FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 [Fee Required]
For the fiscal year ended June 30, 1998
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required]
For the transition period from _______________ to________________
Commission File No. 333-22997
ORGANIC FOOD PRODUCTS, INC.
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(Name of Small Business Issuer in its Charter)
California 94-30762-94
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
550 Monterey Road
Morgan Hill, California 95037
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (408) 782-1133
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
No Par Value Common Stock
(Title of Class)
Check whether the Registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days.
Yes X No
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As of September 30, 1998, 7,275,688 shares of the Registrant's no par value
Common Stock were outstanding. As of September 30, 1998, the market value of the
Registrant's no par value Common Stock, excluding shares held by affiliates, was
$8,185,149 based upon a closing bid price of $1.125 per share of Common Stock on
the NASDAQ Smallcap Market.
Check if there is no disclosure contained herein of delinquent filers in
response to Item 405 of Regulation S-B, and will not be contained, to the best
of the Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB.
The Registrant's revenues for its year ended June 30, 1998 were
$12,304,323.
The following documents are incorporated by reference into Part III, Items
9 through 12 hereof: None.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
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Introduction
This Form 10-KSB of Organic Food Products, Inc., ("OFPI" or the "Company")
contains forward-looking statements within the meaning of the Private Litigation
Reform Act of 1995 (the "Litigation Reform Act"). These forward-looking
statements are subject to risks and uncertainties that may cause actual results
to differ materially.
The Company was incorporated in 1987 as S&D Foods, Inc., and changed its
name to Garden Valley Naturals in 1995. The Company, doing business as Garden
Valley Naturals from 1987 to 1996, 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 ("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. The surviving merged entity
operates under the Organic Food Products, Inc. name. In August, 1997 the Company
completed an initial public offering of its securities ("IPO") selling 1,300,000
shares of its Common Stock to the public through three underwriters at $4.00 per
share for gross proceeds of $5,200,000.
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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 to its product offerings.
In February, 1998, the Company acquired product lines from Sunny Farms
Corporation of Richmond, California, a producer of natural fruit and vegetable
juices for the food service market. Sunny Farms also markets a line of water
products under the Napa Valley Spring Water brand (see Sunny Farms acquisition).
In April, 1998, the Company introduced a new energy drink known as Energy
Plus (E+). This drink is positioned to compete with energy drinks marketed by
Red Bull and Hansens. However, unlike some of the energy drinks, the ingredients
in E+ are healthy and meant to give the user a "natural" lift.
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, Trader Joe's, Raley's, Long's and Lucky's). See "Marketing and New Product
Development."
Sunny Farms Acquisition
In February, 1998, the Company acquired the natural fruit juice and water
bottling operations of Sunny Farms Corporation for a total of $971,171 in cash
(including costs of acquisition) assumption of debt, and the issuance of 566,667
shares of Common Stock of the Company valued at $1,700,000, including escrowed
shares valued at $850,000. The release of the escrowed shares is contingent upon
attaining a total of $935,000 in gross profit relating to Sunny Farms business
(as defined) during the first year after acquisition. Accordingly, this portion
of the purchase price has not yet been recorded. The $963,822 excess of the
remaining purchase price over identified inventory and fixed assets of
approximately $857,000 was accounted for as goodwill.
The agreement was accounted for as a purchase and, accordingly, the results
of the Sunny Farms operations are included from February 11, 1998 forward.
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
product lines through acquisition. The Company has added new products through
its strategic purchase of two brands as well as the private label juice business
from Sunny Farms Corporation. New product offerings open new channels of
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distribution, expand revenues and improve the utilization of manufacturing
facilities, (iv)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 (v) specialize in the marketing of organic
food products.
(i) Offer Additional Organic Food Products. Since the merger, the Company has
developed new flavors and packages for its sauces and salsas to add to its
product offerings. 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
better utilization of the Company's existing distribution channels to offer new
products.
(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. In this regard, the Company manufactures pasta
sauces for Trader Joe's, but has no other finalized agreements or arrangements
to manufacture for others as of June 30, 1998.
(iv) 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. The
Company is seeking additional distribution in order to increase its club store,
grocery store, and convenience store sales throughout the United States.
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 twenty organic pasta sauces under the Garden Valley
Organic 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 dry organic pastas
including spaghetti, linguini, fettuccine, angel hair, rotini, penne and
bowties.
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Organic Salsas
The Company markets lines of sixteen organic salsas under the Garden Valley
Organic 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 as well as an enchilada sauce.
Natural(preservative free) Juices and Water
The Company markets a line of natural fruit and vegetable juices under the
Sunny Farms brand name. In addition, it also distributes a line of water
products under the Napa Valley Spring Water brand.
Organic Condiments
The Company offers three organic mustards under the Garden Valley Organic
brand name. All three mustards use organic mustard seed for flavoring and are
offered in yellow, stoneground and dijon. The Company offers an organic ketchup
and an organic crushed garlic under the Millina's Finest brand name. All
condiments are fat-free and sugar-free.
