmental or regulatory agency affecting Borrower,
except litigation or proceedings which, if adversely determined, could not
materially and adversely affect the financial condition of Borrower.
4.1.12 ADDITIONAL COVENANTS REGARDING TRANSACTION DOCUMENTS.
Obtain or cause to be obtained any consent or approval of any person or
entity that may be required to the execution, delivery or performance of the
Transaction Documents.
4.1.13 COMPLIANCE WITH LAWS. Comply in all respects with all
federal, state, local or foreign environmental protection laws and
regulations where the failure to comply with such laws and regulations would
have a material adverse effect upon the financial condition, business or
operations of Borrower.
4.1.14 RESERVATION OF SECURITIES. Borrower shall at all times
reserve and keep available out of its authorized and unissued stock and other
securities, for issuance and delivery to Lender as provided in the
Transaction Documents, all Securities that Borrower could be obligated to
issue or deliver under the provisions of the Transaction Documents.
4.1.15 FURTHER ASSURANCES. Upon the reasonable request of
Lender, do, execute, acknowledge and deliver or cause to be done, executed,
acknowledged and delivered all such other instruments, acts, deeds, and
assurances as may be required by Lender for the purpose of carrying out the
provisions and intent of the Transaction Documents.
SECTION 4.2 NEGATIVE COVENANTS OF BORROWER. So long as the Note shall
remain unpaid and obligations exist under this Agreement, without the prior
written consent of Lender, Borrower shall not:
4.2.1 INDEBTEDNESS, LIENS, ETC. Incur any Indebtedness, or
create, incur, assume or suffer to exist any mortgage, deed of trust, pledge,
lien, security interest, or other charge or encumbrance (including the lien
or retained security title of a conditional vendor) of any nature, upon or
with respect to any of its assets or properties, or assign or otherwise
convey any right to receive income or sell, convey, lease, assign or transfer
any substantial part of its assets outside the ordinary course of business,
or change the character of its business as conducted on the date hereof.
4.2.2 MERGERS, ETC. Merge into or consolidate with or into, or
sell, assign, lease or otherwise dispose of (whether in one transaction or in
a series of transactions) all or substantially all of its assets (whether now
owned or hereafter acquired in the ordinary course of business).
4.2.3 DIVIDENDS. Declare or pay any dividends or purchase,
redeem, retire or otherwise acquire for value any of its capital stock now or
hereafter outstanding, or return any
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capital to its shareholders as such, or make any distribution of assets to
its shareholders as such, or issue any additional shares of capital stock or
in any way cause a dilution in the stock ownership interests in Borrower.
4.2.4 CHANGE IN NATURE OF BUSINESS. Make any material change in
the nature of its business.
SECTION 4.3 REGISTRATION RIGHTS. Lender (and any transferee of any of
the Securities) shall have the right to require Borrower to register the
Conversion Shares, the Payment Shares and the Warrant Shares under the
Securities Act and/or to register and/or to qualify (or exempt from
registration and/or qualification) the Conversion Shares, the Payment Shares
and the Warrant Shares under the registration, permit or qualification
requirements of any state securities laws, whenever Borrower takes any such
action with respect to any stock or other equity securities held by any other
Person, all on terms and subject to conditions no less favorable to Lender
(or such transferee) than the terms and conditions applicable to any such
other Person.
SECTION 4.4 STOCKHOLDER RIGHTS. So long as Lender and/or his heirs,
executors, personal representatives and transferees continue to hold at least
50% of the Conversion Shares, Payment Shares or Warrant Shares, as the case
may be, that are issued, Borrower shall do all of the following:
4.4.1 DIRECTORS/OFFICERS. Unless consented otherwise in writing
by Lender (or any such heir, executor, personal representative or
transferee), take all actions (and cause its directors and stockholders to
take all actions) necessary to (i) elect Floyd Hill as the Chief Operating
Officer of Borrower, and (ii) if and when requested by Lender (or any such
heir, executor, personal representative or transferee), elect a person
designated by Lender (or any such heir, executor, personal representative or
transferee) as a director to serve on the Board of Directors (and each
committee thereof) of Borrower and each subsidiary of Borrower and replace
any such person with another person designated by Lender (or any such heir,
executor, personal representative or transferee). If there is more than one
Person holding Conversion Shares, Payment Shares or Warrant Shares, the
rights granted under this Section 4.4.1 shall be exercised by the Person or
Persons holding a majority of the outstanding Conversion Shares, Payment
Shares or Warrant Shares, as the case may be, held by Lender and/or his
heirs, executors, personal representatives and transferees or, if there is no
such Person or Persons, such rights shall be exercised by the Lender or his
designee.
4.4.2 INSPECTION/AUDIT RIGHTS, Upon reasonable notice, at any
reasonable time and from time to time, permit Lender (and any such heir,
executor, personal representative or transferee) or any agents or
representatives thereof, to examine and make copies of and abstracts from and
to otherwise audit the records and books of account of, and, at Lender's (or
such heir's, executor's, personal representative's or transferee's) expense,
visit its properties to discuss the affairs, finances and accounts of
Borrower and its subsidiaries with any of its officers or directors.
Borrower shall furnish and make available to Lender (and any such heir,
executor,
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personal representative or transferee) all such documents and information
relating to Borrower and any subsidiary of Borrower as Lender (or such heir,
executor, personal representative or transferee) may from time to time
reasonably request, and Lender (and any such heir, executor, personal
representative or transferee) or a representative of Lender (or any such
heir, executor, personal representative or transferee) shall have the right
to attend or participate by telephone in all meetings of the Board of
Directors (and each committee thereof) of Borrower and each subsidiary of
Borrower.
4.4.3 PREEMPTIVE RIGHTS. Give Lender (and any such heir,
executor, personal representative or transferee) the preemptive right to
purchase (at the same price and on the same terms and conditions as any other
Person) Lender's (or such heir's, executor's, personal representative's or
transferee's) pro rata share of any stock or other equity securities that
Borrower or any subsidiary may propose to sell or otherwise issue (which pro
rata share shall be based upon the percentage of the outstanding common stock
of Borrower represented by the shares of common stock of Borrower owned by
Lender (or such heir, executor, personal representative or transferee).
ARTICLE V
EVENTS OF DEFAULT AND REMEDIES
SECTION 5.1 EVENTS OF DEFAULT. The occurrence of any of the following
events shall be an Event of Default.
5.1.1 Failure to pay in full the amount of any principal of the
Note, or failure to pay any interest on the Note, when any such payment shall
be or become due; or
5.1.2 Any representation or warranty made in any of the
Transaction Documents or in any certificate, agreement, instrument or
statement contemplated by or made or delivered pursuant to or in connection
with any Transaction Documents, shall prove to have been incorrect when made
in any respect that is material to the transactions contemplated by the
Transaction Documents; or
5.1.3 Failure of Borrower or any other party other than Lender
to perform or observe any other term, covenant or agreement contained in any
of the Transaction Documents; or
5.1.4 Any of the Transaction Documents at any time after
execution and delivery and for any reason, shall cease to be in full force
and effect or shall be declared to be null and void, or the validity or
enforceability thereof shall be contested by Borrower or the Current
Stockholders or Borrower shall deny or disclaim any further liability or
obligation under any of the Transaction Documents to which Borrower and/or
the Current Stockholders are a party; or
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5.1.5 A decree or order for relief shall be entered by a court
having jurisdiction in the premises in respect of Borrower in an involuntary
case under the Federal bankruptcy laws, as now or hereafter constituted, or
any other applicable federal or state bankruptcy, insolvency or other similar
law, or a receiver, liquidator, assignee, custodian, trustee, sequestrator or
similar official shall be appointed for borrower or for any substantial part
of its properties, or the winding-up or liquidation of its affairs shall be
ordered and any such decree, order or appointment shall continue unstayed and
in effect for a period of 30 consecutive days.
5.1.6 Borrower shall commence a voluntary case under the federal
bankruptcy laws, as now constituted or hereafter amended, or any other
applicable federal or state bankruptcy, insolvency or other similar law, or
shall consent to the appointment of or taking possession by a receiver,
liquidator, assignee, trustee, custodian, sequestrator (or other similar
official) of or for Borrower or any substantial part of its properties or
Borrower shall make any assignment for the benefit of creditors, or Borrower
shall fail generally to pay its debts as such debts become due, or Borrower
shall take corporate action in furtherance of any of the foregoing.
5.1.7 There shall occur any material adverse change in the
financial condition, business or operations of Borrower;
5.1.8 There shall occur any material adverse change
in the Collateral;
5.1.9 A final judgment or judgments for the payment of money in
excess of $25,000 in the aggregate shall have been rendered against Borrower
and the same shall have remained unsatisfied and in effect, without stay of
execution, for any period of sixty (60) days.
And in the case of events (other than (i) Note payment defaults, (ii)
Collateral defaults, (iii) any act, event or condition resulting in or
relating to an emergency situation or is incurable in the reasonable judgment
of Lender, or (iv) an event for which Borrower fails to give Lender notice as
required in Section 4.1.11(a) within a period of 10 days after obtaining
knowledge of any Event of Default or other event referred to therein, in each
of which cases, notice and opportunity to cure shall not be applicable), such
failure remains unremedied for 30 days after written notice thereof shall
have been given to Borrower.
SECTION 5.2 REMEDIES UPON DEFAULT. Upon the occurrence of and during
the continuance of any Event of Default, the Lender may exercise any and all
right and remedies granted to Lender under the Transaction Documents or by
law.
ARTICLE VI
MISCELLANEOUS
SECTION 6.1 NO WAIVER; CUMULATIVE REMEDIES. No failure or delay
on the part of Lender, or any other holder of the Note in exercising any
right, power or remedy hereunder or
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under the Note shall operate as a waiver thereof; nor shall any single or
partial exercise of any right, power or remedy preclude any other or further
exercise thereof or the exercise of any other right, power or remedy
hereunder or under the Note. The remedies in the Transaction Documents are
cumulative and not exclusive of any remedies provided by law.
SECTION 6.2 AMENDMENTS, ETC. No amendment, modification, termination
or waiver of any provision of any Transaction Document nor consent to any
departure by Borrower or any other party other than Lender therefrom, shall
in any event be effective unless the same shall be in writing and signed by
Lender and then such waiver or consent shall be effective only in the
specific instance and for the specific purpose for which given. No notice to
or demand on Borrower in any case shall entitle Borrower to any other or
further notice or demand in similar or other circumstances.
SECTION 6.3 ADDRESSES FOR NOTICES, ETC. All notices, requests,
demands, directions and other communications provided for under this
Agreement shall be in writing and mailed, sent by FAX or otherwise delivered
to the applicable party at the address or FAX number indicated below:
If to Borrower:
S&D Foods, Inc.
1333 Marsten Road
Burlingame, California 94010
Attn: President
FAX: (415) 579-5566
If to Lender:
Kenneth A. Steel
c/o K.A. Steel Chemicals Inc.
1001 Main Street
Lemont, IL 60439
FAX: 708-257-3922
or, as to each party, at such other FAX number or address as shall be
designated by such party in a written notice to each other party complying as
to delivery with the terms of this Section. All such notices, requests,
demands, directions and other communications shall, when mailed, be effective
when deposited in the mails addressed as aforesaid.
SECTION 6.4 COSTS, EXPENSES AND TAXES. Borrower shall pay any and all
documentary and other taxes (other than income or gross receipts taxes
generally applicable to banks) and fees or charges payable or determined to
be payable in connection with the execution, delivery, filing, or recording
of the Transaction Documents, or any other instrument or writing to be
delivered
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thereunder, or in connection with any transaction pursuant thereto, and shall
reimburse, hold harmless, and indemnify Lender for, from, and against any and
all loss, liability, or legal or other expense with respect to or resulting
from any delay in paying or failing to pay any tax, fee or charge or that any
of them may suffer or incur by reason of the failure of Borrower to perform
any of its obligations under the Transaction Documents or any event of
default hereunder; PROVIDED, HOWEVER, that each party shall pay its own
attorneys' fees in connection with the preparation and review of the
Transaction Documents. The covenants and agreements of this Section 6.4
shall survive the repayment of the Note and the cancellation thereof.
SECTION 6.5 EXECUTION IN COUNTERPARTS. This Agreement may be executed
in any number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed and delivered shall be deemed to
be an original and all of which counterparts of this Agreement taken together
shall constitute but one and the same instrument.
SECTION 6.6 BINDING EFFECT; ASSIGNMENT. This Agreement shall become
effective when it shall have been executed by the parties hereto and
thereafter shall be binding upon and inure to the benefit of and be enforced
by the parties hereto and their respective successors, assigns, heirs,
executors and personal representatives, and, in the case of any Security, any
person to whom such Security may be conveyed, transferred or assigned, except
that Borrower shall not have the right to assign its rights or obligations
hereunder or any interest herein without the prior written consent of Lender.
Lender shall be entitled to assign the Transaction Documents, in whole or in
part, by way of participation or otherwise, at any time.
SECTION 6.7 GOVERNING LAW. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Illinois, without
regard to the choice of law provisions thereof.
SECTION 6.8 SEVERABILITY OF PROVISIONS. Any provision of any
Transaction Document which is prohibited or unenforceable in any jurisdiction
shall, as to such jurisdiction, be ineffective to the extent of such
prohibition or unenforceability without invalidating the remaining provisions
hereof or thereof or affecting the validity or enforceability of such
provision in any other jurisdiction.
SECTION 6.9 HEADINGS. Article and Section headings in this Agreement
are included herein for convenience of reference only and shall not
constitute a part of this Agreement for any other purpose.
SECTION 6.10 SECURITY. The Obligations, all amounts owing to Lender
under the Collateral Documents, and all amounts advanced or expended by
Lender for the maintenance or preservation of collateral shall be secured by
liens on the property described in the Collateral Documents.
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SECTION 6.11 PAYMENTS ON NON-BUSINESS DAYS. If any payment to be made
hereunder or under the Note shall become due on a day other than a Business
Day, such payment shall be made on the next Business Day and such extension
of time shall be included in computing any interest in respect of such
payments.
SECTION 6.12 INTEGRATION; ENTIRE AGREEMENT. This Agreement, the Note,
the Transaction Documents, and other instruments and documents to be
delivered hereunder and thereunder are intended by the parties hereto and
thereto to be an integrated contract, which together, except as otherwise
provided herein, contain the entire understandings of the parties with
respect to the subject matter contained herein and therein. There are no
restrictions, warranties, representations, covenants or undertakings other
than those expressly set forth herein and therein. This Agreement, the Note,
the Transaction Documents and other documents to be delivered hereunder and
thereunder, except as otherwise provided for herein, supersede all prior
agreements and understandings between the parties with respect to such
subject matter. All exhibits attached to this Agreement are incorporated
herein by reference as though fully set forth.
SECTION 6.13 SURVIVAL OF AGREEMENTS. All agreements, covenants,
representations and warranties made herein shall survive the execution and
delivery of the Transaction Documents and the making of the Loan hereunder.
SECTION 6.14 FAILURE OR INDULGENCE NOT WAIVER. No failure or delay on
the part of the Lender or any holder of any Security in the exercise of any
power, right or privilege hereunder shall operate as a waiver thereof, nor
shall any single or partial exercise of any such power, right or privilege
preclude other or further exercise thereof or of any other right, power or
privilege. All rights and remedies existing under the Transaction Documents
are cumulative to, and not exclusive of, any rights or remedies otherwise
available.
SECTION 6.15 INDEMNITY BY BORROWER. Borrower agrees to indemnify, save,
defend and hold harmless Lender and its directors, officers, agents, and
employees (collectively the "indemnitees") from and against any and all
claims, demands, actions, or causes of action that are asserted against any
indemnitee by any Person if the claim, demand, action or cause of action
directly or indirectly relates to a claim, demand, action or cause of action
that the Person has or asserts against Borrower, except to the extent such
claim, demand, action or cause of action arises from the negligence or
misconduct of Lender.
SECTION 6.16 FURTHER ASSURANCES. At any time or from time to time upon
the request of Lender, Borrower will execute and deliver such further
documents and do such other acts and things as Lender may reasonably request
in order to effect fully the purposes of the Transaction Documents and to
provide for the payment of all Obligations in accordance with the terms of
the Transaction Documents.
SECTION 6.17 TIME OF THE ESSENCE. With respect to all of the
Transaction Documents, time is of the essence.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers thereunto duly authorized, on the date
first above written.
S&D FOODS, INC.
By: /s/ DEAN NICHOLAS
----------------------------------
Its: President
----------------------------------
/s/ KENNETH A STEEL
----------------------------------
KENNETH A STEEL
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EXHIBIT A
S&D FOODS, INC.
CONVERTIBLE PROMISSORY NOTE
THIS NOTE AND THE SHARES THAT MAY BE ISSUED UNDER THE PROVISIONS OF THIS NOTE
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR REGISTERED OR
QUALIFIED UNDER ANY STATE SECURITIES LAW AND MAY NOT BE OFFERED FOR SALE,, SOLD
OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO (A) AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OF 1933 AND REGISTRATION AND/OR QUALIFICATION
OF THE SAME UNDER ANY APPLICABLE STATE SECURITIES LAW OR (B) AN EXEMPTION
THEREFROM.
$500,000 OCTOBER __, 1995
SAN FRANCISCO, CALIFORNIA
FOR VALUE RECEIVED, S&D FOODS, INC., a California corporation ("Maker"),
promises to pay to KENNETH A. STEEL ("Holder"), or order, the principal amount
of Five Hundred Thousand Dollars ($500,000), together with interest on such
amount, all as set forth below:
LOAN AND INVESTMENT AGREEMENT. This Note is the Convertible Promissory
Note referred to in that certain Loan and Investment Agreement of even
date herewith (the "Loan Agreement") between Maker and Holder. All
terms used in this Note that are defined in the Loan Agreement and not
otherwise defined herein shall have the meanings assigned to such terms
in the Loan Agreement.
INTEREST RATE. The outstanding principal of this Note shall bear
interest at the rate of ten and a quarter percent (10.25%) per annum.
Interest shall accrue on the outstanding principal of this Note from and
after the date of this Note and shall be calculated on the basis of a
365-day year.
MAXIMUM INTEREST. In no event whatsoever shall the amount paid, or
agreed to be paid, to Holder for the use, forbearance or detention of
money loaned hereunder or for the performance or payment of any covenant
or obligation contained herein, as interest or
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otherwise, exceed the maximum amount permissible under applicable law. If
under any circumstance fulfillment of any covenant or obligation hereunder
exceeds the limit of validity prescribed by law, then, IPSO FACTO, the
obligation to be fulfilled shall be reduced to the limit of such validity,
and if under any circumstance Holder shall ever receive as interest under
this Note or otherwise an amount that would exceed the highest lawful rate,
such amount that would be excessive interest shall be applied to the
reduction of the unpaid principal hereof and not to the payment of interest
or, if such amount that would be excessive interest exceeds the unpaid
principal hereof, the amount thereof in excess of the unpaid principal hereof
shall be refunded to Maker. Nothing contained in this paragraph shall limit
or restrict Maker's covenants and obligations under the provisions of
CONVERSION RIGHT, STOCK PAYMENT RIGHT, DIVIDENDS/DISTRIBUTIONS, or ADJUSTMENT
EVENTS below.
MATURITY DATE/PAYMENT. All unpaid principal of this Note, together with all
accrued and unpaid interest, shall be due on March 31, 1996 ("Stated Maturity
Date"). Any payment with respect to this Note shall be applied first to the
payment of attorneys fees and costs and expenses of collection, if any, then to
accrued and unpaid interest, and then to unpaid principal. All payments of
principal and interest are to be made to Holder at K.A. Steel Chemicals Inc.,
1001 Main Street, Lemont, IL 60439, Attn: Kenneth A. Steel, or such other
address as Holder may specify to be the Place of Payment by notice given to
Maker as provided below under NOTICES (the "Place of Payment"), and, except as
expressly provided below under STOCK PAYMENT RIGHT, all payments of principal
and interest are to be made in lawful money of the United States of America.