Children's Meals
The Company offers five canned organic kid's meals, composed of pasta rings
in tomato sauce, rings in tomato cheese sauce, ABC's & numbers in tomato sauce,
pasta rings and veggie franks, and beans with veggie franks.
Organic (pesticide free) Juices
The Company markets a line of pasteurized organic fruit juices under the
"Cinagro" brand name in 32 oz. and 10 oz. glass jars. Flavors include
Carrot/Lemon Lime, Apple Carrot Smoothie, Total Tomato, Veggie Array, Hibiscus
Super "C", Lemon Berry, Tropical Peach, and Very Berry Cranberry.
Functional Beverages
The Company markets a functional beverage called Energy Plus (E+), sold in
7.7 oz. cans in a single flavor.
Sales and Distribution
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), (iii) retail chain and independent grocery stores (including Safeway,
A&P, Trader Joe's, Raley's, Long's and Lucky's) and (iv) convenience stores.
Currently the Company's products are offered in over 6,000 health food stores,
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250 club stores and 2,000 grocery stores located in all 50 states and in the Far
East, Middle East, Canada, and Europe. The Company currently uses 21 specialty
food brokers and 50 food distributors to sell to health food and other
independent retail stores and 8 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, the Company will offer
special promotional pricing and occasionally may pay "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.
A Broker Incentive Plan has been implemented based against semi-annual
quotas to motivate brokers to grow the business. The Company has also entered
into "Preferred Vendor" agreements with certain retail store chains to obtain
closer working relationships and enhanced retail merchandising and promotional
support. It has also entered into an agreement with California Beverages in San
Francisco to distribute the Company's "Energy Plus" through a selection of
California Beverages' 2600 accounts in the San Francisco, and is working to push
out to other distributors to expand coverage in the Bay Area.
The Company is focusing on its core natural foods distribution, while
entering into new distribution in mass market accounts where profitable.
Management believes there is a major growth opportunity in expanding into
conventional supermarkets as they become more committed to providing a variety
of organic and natural food products.
Marketing and New Product Development
A marketing strategy has been developed with distinct positionings and
strategy statements for each of OFPI's brands, that will guide product
development, channel development and marketing communications for the brands.
Each brand has a distinct target audience and marketing efforts will focus on
products and product attributes that appeal specifically to those target
audiences. Focus and strategy has been brought to each brand, with SKU
rationalization leading to discontinuation for low-selling items and
identification of line extension opportunities. A new product development
strategy has been undertaken that includes targeted new products within the
existing lines, and the implementation of a cross-functional team-based new
product development process to improve the execution of new product
introductions.
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. Each brand is targeted toward specific
consumer segments with appropriate products, flavor variants, images and
messages. The Company promotes its Millina's Finest and Parrot product lines for
sale to natural food and health food stores and the specialty or "gourmet"
departments of grocery stores. The Garden Valley Naturals line represents a
lower price point line. The Company also promotes a pricing strategy in which
its organic products are offered at prices only slightly higher than their
non-organic counterparts.
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One customer (Price/Costco) accounted for 17% of the Company's revenues for
the year ended June 30, 1998, and 21% of the Company's revenues for the year
ended June 30,1997. A loss of this customer 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 and warehouse facility it leases in Morgan Hill, California.
Manufacturing 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 mustard condiments, Kids' Meals, E+ and certain beverage
sizes and pastas 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 two suppliers
and has written agreements covering a majority of its anticipated tomato product
purchases. Sun Garden Packing Company accounted for 20% of the Company's
purchases for the year ended June 30, 1998. The Company believes that other
suppliers are available who could provide product at similar prices and terms. A
change in suppliers, however, could cause a delay in manufacturing and a
possible loss of sales, which would affect operating results adversely.
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 and Gulden'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, brand image 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.
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Trade Names and Trademarks
The Company has Federal registration for its "Millina's Finest" and "Parrot
Brand" trademarks, and has applied for Federal trademark registration for its
"Cinagro" 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.
Employees
The Company employs 50 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.
Additionally, the Company has contracted for the services of four management
executives from Global Natural Brands, Ltd. (See Note 3 to the Financial
Statements and Item 12 Certain Relationships and Related Transactions).
ITEM 2. DESCRIPTION OF PROPERTY
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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 $6,674 plus rental escalations of 3% per year. The Company is negotiating
with its landlord to lease to the Company an additional 30,000 square feet of
space for additional warehousing facilities, although no such lease has been
executed.
ITEM 3. LEGAL PROCEEDINGS
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Not applicable.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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Not applicable.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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The Company's Common Stock has traded on the NASDAQ Smallcap Market under
the symbol "OFPI" since August, 1997.
The following table sets forth for the quarter indicated the range of high
and low closing prices of the Company's Common Stock as reported by NASDAQ but
does not include retail markup, markdown or commissions.
Price
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By Quarter Ended: High Low
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September 30, 1997....................................... $ 4.3125 $ 3.875
December 31, 1997........................................ 4.5625 2.875
March 31, 1998 .......................................... 3.625 2.625
June 30, 1998 ........................................... 4.25 3.00
As of September 30, 1998, the Company had approximately 700 record and
beneficial stockholders.
Dividend Policy
The Company has not paid cash dividends on its Common Stock in the past and
does not intend to do so in the near future. The Company intends to retain
earnings, if any, for use in the operation and expansion of its business. The
amount of future dividends, if any, will be determined by the Board of Directors
based upon the Company's earnings, financial condition, capital requirements and
other conditions.
In connection with the February, 1998 acquisition of Sunny Farms, the
company is obligated to pay a 6% "coupon rate" on the portion of the purchase
price that was paid for in common stock. Amounts earned through June 30, 1998
were not material.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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The following discussion should be read in conjunction with the
financial statements and related notes and other information included in this
report. The financial results reported herein do not necessarily indicate the
financial results that may be achieved by the Company in any future period.
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Introduction
Since 1987, the Company (or "OFPI") 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. In August, 1997 the Company raised gross proceeds of
$5,200,000 through its IPO. 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, Raley's, Long's, Trader Joe's, and
Lucky's).
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 development 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.
Investors should carefully consider the following information as well as
other information contained in this Report. Information included in this Report
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., "Item 1-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 could also cause actual results to
vary materially from the future results covered in such forward-looking
statements.
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Year Ended June 30, 1998 Compared to Year Ended June 30, 1997
Revenues
OFPI's revenues for the year ended June 30, 1998 ("1998") were $12,304,000
compared to $11,379,000 for the year ended June 30, 1997 ("1997"), an increase
of $925,000, or 8.1% compared to 48.9% increase in 1997. The increase in
revenues in 1998 was primarily due to the acquisition of the natural juice
business of Sunny Farms Corporation in February of 1998. The 1997 increase was
attributable to the acquisition of OFP in June, 1996.
Cost of Goods Sold
OFPI's cost of goods sold for 1998 was $9,420,000 or 76.5% of sales, versus
$7,530,000, or 66.2% of sales for 1997. The increase in cost-of-goods sold was
due to increased manufacturing costs due to excess capacity, inventory
write-downs, and higher priced raw food ingredients for Sunny Farms' products.
Moreover, Sunny Farms' products were co-packed (manufactured and packaged by an
outside processor) from the time of its acquisition through the end of the
fiscal year. Accordingly, the resultant gross margin was significantly below the
margin which could have been attained had all products been produced by OFPI.
Subsequent to year-end, Sunny Farms has been fully integrated into the OFPI
organization and the anticipated synergies should be attained given that its
products are now being manufactured by OFPI.
Additionally, subsequent to year-end, organizational changes have been made
within the manufacturing and purchasing functions. Management is continuing to
evaluate additional potential operating and cost efficiencies, including the
possibility of outsourcing certain copacking, if suitable cost-efficient
arrangements could be found. As a result, management believes that OFPI's
operations will become more efficient and purchasing costs will decrease by the
end of the 1999 fiscal year, producing reductions in cost-of-goods sold in
subsequent periods.
Sales and Marketing Expenses
OFPI's sales and marketing expense for 1998 as $3,049,000, or 24.8% of
sales, versus $2,409,000 or 21.2% of sales for 1997. The increase in sales and
marketing expense was due to increases in personnel and increases in promotional
activities such as in-store demonstrations, etc.
General and Administrative Expenses
OFPI's general and administrative expenses for 1998 were $1,922,000, or
15.6% of sales, versus $1,119,000 or 9.8% of sales for 1997. This change was
due, in large part, to increases in professional services, legal fees,
accounting and tax services and such other costs incidental to OFPI becoming a
public company. Moreover, notes receivable from stockholder, $168,000,
separation costs associated with the former Chief Executive Officer, $167,000,
and $217,000 associated with a failed acquisition were written off.
Additionally, contributing to this increase were $154,000 in expenses associated
with retaining the Global Natural Brands Management Team during the fourth
quarter of 1998.
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Loss on Write-down of Fixed Assets and Goodwill
During 1998, the Company determined that certain goodwill and fixed assets
were impaired, based on estimations of expected undiscounted future cash flows
from operations under current operating conditions. Discounted cash flow
estimates under the same operating assumptions indicated that they may not be
sufficient to recover the cost of the goodwill arising from the purchase of OFP,
and accordingly, goodwill of $2,182,401 was written off. The related fixed
assets were reduced by $240,024 to its fair value as estimated by appraisal from
an independent third party. The resulting total $2,422,425 loss is included in
"Loss on write-down of fixed assets and goodwill" in the accompanying statements
of operations. The affected fixed assets will be depreciated at their new book
basis over their remaining useful life. Unamortized goodwill of $923,156
relating to the February, 1998 Sunny Farms acquisition was not affected, and
will be reevaluated in future years on an ongoing basis.