All principal, interest and other amounts payable under this Note that remain
unpaid after the Stated Maturity Date shall bear interest from such date until
paid at the rate specified above under INTEREST PATE.
SECURITY. The payment of principal and interest and all other obligations of
Maker in respect of this Note are secured by a first lien and security interest
in the Collateral under the Security Agreement.
CONVERSION RIGHT. Maker is currently contemplating a private placement of its
Common Stock (the "Private Placement"). This Note shall be convertible at any
time on or prior to the Stated Maturity Date (but in no event later than the
Stated Maturity Date) at the option of Holder (the "Conversion Right") into
shares of Maker's Common Stock ("Common Stock") at the lowest price per share at
which Common Stock is offered or sold in connection with the Private Placement
(the "Conversion Price"). If the Conversion Right is exercised, the number of
shares of Common Stock that Holder shall be entitled to receive upon exercise of
the Conversion Right shall equal the greater of (i) $500,000 divided by the
Conversion Price or (ii) the number of shares necessary to give Holder a __%
equity interest in Maker on a fully diluted basis as of the Conversion Date (as
defined below). The shares of Common Stock acquired upon exercise of the
Conversion Right are hereinafter referred to as the "Conversion Shares"). The
Conversion Right may be
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exercised by Holder by giving notice to Maker as provided below under NOTICES
stating that Holder is exercising the Conversion Right. The date on which such
notice is given to Maker is the "Conversion Date", and all Conversion Shares
shall be issued to Holder as of the Conversion Date, with the result that Holder
shall be treated as the holder of record of the Conversion Shares on and as of
the Conversion Date. Within a period of ten (10) days after the Conversion
Date, Maker shall deliver to Holder, at the Place of Payment, a stock
certificate, dated the Conversion Date, for the Conversion Shares and a check in
payment of all accrued and unpaid interest on this Note, against delivery to
Maker by Holder of this Note marked canceled (or an Affidavit of Loss and
Indemnity Agreement in the form attached hereto duly completed and signed by
Holder).
STOCK PAYMENT RIGHT. If (i) prior to the Stated Maturity Date, Maker raises at
least $2,140,000 in cash from the sale of its Common Stock in the Private
Placement, (ii) on or prior to the Stock Payment Date (as defined below), no
Event of Default has occurred and is continuing, and no event has occurred and
is continuing which, upon the giving of notice, the lapse of time, or otherwise,
could become an Event of Default, and (iii) on or prior to the Stated Maturity
Date, Maker delivers to Holder a written certification from the President, of
Maker that the conditions described in clauses (i) and (ii) of this paragraph
have been satisfied (the date on which such certification is delivered to Maker
is the "Stock Payment Date"), then Maker shall have the right (the "Stock
Payment Right") to pay the unpaid principal of this Note, by delivering to
Holder, on the Stock Payment Date (but in no event later than the Stock Payment
Date), the number of shares of its Common Stock equal the greater of (i)
$500,000 divided by the Conversion Price or (ii) the number of shares necessary
to give Holder a __% equity interest in Maker on a fully diluted basis as of
the Stock Payment Date. The shares of Common Stock so delivered are hereinafter
referred to as the "Payment Shares"). The Payment Shares shall be issued to
Holder as of the Stock Payment Date, with the result that Holder shall be
treated as the holder of record of the Payment Shares on and as of the Stock
Payment Date. On the Stock Payment Date, Maker shall deliver to Holder, at the
Place of Payment, a stock certificate, dated the Stock Payment Date, for the
Payment Shares and a check in payment of all accrued and unpaid interest on this
Note through the Stock Payment Date, against delivery to Maker by Holder of this
Note marked canceled (or an Affidavit of Loss and Indemnity Agreement in the
form attached hereto duly completed and signed by Holder). Maker acknowledges
and agrees that, on the Stock Payment Date, the fair market value of the Payment
Shares, together with any other stock, securities or property that may be
delivered to Holder as provided below under DIVIDENDS/DISTRIBUTIONS, does not
and will not exceed the amount of unpaid principal and accrued and unpaid
interest that is being paid with the Payment Shares.
DIVIDENDS/DISTRIBUTIONS.
Whenever any Conversion Shares or Payment Shares are issued, Maker shall also
deliver to Holder, at the time the certificate representing such Conversion
Shares or Payment Shares
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are delivered to Holder, any and all dividends and other distributions that
would have been paid or made to the Holder in respect of the Conversion Shares
or the Payment Shares if Holder had been the holder of record of such Conversion
Shares or Payment Shares on and as of the date of this Note and at all times
subsequent thereto through and including the Conversion Date or the Stock
Payment Date, as the case may be. The provisions of this paragraph shall
survive the surrender and cancellation of this Note.
ADJUSTMENT EVENTS. In the event that, on or after the date of this Note and
prior to the Conversion Date or the Stock Payment Date, as the case may, there
should be a merger, consolidation, reorganization, recapitalization, stock
dividend, stock split or other similar change in the corporate structure or
capitalization of Maker which affects the outstanding Common Stock (an
"Adjustment Event"), then, in the case of each such Adjustment Event, an
appropriate adjustment to reflect such Adjustment Event, as reasonably
determined in good faith by Maker and Holder, shall be made with respect to the
Conversion Price and the number and character of the securities which may be
issued in connection with the Conversion Right and the Payment Right and any and
all other provisions of this Note that may be affected thereby. Notice of each
Adjustment Event will be delivered to Holder by Maker not less than ten (10)
days prior to the date on which such Adjustment Event is to occur. The
provisions of this paragraph shall survive the surrender and cancellation of
this Note.
TRANSFER OF NOTE.
RIGHT TO TRANSFER. Subject to the provisions of SECURITIES LAWS below, Holder
may sell, assign or otherwise transfer this Note, in whole or in part, (i) at
any time prior to the exercise of the Conversion Right or the Stock Payment
Right, or (ii) if neither such right is exercised, at any time prior to the
payment of all principal, interest and other amounts payable hereunder.
TRANSFER PROCEDURE.
(i) This Note will be deemed to have been transferred only if and when Maker
has received all of the following items (the date on which all of such items are
received by Maker is hereinafter sometimes referred to as the "Transfer Date"):
(A) This Note (or an Affidavit of Loss and Indemnity Agreement in the form
attached hereto duly completed and signed by Holder) with a Notice of
Transfer in the form attached hereto duly completed and signed by Holder
and the proposed transferee; and
(B) Any written agreement that Maker may require Holder to furnish
pursuant to the provisions of SECURITIES LAWS below.
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(ii) Within a period of ten days after the Transfer Date, Maker shall
deliver to the transferee and/or Holder, as the case may be:
(A) A new Note dated the Transfer Date issued in the name of the
transferee for the principal amount of this Note that is being
transferred; and
(B) If this Note is being transferred only in part, a new Note dated
the Transfer Date issued in the name of Holder for the remaining
principal amount of this Note.
(iii) This Note will be deemed to have been transferred to the proposed
transferee on the Transfer Date, and the proposed transferee will be deemed for
all purposes to have become the holder of this Note (with respect to the
principal amount of this Note that is being transferred) on and as of the
Transfer Date.
SECURITIES LAWS. By acceptance of this Note and any Conversion Shares or
Payment Shares, Holder agrees that:
SECURITIES LAW COMPLIANCE. Any sale, assignment or other transfer of this Note,
any Conversion Shares or any Payment Shares (and any other securities that may
be issued or distributed therewith or with respect thereto or in exchange or
substitution therefor) must be made in compliance with applicable federal and
state securities laws, and no sale, assignment or other transfer of this Note,
any Conversion Shares or any Payment Shares (or any other securities that may be
issued or distributed with respect thereto or issued in exchange or substitution
therefor) may be made that would violate any applicable federal and state
securities laws.
TRANSFEREE AGREEMENT. As a condition precedent to any proposed sale, assignment
or other transfer of this Note, any Conversion Shares or any Payment Shares (and
any other securities that may be issued or distributed therewith or with respect
thereto or in exchange or substitution therefor), Maker may require that Holder
furnish to Maker a written agreement from the proposed transferee, in form and
substance reasonably satisfactory to Maker and its legal counsel, concerning the
investment intent of the proposed transferee and other matters relating to
federal and state securities law compliance.
LEGENDS. Unless and until this Note, all Conversion Shares and all Payment
Shares (and any other securities that may be issued or distributed therewith or
with respect thereto or in exchange or substitution therefor) are freely
transferable without registration under the Securities Act of 1933 and/or
registration and/or qualification under any applicable state securities laws,
this Note and each certificate representing Conversion Shares or Payment Shares
(and any other securities that may be issued or distributed therewith or with
respect thereto or in exchange or substitution therefor) shall have endorsed
thereon a legend substantially as follows:
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"THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933 OR REGISTERED OR QUALIFIED UNDER ANY STATE SECURITIES LAW AND MAY
NOT BE OFFERED FOR SALE, SOLD OR OTHERWISE TRANSFERRED EXCEPT PURSUANT
TO (A) AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF
1933 AND REGISTRATION AND/OR QUALIFICATION OF SUCH SHARES UNDER ANY
APPLICABLE STATE SECURITIES LAW OR (B) AN EXEMPTION THEREFROM."
Maker may place such additional legends on this Note and any certificate
representing Conversion Shares or Payment Shares (and any other securities that
may be issued or distributed therewith or with respect thereto or in exchange or
substitution therefor) as Maker, upon the advice of its legal counsel, may from
time to time deem necessary or appropriate to comply with any applicable federal
or state securities laws.
SHARES DULY AUTHORIZED, ETC. All Conversion Shares and all Payment Shares will,
when delivered to Holder, be duly authorized, validly issued, fully paid and
nonassessable.