Net Interest Expense
OFPI's interest expense for 1998 was $102,000 versus $261,000 for 1997. The
decrease in interest expense resulted from a 60% reduction in notes payable as
well as a decrease in the utilization of the revolving credit line due to the
application of IPO proceeds to pay down debt. (See Liquidity and Capital
Resources).
Deferred Tax Assets
Since the Company could not determine that it was more likely then not that
the deferred tax assets would be realized, a 100% valuation allowance was
provided.
Year 2000 Compliance
Organic Food Products Inc., uses computer software that may be impacted by
the year 2000 problem, and also relys upon vendors of equipment and services
whose products may be impacted by the year 2000 problem. The Company's year 2000
compliance issues include: 1) the equipment it uses in its manufacturing
process; 2) the hardware and third-party software it uses for corporate
administration; 3) the services of third-party providers it purchases for
certain professional services; and 4) the external services such as
telecommunications and electrical power. The Company has initiated a plan that
will attempt to identify all computer hardware and software, plant equipment and
services upon which it relies that may be impacted. After identification of any
problem areas, the Company will verify whether or not those products or services
are year 2000 compliant. The plan includes contacting those vendors or service
providers to determine their compliance or plans to become complaint before
December 31, 1999. It is the intent of the Company to complete this process by
December 31, 1998.
The Company uses various pieces of equipment in its manufacturing process
that may contain computer chips that could be affected by the year 2000 problem.
The company has started, but not completed a program to identify which pieces of
equipment could be affected and how the affected equipment could be updated.
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The Company's corporate administrative and operating systems are
exclusively PC-based using a commercially available software package. The
Company has received written confirmation from the legal department of the
software developer confirming that it is year 2000 compliant.
The Company uses outside service providers for the processing and
administration of its payroll, 401(k) retirement plan and insurance benefit
programs. Although a survey of these services providers has not been completed,
the Company believes that these providers will have systems, and based upon its
initial efforts to date as described herein, and does not anticipate that any
other information technology projects will be delayed in the future due to the
year 2000 problem.
The Company has not deferred any information technology projects to date
due to the need to assess or ensure year 2000 compliance of its systems, and
based upon its initial efforts to date as described herein, and does not
anticipate that any other information technology projects will be delayed in the
future due to the year 2000 problem.
For the reasons mentioned herein, the Company does not anticipate that it
will have an incomplete or untimely resolution of the year 2000 problem.
Although the total costs of compliance have not been completely assessed,
management does not believe they will be material in nature. As previously
mentioned, with regard to items (1) - (3), the Company believes it has or will
achieve year 2000 compliance in advance of December 31, 1999. With respect to
external companies that provide telecommunications and electrical power, the
Company is less certain about the impact of their non-compliance regarding the
year 2000 problem. Clearly, the loss of these services would create a major
disruption of the Company's normal operations. Given this scenario, the Company
would be required to obtain these services from other sources. The cost of
switching to other utility providers has not been assessed.
Issues similar to these also face the Company's customers. The Company has
not yet completed an assessment of year 2000 readiness of its customers.
However, based on initial discussions with certain customers, management does
not currently believe that business with those customers will be significantly
disrupted by the year 2000 problem.
Seasonality
The Company is experiencing some 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, with payments
being made quarterly and are effected to reduce the risk of price swings due to
demand fluctuations. These annual purchases can occasionally create overages or
shortages in inventory. The Company's intention to sell certain excess bulk raw
materials to other manufacturers may assist in reducing any overages and should
allow for more effective purchasing of the required raw materials.
13
<PAGE>
Liquidity and Capital Resources
During the year, the Company completed its initial public offering (IPO) of
1,495,000 shares of Common Stock at $4.00 per share, for gross proceeds at
$5,902,000 (including 195,000 underwriters' over-allotment shares sold at
$3.60). The net proceeds of approximately $4,596,000 (after offering costs of
$1,806,000) was used to pay down approximately $3,613,000 of existing debt. The
balance was used for working capital purposes, to purchase raw materials and
equipment, to repay debt and to provide marketing funds to introduce new
products and to introduce existing products into new markets. Equipment
purchases were used for retooling and to acquire additional packaging equipment
to convert, when required, production from boxed cases to shrink wrap cases.
The Company also used an equipment line provided by its lender to finance
the purchase of juice bottling equipment as part of its acquisition of Sunny
Farms. Such equipment line was retired during 1998.
As of June 30, 1998, the Company's cash position was limited. The purchase
of nearly $700,000 of inventory during the Sunny Farms acquisition, the
investment in plant equipment and the cash outlays and lost sales resulting from
from a temporary product withdrawal, have placed severe strains on the Company's
cash position. The Company has, subsequent to year end, received a commitment
from a lender to provide a $3,000,000 revolving line of credit and a $500,000
equipment line to replace an existing $1,000,000 revolving line. The Company
believes that with this substantial increase in credit facilities, coupled with
anticipated cost savings in the area of manufacturing, should be adequate to
fund the Company's estimated cash requirements for the year ending June 30,
1999. There can be no assurances, however, that all of the anticipated savings
can be attained by year end.
During 1998, the Company used $1,215,000 in operations, compared to
$1,755,000 in 1997. The decreased use of cash resulted primarily from additional
cash received from customers, due to the increase in sales, offset by $1,332,000
in increased payments to suppliers due to costs of the increased sales. Cash
used in investing activities was $1,624,000 in 1998 compared to $322,000 in
1997, due to the Sunny Farms acquisition as well as increased purchases of fixed
assets.
Cash provided by financing activities increased to $2,818,000 in 1998
compared to $1,949,000 in 1997. Proceeds from sale of stock to Global Natural
Brands, Ltd. and the IPO mentioned above were $5,517,000 compared to $1,718,000
from a private placement in 1997(offset by $350,000 in deferred offering costs
in preparation for the IPO).
The Company's future results of operations and the other forward-looking
statements contained in this document, in particular the statements concerning
plant efficiencies and capacities, capital spending, research and development,
competition, marketing and manufacturing operations and other information
provided herein involve a number of risks and uncertainties. In addition to the
factors discussed above, among the other factors that could cause actual results
to differ materially are general business conditions and the general economy;
competitors' pricing and marketing efforts; availability of third-party material
products at reasonable prices; risk of nonpayment of accounts receivable; risks
of inventory obsolescence due to shifts in market demand; timing of product
introductions; and litigation involving product liabilities and consumer issues.
14
<PAGE>
New Applicable Account Pronouncements
During 1997, the Financial Accounting Standards Board released SFAS No.
130, Reporting Comprehensive Income. SFAS 130, which is effective for fiscal
years beginning after December 15, 1997, establishes standards for reporting and
display of comprehensive income and its components in the entity's financial
statements. The objective of SFAS 130 is to report a measure of all changes in
the equity of an enterprise that result from transactions and other economic
events of the period. Comprehensive income is the total of net income and all
other non-owner changes in equity. SFAS 130 does not address issues of
recognition or measurement for comprehensive income and its components and,
therefore, it will not have an impact on the financial condition or results of
the Company upon adoption.
The Financial Accounting Standards Board also recently released SFAS No.
131, Disclosures about Segments of an Enterprise and Related Information. This
Statement, which is also effective for fiscal years beginning after December 15,
1997, requires reporting of financial and descriptive information about
reportable operating segments. Operating segments are components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. The Company believes it
operates in only one business segment, production and distribution of processed
organic foods, and has already substantially complied with any additional
disclosure requirements. SFAS 131 does not address issues of recognition or
measurement in the basic financial statements, and thus will have no impact on
the Company's financial condition or results of operation upon adoption.
15
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
- ------------------------------
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
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, 1998, and the related statements of operations, changes in
shareholders' equity, and cash flows for the year then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1998 financial statements referred to above present fairly,
in all material respects, the financial position of Organic Food Products, Inc.
as of June 30, 1998, and the results of its operations, changes in shareholders'
equity, and its cash flows for the year then ended in conformity with generally
accepted accounting principles.
BDO SEIDMAN, LLP
Certified Public Accountants
San Francisco, California
September 23, 1998, except for Note 6,
as to which the date is October 9, 1998
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To The Shareholders and Board of Directors of Organic Food Products, Inc.
We have audited the accompanying statements of operations, changes in
shareholders' equity, and cash flows of Organic Food Products, Inc., for the
year ended June 30, 1997. 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides 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 shareholders'
equity, and cash flow of Organic Food Products, Inc., for the year ended June
30, 1997, in conformity with generally accepted accounting principles.
Semple & Cooper, LLP
Certified Public Accountants
Phoenix, Arizona
September 24, 1997
F-2
<PAGE>
ORGANIC FOOD PRODUCTS, INC.
BALANCE SHEET
June 30, 1998
ASSETS
Current Assets:
Cash $ 41,585
Accounts receivable, less allowance for
bad debts, spoils and returns, and
manufacturer charge back adjustments
of $324,493 (Notes 1, 6 and 7) 1,096,285
Inventory, net (Notes 1, 2, 3, 5, 6, and 7) 3,693,986
Prepaid expenses 187,469
Receivable from related party (Note 3) 50,000
-----------
Total Current Assets 5,069,325
Fixed Assets (Notes 1, 4, 5, and 6) 1,263,007
Goodwill (Note 1, 4 and 9) 923,515
-----------
Total Asets $7,255,847
===========
The Accompanying Notes are an Integral Part
of the Financial Statements
F-3
<PAGE>
ORGANIC FOOD PRODUCTS, INC.