EVENTS OF DEFAULT/ACCELERATION. Upon the occurrence and during the continuance
of any Event of Default, at the election of Holder, all unpaid principal of this
Note, together with all accrued and unpaid interest may be declared (and, if so
declared, shall be and become) immediately due and payable, all without demand,
presentment or notice, each of which is hereby waived by Maker, and, following
any such election, Holder shall have and may exercise any and all rights and
remedies to which Holder may be entitled under this Note, the Security Agreement
or any other agreement or by law. The date on which such election is made is
the "Accelerated Maturity Date". All principal, interest and other amounts
payable under this Note that remain unpaid after the Accelerated Maturity Date
shall bear interest from such date until paid at the rate specified above under
INTEREST RATE.
ATTORNEYS' FEES AND COSTS. If Holder brings any legal action against Maker to
enforce any of the provisions of this Note or because of a breach or default by
Maker under this Note, Holder shall be entitled, in addition to any other relief
granted, to recover from Maker all costs and expenses incurred by Holder in
connection with such legal action, including, without limitation, all reasonable
attorneys' fees, and the right to recover such costs and expenses shall be
deemed to have accrued upon the commencement of such legal action and shall be
enforceable whether or not such legal action is prosecuted to judgment.
WAIVERS. Maker hereby (i) waives diligence, demand, presentment, notice of
non-payment, protest and notice of protest, (ii) expressly agrees that this
Note and any payment hereunder may be renewed, modified or extended from time
to time and at any time, (iii) consents to the acceptance or release of
security for this Note, and (iv) waives to
6
<PAGE>
the fullest extent permitted by law the right to plead any and all statutes of
limitations as a defense to any demand on this Note or to any agreement to pay
this Note.
GOVERNING LAW/JURISDICTION AND VENUE. This Note shall be governed by and coded
in accordance with the internal laws of the State of Illinois, without reference
to its conflict of laws rules. Maker hereby consents and agrees that any
federal or state court located in the State of Illinois shall have jurisdiction
over Maker for any legal action that may be brought against Maker to enforce any
of the provisions of this Note or because of a breach or default by Maker under
this Note. Maker hereby waives any and all objections based on venue or
jurisdiction to any legal action brought in any such court for such purpose, and
Maker hereby agrees that, to the fullest extent permitted by law, service in any
such legal action may be made on Maker as provided below under NOTICES.
NOTICES. All notices, requests, demands and other communications under this
Note must be in writing and shall be deemed to have been duly given and
delivered (i) on the date of delivery if delivered personally or by fax to the
party to whom notice is to be given, or (ii) on the third (3rd) day after
mailing if mailed to the party to whom notice is given, by first class mail,
registered or certified, postage prepaid, and properly addressed as follows:
If to Holder:
Kenneth A. Steel.
K.A. Steel Chemicals Inc.
1001 Main Street
Lemont, IL 60439
FAX: (708) 257-3922
If to Maker:
S&D Foods, Inc.
1333 Marsten Road
Burlingame, California 94010
Attn: President
FAX: (415) 579-5566
Either party may change the address or FAX number to which notices to such party
are to be addressed by giving the other party notice of such change in the
manner set forth above.
MISCELLANEOUS. The provisions of this Note shall inure to the benefit of and be
binding upon and enforceable against (i) the undersigned Maker and its
successors and assigns, including any person or entity that succeeds to all or
any substantial part of the business and assets of Maker, whether or not such
person or entity expressly assumes this
7
<PAGE>
Note, and (ii) the named Holder and his heirs, executors, personal
representations, and any person or entity to whom this Note or any interest
herein may be conveyed, transferred or assigned. As used herein, the term
"Maker" shall include the undersigned Maker and its successors and assigns,
including any person or entity that succeeds to all or any substantial part
of the business and assets of Maker, whether or not such person or entity
expressly assumes this Note, and the term "Holder, shall include the named
Holder and his heirs, executors, personal representations, and any person
or entity to whom this Note or any interest herein may be conveyed,
transferred or assigned. Maker represents and warrants to Holder that all
obligations under this Note arise out of or in connection with business
purposes and do not relate to any personal, family or household purpose.
IN WITNESS WHEREOF, Maker has caused this Note to be executed by one of its duly
authorized officer on October __, 1995.
S&D FOODS, INC.,
a California corporation
By:
------------------------------------
Its:
-------------------------------
8
<PAGE>
NOTICE OF TRANSFER
The Holder hereby:
(i) sells, assigns and offers this Note as to __________ unpaid
principal of this Note to the following proposed transferee:
Name:
--------------------------
Address:
--------------------------
--------------------------
--------------------------
Taxpayer I.D. No.: --------------------------
(ii) Requests that a new Note be issued in the name of the transferee for
the principal amount of this Note that is being transferred and that the same be
delivered to the transferee at the address set forth above; and
(iii) if this Note is being transferred only in part, requests that a
new Note be issued in the name of Holder for the remaining balance of the unpaid
principal of this Note and that the same be delivered to the Holder at the Place
or Payment.
Dated: 19
--------------, -- ---------------------------------
Signature
(Sign exactly as your name appears
in this Note)
<PAGE>
The undersigned, being the proposed transferee named in this Notice of
Transfer, hereby accepts and agrees to be bound by all of the terms and
conditions of the new Note that is being issued to the undersigned.
Dated: 19
--------------, -- ---------------------------------
Signature
(Sign exactly as your name appears
in this Notice of Transfer)
10
<PAGE>
STOCK REDEMPTION AGREEMENT
This Stock Redemption Agreement is entered into as of November 15,
1995, by and between S & D FOODS, INC., a California corporation (the
"Corporation"), and DEAN NICHOLSON ("Nicholson") and STEVEN REEDY ("Reedy"),
with reference to the following facts:
A. Nicholson and Reedy each owns 1,000,000 shares of common stock of
the Corporation.
B. Nicholson and Reedy each desire to sell to the Corporation, and the
Corporation desires to purchase from each of Nicholson and Reedy, 550,000
shares of the common stock of the Corporation owned by them, pursuant to the
terms and conditions hereof.
NOW, THEREFORE, the parties hereto agree as follows:
1. PURCHASE AND SALE. Effective upon the closing of the private
placement of 1,100,000 shares of common stock for a purchase price of $2.00
per share (the "Private Placement"), Nicholson and Reedy each shall sell to
the Corporation, and the Corporation shall purchase from each of Nicholson
and Reedy 160,000 shares of the common stock of the Corporation for the
purchase price indicated in Section 2.a, and immediately thereafter, the
Corporation shall purchase from each of Nicholson and Reedy 390,000 shares of
the common stock of the Corporation for the purchase price indicated in
Section 2.b (collectively, the "Shares"). Upon the closing of the Private
Placement, Nicholson and Reedy shall deliver to the Corporation certificates
representing the Shares, duly endorsed to the Corporation or accompanied by
stock assignments, executed by Nicholson and Reedy, respectively.
2. PURCHASE PRICE AND PAYMENT. The purchase price of the Shares shall
be Two Million Two Hundred Thousand Dollars ($2,200,000), payable as follows:
a. The Corporation shall pay to each of Nicholson and Reedy Three
Hundred Twenty Thousand Dollars ($320,000) by check upon the closing of the
Private Placement.
b. The Corporation shall execute and deliver to each of Nicholson
and Reedy the Promissory Notes in the forms attached hereto as Exhibit A,
each in the original principal amounts of Seven Hundred Eighty Thousand
Dollars ($780,000) (the "Promissory Notes"). The Corporation shall pay
Nicholson and Reedy,
1
<PAGE>
respectively, the principal amounts under the Promissory Notes upon the
earlier of (i) the date that is two years after the date of the closing of
the Private Placement, or (ii) the closing of any initial public offering of
the Corporation's securities.
3. SEVERABILITY. If any provision of this Agreement is held to be
illegal, invalid, or unenforceable under current or future laws, that
provision shall be fully severable, this Agreement shall be construed and
enforced as if such illegal, invalid, or unenforceable provision had never
composed a part of this Agreement, and the remaining provisions of this
Agreement shall remain in full force and effect and shall not be affected by
the illegal, invalid, or unenforceable provision or by its severance from
this Agreement. Furthermore, in lieu of each such illegal, invalid, or
unenforceable provision, there shall be added automatically as a part of this
Agreement a provision as similar in terms to such illegal, invalid, or
unenforceable provision as may be possible and be legal, valid, and
enforceable, and the Corporation hereby requests the court or any arbitrator
to whom disputes relating to this Agreement are submitted to reform the
otherwise unenforceable covenant in accordance with the preceding provision.
4. CORPORATE DISTRIBUTIONS. Upon the closing of the Private Placement,
the Corporation shall obtain a certificate from its outside CPA indicating
whether the payment under this Agreement complies with Section 500 of the
California Corporations Code and showing the calculations made by them. The
Corporation's outside CPA shall also provide a certificate indicating whether
the payment as of the due date of the Promissory Notes complies with Section
500. In regard to the portion of the payment that does not comply with
Section 500, Nicholson and Reedy agree to subordinate equal amounts of that
portion owing under the Promissory Notes to the then-existing creditors until
such time as the payment of the Promissory Notes would comply with Section
500, without regard to compliance as of the date of the issuance of the
Promissory Notes.
5. REPRESENTATIONS AND WARRANTIES OF NICHOLSON AND REEDY. Nicholson
and Reedy represent and warrant that with respect to the shares to be sold by
them under this Agreement that each is the owner of his respective Shares,
beneficially and of record, free and clear of all security interests,
pledges, charges, encumbrances and options.
6. REPRESENTATION AND WARRANTY OF THE CORPORATION. The Corporation
represents and warrants that redemption of the Shares has been duly
authorized by all necessary corporate action on the part of the Corporation.
2
<PAGE>
7. ENTIRE AGREEMENT. This Agreement contains the entire agreement
between the parties with respect to the subject matter contained herein.
There are no representations, agreements, arrangements or understandings,
oral or written, between the parties, with respect to such subject matter
which are not fully expressed herein.
8. BINDING AGREEMENT. This Agreement shall be binding on, and shall
inure to the benefit of, the parties to it and their respective heirs, legal
representatives, successors and assigns.
9. GOVERNING LAW. This Agreement shall be construed in accordance
with, and governed by, the laws of the State of California.