BALANCE SHEET (Continued)
June 30, 1998
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable (Note 6) $ 992,589
Accounts payable 1,613,279
Accrued wages and taxes 199,221
Accrued liabilities 76,318
Notes payable - related parties -
current portion (Note 3) 462,754
-----------
Total Current Liabilities 3,344,161
-----------
Notes payable - related parties
- long-term portion (Note 3) 34,484
-----------
Total Liabilities 3,378,645
-----------
Commitments (Notes 3, 5, 6, and7)
Shareholders' Equity (Note 8):
Common stock
No par value, 20,000,000 shares authorized,
7,275,688 issued and outstanding 9,851,687
Accumulated deficit (5,974,485)
-----------
3,877,202
-----------
Total Liabilities and Shareholders' Equity $ 7,255,847
===========
The Accompanying Notes are an Integral Part
of the Financial Statements
F-4
<PAGE>
ORGANIC FOOD PRODUCTS, INC.
STATEMENTS OF OPERATIONS
For The Years Ended June 30, 1998 and 1997
June 30, June 30,
1998 1997
------------ ------------
Revenues (Notes 1 and 8) $ 12,304,323 $ 11,378,916
Cost of Goods Sold (Notes 3 and 8) 9,419,802 7,530,270
------------ ------------
Gross Profit 2,884,521 3,848,646
------------ ------------
Sales and Marketing Expense 3,048,865 2,408,864
General and Administrative
Expenses (Note 3) 1,922,030 1,118,686
Loss on Write-down of
Fixed Assets and Goodwill 2,410,936 --
(Note 4)
------------ ------------
7,381,831 3,527,550
------------ ------------
Income (Loss) from Operations (4,497,310) 321,096
Interest Income (Expense), Net (102,413) (261,376)
Other Income (Expense), Net (34,719) 11,447
------------ ------------
Income (Loss) before Provision for
Income Taxes (4,634,442) 71,167
Provision for Deferred Income Tax
Benefit (Expense)(Note 1 and 11) 15,200 (16,000)
------------ ------------
Net Income (Loss) $ (4,619,242) $ 55,167
============ ============
Basic and Diluted Earnings
(loss) per Share (Notes 1 and 9) $ (.69) $ .01
============ ============
Weighted Average Number of Shares
Outstanding (Notes 1 and 9) 6,696,945 5,692,830
============ ============
The Accompanying Notes are an Integral Part
of the Financial Statements
F-5
<PAGE>
<TABLE>
<CAPTION>
ORGANIC FOOD PRODUCTS, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
Total
Common Stock Additional Shareholders'
------------------------ Paid-in Accumulated Equity
(See Note 9) Shares Amount Capital (Deficit) (Deficit)
- ------------- ------ ------ ------- --------- -------------
<S> <C> <C> <C> <C> <C>
Balance at July 1, 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
Repurchase of shares (31,250) (78,125) -- -- (78,125)
Stock issued for
director expenses 5,663 14,157 -- -- 14,157
Net income for the
year ended June 30,
1997 -- -- -- 55,167 55,167
----------- ----------- ---------- ----------- -----------
Balance at June 30, 1997 5,297,913 3,971,720 -- (1,355,243) 2,616,477
Repurchase of Shares (40,000) (100,000) -- -- (100,000)
Proceeds from initial
public offering, net
of costs of $1,306,404 1,495,000 4,595,566 -- -- 4,595,566
Stock issued for director
expenses 17,200 34,401 -- -- 34,401
Stock issued for
acquisition of
Sunny Farms, Inc. 283,333 850,000 -- -- 850,000
Proceeds from sale of stock
to Global Natural Brands 222,222 500,000 -- -- 500,000
Net loss for the year ended
June 30, 1998 -- -- -- (4,619,242) (4,619,242)
----------- ----------- ---------- ----------- -----------
Balance at June 30,
1998 7,275,688 $ 9,851,687 $ -- $(5,974,485) $ 3,877,202
=========== =========== ========== =========== ===========
The Accompanying Notes are an Integral Part
of the Financial Statements
F-6
</TABLE>
<PAGE>
ORGANIC FOOD PRODUCTS, INC.
STATEMENTS OF CASH FLOWS
For The Years Ended June 30, 1998 and 1997
(See Note 12) 1998 1997
- ------------- ------------ ------------
Increase (Decrease) in Cash:
Cash flows from operating activities:
Cash received from customers $ 12,501,929 $ 10,745,430
Cash paid to suppliers and employees (13,781,403) (12,449,168)
Interest paid (114,413) (142,966)
Interest received 12,000 --
Income taxes received 167,694 91,753
Income taxes paid (800) --
------------ ------------
Net cash used by operating
activities (1,214,993) (1,754,951)
------------ ------------
Cash flows from investing activities:
Purchase of fixed assets (603,915) (243,596)
Advances to shareholder (84,000) (84,000)
Cash received from sale of fixed assets 34,600 5,483
Purchase of Sunny Farms (971,171) --
------------ ------------
Net cash used by investing
activities (1,624,486) (322,113)
------------ ------------
Cash flows from financing activities:
Repayment of notes payable and capital lease (832,349) (140,627)
Repayment of notes payable
- related parties (1,766,416) (257,685)
Proceeds from notes payable -- 1,057,178
Proceeds from issuance of stock 5,516,904 1,718,288
Re-purchase of common stock (100,000) (78,125)
Deferred offering costs -- (350,113)
------------ ------------
Net cash provided by financing
activities 2,818,139 1,948,916
------------ ------------
Net decrease in cash (21,340) (128,148)
Cash at beginning of year 62,925 191,073
------------ ------------
Cash at end of year $ 41,585 $ 62,925
============ ============
The Accompanying Notes are an Integral Part
of the Financial Statements
F-7
<PAGE>
ORGANIC FOOD PRODUCTS, INC.