10. ATTORNEY'S FEES. If any dispute arises out of the terms of this
Agreement, the prevailing party shall be entitled to recover reasonable
attorney's fees and other costs incurred in connection with that dispute, in
addition to any other relief to which he or it is entitled.
IN WITNESS WHEREOF, the parties hereto have executed this Redemption
Agreement as of the date first written above.
S & D FOODS, INC.,
a California corporation
By: /s/ DEAN NICHOLSON
-----------------------------------
Its: President
-----------------------------------
"Corporation"
/s/ DEAN NICHOLSON
---------------------------------------
DEAN NICHOLSON
"Nicholson"
/s/ STEVEN REEDY
---------------------------------------
STEVEN REEDY
"Reedy"
3
<PAGE>
EXHIBIT A
SECURED PROMISSORY NOTE
$780,000 Burlingame, CA ,1995
-------------
FOR VALUE RECEIVED, the undersigned, S & D FOODS, INC., California
corporation ("Maker"), promises to pay to DEAN NICHOLSON ("Payee"), or order,
at ___________________________, California, or at such other place as Payee
may from time to time designate by written notice to Maker, the principal sum
of Seven Hundred Eighty Thousand Dollars ($780,000), without interest charged
thereon.
The principal under this Note shall be due and payable on the earlier of
(i) two years after the date hereof or (ii) the closing of any initial public
offering of Maker's securities. If the payment of the principal amount of
this Note is held to be illegal, This Note may be prepaid, at any time, in
whole or in part, without penalty.
Maker hereby waives presentment, demand for payment, notice of dishonor
and any and all other notices and demands in connection with the delivery,
acceptance, and performance, default, or enforcement of this note, and hereby
consents to any and all extensions of time, renewals, releases of liens,
waivers, or modifications that may be made or granted by Payee to Maker.
In regard to any payment of any portion of the principal amount of this
Note that does not comply with Section 500 of the California Corporations
Code, Payee agrees to subordinate that amount to the then-existing creditors
as of the date when due until such time as the payment of that portion of the
principal amount would comply with Section 500, without regard to compliance
as of the date of the issuance of this Note.
Maker agrees to pay all costs of collection hereof, including reasonable
attorneys' fees. The interpretation and enforcement of this note shall be
governed by California law.
S & D FOODS, INC.,
a California Corporation
By
---------------------------------
Steve Reedy, Secretary
"Maker"
<PAGE>
EXHIBIT A
SECURED PROMISSORY NOTE
$780,000 Burlingame, CA ,1995
-------------
FOR VALUE RECEIVED, the undersigned, S & D FOODS, INC., California
corporation ("Maker"), promises to pay to STEVE REEDY ("Payee"), or order,
at ___________________________, California, or at such other place as Payee
may from time to time designate by written notice to Maker, the principal sum
of Seven Hundred Eighty Thousand Dollars ($780,000), without interest charged
thereon.
The principal under this Note shall be due and payable on the earlier of
(i) two years after the date hereof or (ii) the closing of any initial public
offering of Maker's securities. If the payment of the principal amount of
this Note is held to be illegal, This Note may be prepaid, at any time, in
whole or in part, without penalty.
Maker hereby waives presentment, demand for payment, notice of dishonor
and any and all other notices and demands in connection with the delivery,
acceptance, performance, default, or enforcement of this note, and hereby
consents to any and all extensions of time, renewals, releases of liens,
waivers, or modifications that may be made or granted by Payee to Maker.
In regard to any payment of any portion of the principal amount of this
Note that does not comply with Section 500 of the California Corporations
Code, Payee agrees to subordinate that amount to the then-existing creditors
as of the date when due until such time as the payment of that portion of the
principal amount would comply with Section 500, without regard to compliance
as of the date of the issuance of this Note.
Maker agrees to pay all costs of collection hereof, including reasonable
attorneys' fees. The interpretation and enforcement of this note shall be
governed by California law.
S & D FOODS, INC.,
a California corporation
By
---------------------------------
Dean Nicholson, President
"Maker"
2
<PAGE>
SETTLEMENT AGREEMENT
THIS SETTLEMENT AGREEMENT is entered into effective as of June 25, 1996,
between DEAN NICHOLSON ("Nicholson"), and GARDEN VALLEY NATURALS, INC., a
California corporation ("GVN"), with reference to the following facts:
A. Nicholson and GVN entered into that certain Employment Agreement
dated November 1, 1995 (the "Employment Agreement"), pursuant to which GVN
agreed to employ Nicholson.
B. Nicholson and GVN have agreed to terminate the Employment Agreement
pursuant to the terms hereof.
NOW, THEREFORE, the parties agree as follows:
1. Nicholson and GVN hereby terminate the Employment Agreement
effective as of June 25, 1996 (the "Effective Date").
2. In connection with the termination of the Employment Agreement, GVN
shall pay to Nicholson a total of $175,000 payable in 24 equal installments
of $7,291.67 on the last day of each month commencing on July 31, 1996, and
continuing through June 30, 1998. If GVN fails to make an installment
payment within 15 days when due, interest shall accrue on the unpaid
installment at the rate of eight percent (8%) per annum from the due date
until the date when paid.
3. After the Effective Date, the parties shall have no further
obligations under the Employment Agreement and Nicholson shall not be
entitled to receive any salary, employee benefits, or any other compensation
or benefits under the Employment Agreement for any period after the Effective
Date.
4. Nicholson and GVN hereby release each other from all claims,
damages, liabilities, obligations, costs, and fees, including, without
limitation, attorneys' fees, arising out of or related to the Employment
Agreement and the employment of Nicholson by GVN (the "Released Matters").
This mutual release shall be a full and final accord and satisfaction and
general release from all Released Matters. The parties acknowledge that they
are familiar with Section 1542 of the California Civil Code which provides as
follows:
A general release does not extend to claims which the creditor does not
know or suspect to exist in his favor at the time of executing the
release, which if known by him must have materially affected his
settlement with the debtor.
Excludes from Release any medical claim arising from injury sustained
March 4, 1997.
<PAGE>
The parties waive any right which either of them has, or may have, under
Section 1542 to the full extent that they may lawfully waive these rights
pertaining to the Released Matters.
5. This Agreement contains the entire agreement between the parties
with respect to the subject matter contained in it and supersedes any and all
other agreements and understandings among the parties, oral and written, with
respect to such subject matter.
6. This Agreement shall be governed by, and construed in accordance
with, the laws of the State of California.
7. If any dispute arises out of the terms of this Agreement, the
prevailing party or parties in any legal proceeding or arbitration shall be
entitled to recover attorneys' fees and costs incurred by it or them in that
proceeding or arbitration.
8. Nicholson agrees to hold in confidence and not disclose to any
third party without the prior written consent of GVN any proprietary or
confidential information of GVN. Proprietary or confidential information
refers to any information not generally known among GVN's competitors and
that has commercial value to GVN. By way of illustration, but not
limitation, proprietary or confidential information includes (a)
developments, improvements, trade secrets, formulae, processes, techniques,
know-how and data; (b) plans for research, development, new products,
marketing and selling; information related to business plans, budgets and
unpublished financial statements; prices and costs; information regarding
suppliers and customers; and (c) any information designated by GVN as
confidential. For a period of two years after the date of this Agreement,
Nicholson shall not induce or solicit (i) any employee or consultant of GVN
to engage in any other employment or activity of any other person or entity
or (ii) any client or potential client of GVN for goods and services similar
to those provided by GVN.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
GARDEN VALLEY NATURALS, INC.
By: /s/ Floyd Hill
-----------------------------------
Floyd Hill, Chairman
"GVN"
/s/ DEAN NICHOLSON
---------------------------------------
DEAN NICHOLSON
"Nicholson"
2
<PAGE>
FIRST AMENDMENT TO STOCK REDEMPTION AGREEMENT
This First Amendment to Stock Redemption Agreement is dated effective as
of January 10,1996, by and among GARDEN VALLEY NATURALS, INC., formerly known
as S & D FOODS, INC., a California corporation (the "Corporation"), DEAN
NICHOLSON ("Nicholson"), and STEVEN REEDY ("Reedy"), with reference to the
following facts:
A. The parties entered into the Stock Redemption Agreement dated
November 15, 1995, pursuant to which the Corporation agreed to redeem from each
of Nicholson and Reedy 550,000 shares of the common stock of Corporation (the
"Agreement").
B. Nicholson and Reedy subsequently each transferred to Marken Company
("Marken") 22,500 shares of the common stock of the Corporation, which shall
be immediately redeemed by the Corporation.
C. The parties desire to amend the Agreement to decrease the number of
shares to be redeemed by the Corporation under the Agreement by the 45,000
shares transferred to Marken.
NOW, THEREFORE, the parties agree as follows:
1. Section 1 of the Agreement shall be amended to read as follows:
1. PURCHASE AND SALE. Upon the execution and delivery of the
First Amendment to the Agreement, Nicholson and Reedy each shall sell
to the Corporation, and the Corporation shall purchase from each of
Nicholson and Reedy 137,500 shares of the common stock of the
Corporation for the purchase price indicated in Section 2.a, and
immediately thereafter, the Corporation shall purchase from each of
Nicholson and Reedy 390,000 shares of the common stock of the
Corporation for the purchase price indicated in Section 2.b
(collectively, the "Shares"). Nicholson and Reedy shall deliver to the
Corporation certificates representing the Shares, duly endorsed to the
Corporation or accompanied by stock assignments, executed by Nicholson
and Reedy, respectively.
1
<PAGE>
2. The introductory paragraph of Section 2 and Section 2.a shall be
amended to read as follows:
2. PURCHASE PRICE AND PAYMENT. The purchase price of the Shares
shall be Two Million One Hundred Ten Thousand Dollars ($2,110,000),
payable as follows:
a. the Corporation shall pay to each of Nicholson and Reedy
$275,000 by check upon the execution and delivery of the First
Amendment to this Agreement.
3. Except as amended hereby, the Agreement shall remain in full force
and effect.
This Amendment is entered into as of the date first written above.