STATEMENTS OF CASH FLOWS (Continued)
For The Years Ended June 30, 1998 and 1997
1998 1997
----------- -----------
Reconciliation of Net Income (Loss) to Net Cash
Used by Operating Activities:
Net Income (Loss) $(4,619,242) $ 55,167
----------- -----------
Adjustments to reconcile net income (loss)
to net cash used by operating activities:
Depreciation and amortization 345,352 235,875
Loan discount amortization -- 118,410
Inventory financed through notes payable -- 222,523
Loan to shareholders forgiven 168,000 --
Loss on write-down of fixed assets -- --
and goodwill 2,410,977 --
Stock issued for director's expenses 34,401 14,157
Provision for reserves against
receivables 160,981 --
Provision for reserve for inventory
obsolesence 85,000 --
Deferred income taxes (16,000) 16,000
Changes in Assets and Liabilities:
Accounts receivable, net 36,625 (525,549)
Inventory 410,061 (2,021,955)
Prepaid expenses (152,022) (10,207)
Income tax refund receivable 167,694 91,753
Deposits and other 8,378 15,625
Accounts payable (461,227) 44,272
Accrued liabilities 206,029 (11,022)
----------- -----------
3,404,249 (1,810,118)
----------- -----------
Net cash used by operating activities $(1,214,993) $(1,754,951)
=========== ===========
The Accompanying Notes are an Integral Part
of the Financial Statements
F-8
<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. ("OFPI" or the "Company") is a California
corporation incorporated on July 7, 1987. The principal business purpose of
the Company is the production and distribution of organic food products
throughout the United States.
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.
Stock-Based Compensation:
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation" established a fair value method of Accounting for
stock-based compensation plans and for transactions in which an entity
acquires goods or services from non-employees in exchange for equity
instruments. SFAS 123 encourages, but does not require companies to record
compensation cost for stock-based employee compensation. The Company has
chosen to continue to account for employee stock-based compensation
utilizing the intrinsic value method prescribed in Accounting Principles
Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees."
Accordingly, compensation cost for employee stock options is measured as
the excess, if any, of the fair market price of the Company's stock at the
date of grant over the amount an employee must pay to acquire the stock.
Options granted to non-employees are recorded at the estimated fair value
of the option granted over the service period. Pro forma disclosure of net
income and earnings per share is provided as if the Company had elected the
fair value method of accounting for all stock-based compensation awards.
Accounts Receivable and Allowances
The Company provides allowances for estimated credit losses, product
returns, spoilage, and other manufacturer charge back adjustments (for
advertising allowances, etc.) at a level deemed appropriate to adequately
provide for known and inherent risks related to such amounts.
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):
The allowances are based on reviews of loss, return, spoilage, adjustment
history, contractual relationships with customers, current economic
conditions, and other factors that deserve recognition in estimating
potential losses. While management uses the best information available in
making its determination, the ultimate recovery of recorded accounts,
notes, and other receivables is also dependent on future economic and other
conditions that may be beyond management's control.
Inventory:
Inventory is stated at the lower of cost, first-in, first-out method or
market.
Earnings Per Share:
In February 1997, the financial Accounting Standards Board issued SFAS No.
128, Earnings Per Share, which supersedes APB No. 15, the existing
authoritative guidance. SFAS No. 128 is effective for financial statements
for periods ending after December 15, 1997, and requires restatement of all
prior-period earnings per share data presented. The new statement modifies
the calculations of primary and fully diluted earnings per share and
replaces them with basic and diluted earnings per share. Basic earnings per
share is computed by dividing income or loss available to common
shareholders by the weighted average number of shares actually outstanding
for the period. Diluted earnings per share reflect the potential dilution
of securities that could share in the earnings of an entity. Because of
losses in 1998, the decline in market price below the exercise price of
certain options and warrants, and differences of less than $.01 per share
due to certain other options and warrants, other potentially dilutive
securities are either anti-dilutive or have no effect. Accordingly,
calculations under the new standard, which was adopted in the quarter ended
December 31, 1997 were the same as those under the prior method.
Income Taxes:
The Company accounts for corporate income taxes in accordance with SFAS No.
109, "Accounting for Income Taxes", which requires an asset and liability
approach. This approach results in the recognition of deferred tax assets
(future tax benefits) and liabilities for the expected future tax
consequences of temporary timing differences between the book carrying
amounts and the tax basis of assets and liabilities. Future tax benefits
are subject to a valuation allowance to the extent of the likelihood that
the deferred tax assets may not be realized.