GARDEN VALLEY NATURALS, INC.,
a California corporation
By: /s/ Floyd Hill
--------------------------------
Floyd Hill, President
By: /s/ Dean Nicholson
--------------------------------
DEAN NICHOLSON
By: /s/ Steven Reedy
-------------------------------
STEVEN REEDY
2
<PAGE>
PROMISSORY NOTE
$780,000 Burlingame, CA January 10, 1996
FOR VALUE RECEIVED, the undersigned, GARDEN VALLEY NATURALS, INC.,
formerly known as S & D FOODS, INC., a California corporation ("Maker"),
promises to pay to DEAN NICHOLSON ("Payee"), or order, at 2609 Hillside
Drive, Burlingame, CA 94010, or at such other place as Payee may from time to
time designate by written notice to Maker, the principal sum of Seven Hundred
Eighty Thousand Dollars ($780,000), without interest charged thereon.
The principal under this Note shall be due and payable on the earlier of
(i) two years after the date hereof or (ii) the closing of any initial public
offering of Maker's securities. This Note may be prepaid, at any time, in
whole or in part, without penalty.
Maker hereby waives presentment, demand for payment, notice of dishonor
and any and all other notices and demands in connection with the delivery,
acceptance, performance, default, or enforcement of this note, and hereby
consents to any and all extensions of time, renewals, releases of liens,
waivers, or modifications that may be made or granted by Payee to Maker.
In regard to any payment of any portion of the principal amount of this
Note that does not comply with Section 500 of the California Corporations
Code, Payee agrees to subordinate that amount to the then-existing creditors
as of the date when due until such time as the payment of that portion of the
principal amount would comply with Section 500, without regard to compliance
as of the date of the issuance of this Note.
Maker agrees to pay all costs of collection hereof, including reasonable
attorneys' fees. The interpretation and enforcement of this Note shall be
governed by California law.
This Note is issued pursuant to the Stock Redemption Agreement dated
November 15, 1995, among Maker, Payee, and Steve Reedy.
GARDEN VALLEY NATURALS, INC.,
a California corporation
By: /s/ Floyd Hill
-------------------------------
Floyd Hill, President
"Maker"
Payment of this Note is subordinated to the payment of all
obligations of the maker hereof to Wells Fargo Bank, National Association
pursuant to the terms of a Subordination Agreement dated as of
February 19, 1997, as the same may be amended or modified from time to
time by the parties thereto, and any substitutions therefor.
<PAGE>
PROMISSORY NOTE
$780,000 Burlingame, CA January 10, 1996
FOR VALUE RECEIVED, the undersigned, GARDEN VALLEY NATURALS, INC.,
formerly known as S & D FOODS, INC., a California corporation ("Maker"),
promises to pay to STEVE REEDY ("Payee"), or order, at 3103 Hillside Drive,
Burlingame, CA 94010, or at such other place as Payee may from time to time
designate by written notice to Maker, the principal sum of Seven Hundred
Eighty Thousand Dollars ($780,000), without interest charged thereon.
The principal under this Note shall be due and payable on the earlier of
(i) two years after the date hereof or (ii) the closing of any initial public
offering of Maker's securities. This Note may be prepaid, at any time, in
whole or in part, without penalty.
Maker hereby waives presentment, demand for payment, notice of dishonor
and any and all other notices and demands in connection with the delivery,
acceptance, performance, default, or enforcement of this note, and hereby
consents to any and all extensions of time, renewals, releases of liens,
waivers, or modifications that may be made or granted by Payee to Maker.
In regard to any payment of any portion of the principal amount of this
Note that does not comply with Section 500 of the California Corporations
Code, Payee agrees to subordinate that amount to the then-existing creditors
as of the date when due until such time as the payment of that portion of the
principal amount would comply with Section 500, without regard to compliance
as of the date of the issuance of this Note.
Maker agrees to pay all costs of collection hereof, including reasonable
attorneys' fees. The interpretation and enforcement of this Note shall be
governed by California law.
This Note is issued pursuant to the Stock Redemption Agreement dated
November 15, 1995, among Maker, Payee, and Dean Nicholson.
GARDEN VALLEY NATURALS, INC.,
a California corporation
By: /s/ Floyd Hill
-------------------------------
Floyd Hill, President
"Maker"
Payment of this Note is subordinated to the payment of all
obligations of the maker hereof to Wells Fargo Bank, National Association
pursuant to the terms of a Subordination Agreement dated as of
February 19, 1997, as the same may be amended or modified from time to
time by the parties thereto, and any substitutions therefor.
<PAGE>
FIRST AMENDMENT TO STOCK REDEMPTION AGREEMENT
This First Amendment to Stock Redemption Agreement is dated effective as
of January 10, 1996, by and among GARDEN VALLEY NATURALS, INC., formerly
known as S & D FOODS, INC., a California corporation (the "Corporation"),
DEAN NICHOLSON ("Nicholson"), and STEVEN REEDY ("Reedy"), with reference to
the following facts:
A. The parties entered into the Stock Redemption Agreement dated
November 15, 1995, pursuant to which the Corporation agreed to redeem from
each of Nicholson and Reedy 550,000 shares of the common stock of Corporation
(the "Agreement").
B. Nicholson and Reedy subsequently each transferred to Marken Company
("Marken") 22,500 shares of the common stock of the Corporation, which shall
be immediately redeemed by the Corporation.
C. The parties desire to amend the Agreement to decrease the number of
shares to be redeemed by the Corporation under the Agreement by the 45,000
shares transferred to Marken.
NOW, THEREFORE, the parties agree as follows:
1. Section 1 of the Agreement shall be amended to read as follows:
1. PURCHASE AND SALE. Upon the execution and delivery of the
First Amendment to the Agreement, Nicholson and Reedy each
shall sell to the Corporation, and the Corporation shall
purchase from each of Nicholson and Reedy 137,500 shares of
the common stock of the Corporation for the purchase price
indicated in Section 2.a, and immediately thereafter, the
Corporation shall purchase from each of Nicholson and Reedy
390,000 shares of the common stock of the Corporation for the
purchase price indicated in Section 2.b (collectively, the
"Shares"). Nicholson and Reedy shall deliver to the
Corporation certificates representing the Shares, duly endorsed
to the Corporation or accompanied by stock assignments,
executed by Nicholson and Reedy, respectively.
1
<PAGE>
2. The introductory paragraph of Section 2 and Section 2.a shall be
amended to read as follows:
2. PURCHASE PRICE AND PAYMENT. The purchase price of the
Shares shall be Two Million One Hundred Ten Thousand Dollars
($2,110,000), payable as follows:
a. the Corporation shall pay to each of Nicholson and
Reedy $275,000 by check upon the execution and delivery of the
First Amendment to this Agreement.
3. Except as amended hereby, the Agreement shall remain in full force
and effect.
This Amendment is entered into as of the date first written above.
GARDEN VALLEY NATURALS, INC.,
a California corporation
By: /s/ Floyd Hill
---------------------------------
Floyd Hill, President
/s/ Dean Nicholson
------------------------------------
DEAN NICHOLSON
/s/ Steven Reedy
------------------------------------
STEVEN REEDY
2
<PAGE>
AMENDMENT TO PROMISSORY NOTE
THIS AGREEMENT TO PROMISSORY NOTE is entered into as of June 9, 1997,
between STEVE REEDY ("Payee") and ORGANIC FOOD PRODUCTS, INC., a California
corporation formerly known as Garden Valley Naturals, Inc. ("Maker"), with
reference to the following facts:
A. Maker is the maker and Payee is the payee of the Promissory Note
dated January 10, 1996, in the original principal amount of $780,000 (the
"Promissory Note").
B. Maker and Payee desire to amend the terms of the Promissory Note
pursuant to the terms hereof.
NOW, THEREFORE, the parties agree as follows:
1. The first two paragraphs of the Promissory Note are hereby deleted
and in their place shall be inserted the following:
FOR VALUE RECEIVED, the undersigned, ORGANIC FOOD PRODUCTS, INC.,
a California corporation formerly known as Garden Valley Naturals, Inc.
("Maker"), promises to pay to STEVE REEDY ("Payee"), or order, at 3103
Hillside Drive, Burlingame, CA 94010, or at such other place as Payee may
from time to time designate by written notice to Maker, the principal sum
of Seven Hundred Eighty Thousand Dollars ($780,000), without interest
thereon until the earlier of (i) the date on which Maker closes an
initial public offering of its securities under the Securities Act of
1933 ("IPO") or (ii) January 10, 1998; thereafter, interest on the
unpaid principal shall accrue at the rate of six percent (6%) per annum.
Principal and interest shall be repaid as follows:
At the closing of the IPO, Maker shall pay principal of $350,000.
Thereafter, principal and interest shall be repaid in monthly installments
of $20,000 on the last day of each month, commencing on the last day of
the month immediately following the IPO. Any installment payments shall be
applied first to accrued interest and then to principal. If the IPO does
not occur prior to January 10, 1998, then this Note shall be due and
payable as of that date. This Note may be prepaid at any time, in whole or
in part, without penalty.
If Maker fails to pay any installment when due and such failure
continues for ten days after Maker's receipt of written notice from
Payee of such failure, Payee may declare the principal and accrued interest
hereof immediately due and payable.
<PAGE>
2. Maker and Payee acknowledge that the Promissory Note, as modified,
is subordinated to the payment of all obligations of Maker to Wells Fargo
Bank, National Association, pursuant to the terms of a Subordination
Agreement dated as of February 19, 1997, as the same may be amended or
modified from time to time by the parties thereto, and any substitutions
therefor.
3. Except as amended hereby, the Promissory Note shall remain in full
force and effect.
IN WITNESS WHEREOF, the parties have executed this Amendment to
Promissory Note as of the date first written above.
STEVE REEDY
---------------------------------------
STEVE REEDY
"Payee"
ORGANIC FOOD PRODUCTS, INC.
By: Floyd Hill
-----------------------------------
Floyd Hill, Chief Executive
Officer
"Maker"
2
<PAGE>
AMENDMENT TO PROMISSORY NOTE
THIS AMENDMENT TO PROMISSORY NOTE is entered into as of June 10, 1997,
between DEAN NICHOLSON ("Payee") and ORGANIC FOOD PRODUCTS, INC., a
California Corporation formerly known as Garden Valley Naturals, Inc.
("Maker"), with reference to the following facts:
A. Maker is the maker and Payee is the payee of the Promissory Note
dated January 10, 1996, in the original principal amount of $780,000 (the
"Promissory Note").
B. Maker and Payee desire to amend the terms of the Promissory Note
pursuant to the terms hereof.
NOW, THEREFORE, the parties agree as follows:
1. The first two paragraphs of the Promissory Note are hereby deleted
and in their place shall be inserted the following:
FOR VALUE RECEIVED, the undersigned, ORGANIC FOOD PRODUCTS, INC., a
California corporation formerly known as Garden Valley Naturals, Inc.
("Maker"), promises to pay DEAN NICHOLSON ("Payee"), or order, at 2609
Hillside Drive, Burlingame, CA 94010, or at such other place as Payee may
from time to time designate by written notice to Maker, the principal sum
of Seven Hundred Eighty Thousand Dollars ($780,000), without interest
thereon until the earlier of (i) the date on which Maker closes an initial
public offering of its securities under the Securities Act of 1933 ("IPO")
or (ii) January 10, 1998; thereafter, interest on the unpaid principal
shall accrue at the rate of six percent (6%) per annum.
Principal and interest shall be repaid as follows:
As the closing of the IPO, Maker shall pay principal of $350,000.
Thereafter, principal and interest shall be repaid in monthly installments
of $20,000 on the last day of each month, commencing on the last day of the
month immediately following the IPO. Any installment payments shall be
applied first to accrued interest and then to principal. If the IPO does
not occur prior to January 10, 1998, then this Note shall be due and
payable as of that date. This Note may be prepaid at any time, in whole
or in part, without penalty.
If Maker fails to pay any installment when due and such failure
continues for ten days after Maker's receipt of written notice from Payee
of such failure, Payee may declare the principal and accrued interest
hereof immediately due and payable.
<PAGE>
2. Maker and Payee acknowledge that the Promissory Note, as modified,
is subordinated to the payment of all obligations of Maker to Wells Fargo
Bank, National Association, pursuant to the terms of a Subordination
Agreement dated as of February 19, 1997, as the same may be amended or
modified from time to time by the parties thereto, and any substitutions
therefor.
3. Except as amended hereby, the Promissory Note shall remain in full
force and effect.
IN WITNESS WHEREOF, the parties have executed this Amendment to
Promissory Note as of the date first written above.
/s/ Dean Nicholson
-----------------------------------
DEAN NICHOLSON
"Payee"
ORGANIC FOOD PRODUCTS, INC.
By: /s/ Floyd Hill
-------------------------------
Floyd Hill, Chief Executive
Officer
"Maker"
2
<PAGE>
SUBSCRIPTION AGREEMENT
Floyd R. Hill, Chief Executive Officer
Organic Food Products, Inc.
550 Monterey Road
Morgan Hill, California 95037
RE: Private offering of unsecured
promissory notes by Organic Food
Products, Inc. (the "Company")
Dear Mr. Hill,
1. SUBSCRIPTION AND OFFERING. The undersigned hereby subscribes for and
agrees to purchase a promissory note (the "Note") issued by the Company in
the principal amount of $______. The Note is unsecured, bears interest at 10%
per annum and is payable in full, including interest, the earlier of one year
from the date of the Note or the effective date of an initial public offering
("IPO") of the Company's securities. As additional consideration for
purchasing the Note, the undersigned will receive ______ common stock
purchase warrants ("Warrants") (at the rate of one Warrant for each $3.00 of
Note purchased), each Warrant entitling the holder to purchase one share of
the Company's Common Stock at $3.00 per share at any time until December 31,
1999. The Warrants provide certain registration rights as set forth in the
form of Warrant attached hereto as Exhibit B.
Notwithstanding the payment date set forth above, if the Note is not
repaid by December 1, 1997, then each month thereafter for a period of five
months the Company will convert at no cost 20% of the Warrants issued to the
undersigned into an equal number of shares of its Common Stock. Accordingly,
after five months, all Warrants will be converted into Common Stock.
Additionally, at the undersigned's election, the Company will issue one
Warrant for each $30.00 of Note purchased in lieu of interest on the Note. A
copy of the Note is attached hereto as Exhibit A.
The undersigned understands that the Company is offering up to $600,000
of Notes (the "offering") to a group of not more than ten investors and that
the offering will close on May 30, 1997 or at such time as all of the Notes
are sold, whichever is sooner. The Company may extend the offering for an
additional 30-day period in its sole discretion.
2. ACCEPTANCE OR REJECTION; MINIMUM SUBSCRIPTION. The undersigned
understands that the Company, in it sole discretion and for any reason, may
accept or reject this subscription, in whole or in part. The undersigned
acknowledges that he or she must purchase a Note in the minimum amount of
$50,000, unless the minimum amount is reduced in the sole discretion of the
Company.
<PAGE>
3. ACKNOWLEDGEMENT. The undersigned acknowledges that: (1) the offering
of Notes and Warrants as made only through direct personal communication
between the undersigned and a representative of Spelman & Co., Inc. (the
"Selling Agent"), who will receive a commission of 10% of the gross proceeds
of the Notes sold; (2) the undersigned has had the opportunity to obtain all
information concerning the Company, it operations, legal structure and any
other materials or documentation requested by the undersigned; (3) the
undersigned has reviewed the Company's preliminary prospectus dated March 7,
1997 filed with the Securities and Exchange Commission and is familiar with
its content; (4) the undersigned has been advised by the Company that (i) he
or she must be prepared to bear the economic risk of the investment in the
Notes for an indefinite period; (ii) the Notes and Warrants have not been
registered under the Securities Act of 1933, or applicable state securities
laws and hence cannot be sold unless they are subsequently registered or an
exemption from such registration is available; (iii) the Notes and Warrants
are highly speculative, involve a high degree of risk and should only be
purchased by individuals who can afford to lose their entire investment; and
(iv) the certificates for the Notes and Warrants will contain an appropriate
restrictive legend prohibiting their sale or transfer, except under certain
circumstances in substantially the following form:
"The securities represented by this Certificate have not been registered
under the Securities Act of 1933 (the "Act") and are "restricted
securities" as that term is defined in Rule 144 under the Act. The
securities may not be offered for sale, sold or otherwise transferred
except pursuant to an effective registration statement under the Act or
pursuant to an exemption from registration under the Act, the availability
of which is to be established to the satisfaction of the Company."
4. EXECUTION OF AGREEMENT. When accepted by the Company, in whole or in
part, this subscription shall be valid and binding on the undersigned and the
Company for all purposes. The undersigned represents and warrants that the
undersigned has received, read and understands the contents hereof and has
consulted with his attorney, business advisor and/or accountant concerning
the offering of shares.
5. PERSONAL INVESTIGATION. The undersigned warrants and represents
that, prior to making a decision whether to invest herein through purchase of
the Note, he or she has conducted a personal investigation and has researched
and considered all factors that bear on the advisability of investing in the
Company, and that his or her investment decision has not been based solely
upon the representations of the Selling Agent. The undersigned has had the
opportunity to ask questions and receive answers from the Company regarding
the terms and conditions of the offering and the business, properties,
prospects and financial condition of the Company, and to obtain additional
information (to the extent the Company possessed such information or could
acquire it without unreasonable effort or expense) necessary to verify the
accuracy of any information furnished to the undersigned.
2
<PAGE>
6. PURCHASE FOR OWN ACCOUNT. The undersigned warrants and represents
that the Notes and Warrants subscribed by the undersigned will be acquired
for the undersigned's own account and benefit and not for the account of any
other person or business entity, and the undersigned has no present intention
of selling or distributing the Notes or Warrants. The undersigned is not
acting as a nominee for any other person or entity. The undersigned
understands that the Notes and Warrants may not be sold, hypothecated,
pledged, transferred, assigned or disposed of except in accordance with the
substantial restrictions on transfer described herein.
7. INVESTMENT EXPERIENCE. The undersigned warrants and represents
that the undersigned is experienced in investments and business matters, has
made similar speculative investments in the past, has sufficient investment
acumen to analyze and evaluate the merits and risks of investing in the Notes
and Warrants and has sufficient financial resources to hold the Notes and
Warrants for an indefinite period of time.
8. SUITABILITY. The undersigned is an "accredited investor" as that
term is defined in Rule 501 of the 1933 Act and has either (i) a net worth
of at least $1,000,000 or (ii) individual income in excess of $200,000 in
each of the last two years (or joint income of $300,000 including the
undersigned's spouse's income) and a reasonable expectation of reaching the
same income level during the current year.
9. CONFIDENTIALITY. The undersigned understands that this
Subscription Agreement and all other documents delivered to the undersigned
in connection with this subscription are confidential documents prepared
solely for the benefit of a limited number of qualified investors associated
with the Company. The undersigned agrees that he or she will not reproduce
or distribute any of such documents in whole or in part.
10. INDEMNIFICATION. The undersigned recognizes that the sale of the
Notes and Warrants will be based upon his or her representations and
warranties set forth herein, and the undersigned hereby agrees to indemnify
and defend the Company and to hold each officer and/or director thereof
harmless from and against any and all loss, damage, liability or expense,
including costs and reasonable attorneys' fees, to which they may be put or
which they may incur by reason of, or in connection with, any misrepresentation
made by the undersigned in this Subscription Agreement or elsewhere, any
breach by the undersigned of his or her warranties and/or a failure to
fulfill any of the covenants or agreements set forth herein or elsewhere or
arising out of the sale or distribution of any Notes and Warrants by the
undersigned in violation of the Securities Act of 1933, as amended, (the
"1933 Act") and any other applicable state securities laws.
11. NASD AFFILIATIONS. The undersigned represents that he or she is
not directly or indirectly associated with any member of the National
Association of Securities Dealers, Inc. ("NASD").
3
<PAGE>
12. DELIVERY OF FUNDS. All investor checks must be payable to "Organic
Food Products, Inc." and delivered to the Selling Agent.
Dated at ____________, this _____ day of __________, 1997.
--------------------------------------
Signature
--------------------------------------
Print Name
--------------------------------------
Residence Address
--------------------------------------
City State Country
--------------------------------------
Country Area Telephone
Code Code Number
--------------------------------------
Name In Which Share Are To Be Issued
--------------------------------------
Social Security or Tax Identification
Number
--------------------------------------
Employer
ACCEPTED:
ORGANIC FOOD PRODUCTS, INC.
By
--------------------------------------
Floyd R. Hill, Chief Executive Officer
on
-----------------------------------
Date
4
<PAGE>
EXHIBIT A
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933 (THE "ACT") AND ARE "RESTRICTED SECURITIES" AS
THAT TERM IS DEFINED IN RULE 144 UNDER THE ACT. THE SECURITIES MAY NOT BE
OFFERED FOR SALE, SOLD OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR PURSUANT TO AN EXEMPTION
FROM REGISTRATION UNDER THE ACT, THE AVAILABILITY OF WHICH IS TO BE
ESTABLISHED TO THE SATISFACTION OF THE COMPANY.
PROMISSORY NOTE
US$ Morgan Hill, California
------------ _________________, 1997
FOR VALUE RECEIVED, the undersigned Organic Food Products, Inc., a
California corporation ("Payor"), with offices at 550 Monterey Road, Morgan
Hill, CA 95037 hereby promises to pay to the order of ____________________
("Payee") at such place as Payee may from time to time designate in writing,
the principal sum of ____________________, and to pay interest from the date
hereof on the unpaid principal balance at a rate of 10% per annum. The
principal balance and all accrued interest outstanding under this promissory
note ("Note"), are due and payable the earlier of (i) one year from the date
of this Note or (ii) the effective date of any initial public offering of the
securities of Payor.
Payor may, at its option, at any time and from time to time, prepay all or
any part of the principal balance of this Note, provided that concurrently with
each such prepayment Payor shall pay accrued interest on the principal so
prepaid to the date of such prepayment. The parties hereto hereby irrevocably
consent to the jurisdiction of the courts of the State of California in
connection with any action or proceeding arising out of or relating to this
Note. This Note shall be governed by California law, without reference to any
choice of law principles thereof.
Payor shall be entitled to reasonable attorney's fees and court costs if
legal proceedings are necessary to collect sums due under this Note.
ORGANIC FOOD PRODUCTS, INC.
By:
------------------------------
Floyd R. Hill,
Chief Executive Officer
<PAGE>
EXHIBIT B
COMMON STOCK PURCHASE WARRANT
WARRANT NO. __________
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933 (THE "ACT") AND ARE "REGISTERED SECURITIES" AS
THAT TERM IS DEFINED IN RULE 144 UNDER THE ACT. THE SECURITIES MAY NOT BE
OFFERED FOR SALE, SOLD OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR PURSUANT TO AN EXEMPTION
FROM REGISTRATION UNDER THE ACT, THE AVAILABILITY OF WHICH IS TO BE
ESTABLISHED TO THE SATISFACTION OF THE COMPANY.
FOR VALUE RECEIVED ____________________________________________________,
the registered holder (the "Holder"), is entitled to purchase from Organic
Food Products, Inc., a California corporation, (the "Company") up to ________
shares of the Company's Common Stock at $3.00 per share (the "Warrant Price")
at any time until December 31, 1999. The Holder will not have the rights or
privileges as a shareholder of the Company prior to exercise of the common
stock purchase warrant ("Warrant") represented by this certificate.
At any time after one year from the effective date of the Company's IPO
as defined in the accompanying subscription agreement ("Subscription
Agreement") upon the written request of the Holders, the Company will
register the shares issuable upon exercise of this Warrant. All expenses
incurred by the Company in connection with such registration, including
without limitation all registration and filing fees, listing fees, printing
expenses, costs of counsel for the Company, the expense of any special audits
incident to or required by any such registration and the expenses of
complying with the securities or Blue Sky laws of any jurisdiction shall be
paid by the Company. Holder shall pay all underwriting discounts or
commissions with respect to the Common Stock sold by Holder.
This Warrant may be exercised by presentation of this certificate and
simultaneous payment of the Warrant Price at the offices of the Company in
Morgan Hill, California, subject to applicable state and federal securities
laws. Payment shall be made in cash or by certified check, at the option of
the Holder.
The Warrant evidenced hereby is of a duly authorized issue of common
stock purchase warrants, is issued under and in accordance with the
Subscription Agreement and is subject to the terms and provisions contained
in the Subscription Agreement. The Holder consents by acceptance of the
certificate to all the terms and conditions of the Subscription Agreement.
This Warrant is exercisable in whole only and not in part. The issuance of
Common Stock upon exercise of this Warrant will be rounded to the nearest
whole share and no fractional shares will
<PAGE>
be issued. The Holder of this certificate shall be treated by the Company as
the absolute owner hereof for all purposes and as the person entitled to
exercise the rights represented hereby. This Warrant does not contain
antidilution provisions.
IN WITNESS WHEREOF, the Company has signed this Warrant and deliverd it
in Morgan Hill, California as of __________________, 1997.
ORGANIC FOOD PRODUCTS, INC.
By:
-----------------------------------
Floyd R. Hill
Chief Executive Officer
2
<PAGE>
EXHIBIT 11
ORGANIC FOOD PRODUCTS, INC.
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
YEARS ENDED NINE MONTH PERIODS ENDED
JUNE 30, MARCH 31,
----------------------- -----------------------
1996 1995 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
PRIMARY EARNINGS PER SHARE:(1)
COMMON STOCK EQUIVALENTS
OPTIONS AND WARRANTS GRANTED AND UNEXERCISED 1,175,000 1,175,000 1,175,000 1,175,000
ASSUMED BUYBACK OF OPTIONS(2) (705,250) (705,250) (705,250) (705,250)
--------- --------- --------- ---------
469,750 469,750 469,750 469,750
TOTAL WEIGHTED AVERAGE SHARES ISSUED 5,297,913 5,297,913 5,297,913 5,297,913
--------- --------- --------- ---------
WEIGHTED AVERAGE SHARES OUTSTANDING 5,767,663 5,767,663 5,767,663 5,767,663
--------- --------- --------- ---------
--------- --------- --------- ---------
FULLY DILUTED EARNINGS PER SHARE:(1)
COMMON STOCK EQUIVALENTS
OPTIONS AND WARRANTS GRANTED AND UNEXERCISED 1,175,000 1,175,000 1,175,000 1,175,000
ASSUMED BUYBACK OF OPTIONS(2) (705,250) (705,250) (705,250) (705,250)
--------- --------- --------- ---------
469,750 469,750 469,750 469,750
TOTAL WEIGHTED AVERAGE SHARES ISSUED 5,297,913 5,297,913 5,297,913 5,297,913
--------- --------- --------- ---------
WEIGHTED AVERAGE SHARES OUTSTANDING 5,767,663 5,767,663 5,767,663 5,767,663
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
(1) EARNINGS PER SHARE ARE BASED UPON THE WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING FOR EACH OF THE RESPECTIVE YEARS. ALL WEIGHTED AVERAGE SHARES
OUTSTANDING GIVE RETROACTIVE EFFECT TO THE 2,000 FOR 1 STOCK SPLIT IN
OCTOBER, 1995, AND THE ISSUANCE OF 2,250,000 IN RELATION TO THE PURCHASE
COMBINATION. PURSUANT TO SECURITIES AND EXCHANGE COMMISSION RULES, COMMON
STOCK ISSUED FOR CONSIDERATION BELOW THE ANTICIPATED OFFERING PRICE PER
SHARE DURING THE PERIOD PRIOR TO FILING OF THE REGISTRATIONS STATEMENT HAS
BEEN INCLUDED IN THE CALCULATION OF COMMON SHARE EQUIVALENT SHARES, USING
THE TREASURY STOCK METHOD, AS IF THEY HAD BEEN OUTSTANDING FOR ALL PERIODS
PRESENTED.
(2) BUYBACK OF OPTIONS UNDER THE TREASURY STOCK METHOD IS AT THE ASSUMED IPO
PRICE OF $4.00 PER SHARE.
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 1 to Registration Statement No.
333-22997 of Organic Food Products, Inc. of our report dated February 28,
1997 appearing in the Prospectus, which is part of such Registration
Statement, and to the reference to us under the heading "Experts" in the
Prospectus.
Semple & Cooper, LLP
Phoenix, Arizona
July 8, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 9-MOS YEAR
<FISCAL-YEAR-END> JUN-30-1997 JUN-30-1996
<PERIOD-START> JUL-01-1996 JUL-01-1995
<PERIOD-END> MAR-31-1997 JUN-30-1996
<CASH> 200 191,073
<SECURITIES> 0 0
<RECEIVABLES> 1,185,252 908,325
<ALLOWANCES> (40,000) (89,983)
<INVENTORY> 3,014,630 1,429,743
<CURRENT-ASSETS> 4,434,861 2,723,845
<PP&E> 1,091,082 809,616
<DEPRECIATION> (138,947) (59,030)
<TOTAL-ASSETS> 7,961,873 5,941,834
<CURRENT-LIABILITIES> 4,647,166 3,492,383
<BONDS> 0 0
0 0
0 0
<COMMON> 3,971,721 2,317,400
<OTHER-SE> (1,066,988) (1,410,410)
<TOTAL-LIABILITY-AND-EQUITY> 7,961,873 5,941,934
<SALES> 9,067,049 7,641,539
<TOTAL-REVENUES> 9,067,049 7,641,539
<CGS> 6,085,139 5,822,337
<TOTAL-COSTS> 2,393,770 2,199,022
<OTHER-EXPENSES> 0 257,468
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 152,340 349,122
<INCOME-PRETAX> 450,514 (983,462)
<INCOME-TAX> (107,092) (334,400)
<INCOME-CONTINUING> 343,422 (649,062)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 343,422 (649,062)
<EPS-PRIMARY> .06 (.11)
<EPS-DILUTED> .06 (.11)
</TABLE>