F-10
<PAGE>
ORGANIC FOOD PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Revenue Recognition:
The Company recognizes revenues through sales of products primarily to
grocery and club store chains. Sales are recorded when goods are shipped
for most customers and upon delivery to retail locations for the Direct
Store Delivery program. Potential returns, adjustments and spoilage
allowances are provided for in accounts receivable allowances and accruals.
Fixed Assets:
Fixed Assets are recorded at cost. Depreciation is provided 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.
Goodwill:
Goodwill represents the excess of the cost of companies or operations
acquired over the fair value of their net assets at the date of
acquisition, and is amortized on the straight-line method over the
estimated period of benefit, generally 15 years. Amortization expense
charged to operations for the year ended June 30, 1998 and 1997 was
$135,194 and $94,887. The Company evaluates the estimated net realizable
value of its goodwill at each balance sheet date, and records write-downs
if the net book value exceeds net realizable value (see also "Long Lived
Assets").
Long-Lived Assets:
Long-lived assets, including fixed assets, goodwill, and other intangible
assets, are assessed for possible impairment whenever events or changes in
circumstances indicate that the carrying amounts may not be recoverable, or
whenever management has committed to a plan to dispose of the assets. Such
assets are carried at the lower of book value or fair value as estimated by
management based on appraisals, current market value, and comparable sales
value, as appropriate. Assets to be held and used affected by such
impairment loss are depreciated or amortized at their new carrying amount
over the remaining estimated life; assets to be sold or otherwise disposed
of are not subject to further depreciation or amortization. In determining
whether an impairment exists, the company uses undiscounted future cash
flows compared to the carrying value of assets.
Fair Value of Financial Instruments:
The Company's notes payable approximate fair value based on rates currently
available from the bank for debt with similar terms and maturities. The
fair value of notes payable - related parties approximates the book value
due to shortness of the remaining term. The fair value of the Company's
commitments to purchase inventory is based on current market prices
available to the Company. The carrying amounts of accounts receivable
approximate fair value because of the short maturity of these items.
F-11
<PAGE>
ORGANIC FOOD PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Other New Accounting Pronouncements:
During 1997, the Financial Accounting Standards Board released SFAS No.
130, Reporting Comprehensive Income. SFAS 130, which is effective for
fiscal years beginning after December 15, 1997, establishes standards for
reporting and display of comprehensive income and its components in the
entity's financial statements. The objective of SFAS 130 is to report a
measure of all changes in the equity of an enterprise that result from
transactions and other economic events of the period. Comprehensive income
is the total of net income and all other non-owner changes in equity. SFAS
130 does not address issues of recognition or measurement for comprehensive
income and its components and, therefore, it will not have an impact on the
financial condition or results of the Company upon adoption.
The Financial Accounting Standards Board also recently released SFAS No.
131, Disclosures about Segments of an Enterprise and Related Information.
This Statement, which is also effective for fiscal years beginning after
December 15, 1997, requires reporting of financial and descriptive
information about reportable operating segments. Operating segments are
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker
in deciding how to allocate resources and in assessing performance. The
Company believes it operates in only one business segment, production and
distribution of processed organic foods, and has already substantially
complied with any additional disclosure requirements. SFAS 131 does not
address issues of recognition or measurement in the basic financial
statements, and thus will have no impact on the Company's financial
condition or results of operation upon adoption.
2. Inventory:
As of June 30, 1998, inventory consisted of the following:
Raw materials $1,513,659
Finished goods 2,305,327
3,818,986
Less: reserve for obsolete inventory (125,000)
----------
$3,693,986
==========
3. Related Party Transactions:
Advances to Shareholder:
As of June 30, 1997, the Company had advanced $168,000 to a shareholder in
accordance with an employment agreement. The advance was unsecured,
non-interest bearing, and considered short-term in nature. As of June 30,
1998, this agreement was eliminated and future payments were discontinued.
F-12
<PAGE>
ORGANIC FOOD PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
The balance of the non-interest bearing note ($168,000) was written off at
June 30, 1998.
Notes Payable - Related Parties:
At June 30, 1998, notes payable - related parties, consist of the
following:
Two (2) 6% interest bearing notes payable for $248,619 to two (2) corporate
shareholders, with monthly payments of $20,000, including principal and
interest until paid in full; unsecured and subordinated to other secured
parties. $497,238
========
A schedule of future minimum principal payments due on notes payable outstanding
at June 30, 1998, is as follows:
Year Ending
June 30, Amount
----------- --------
1999 $462,754
2000 34,484
--------
$497,238
========
Organic Ingredients, Inc. ("OGI"), a company 50% owned by Mr. Battendieri, the
Company's President, supplies certain organic ingredients used primarily in the
Company's fruit juice products. Total purchases from OGI amounted to $564,450
during fiscal year 1998. The price of, and terms for, the ingredients are fair,
reasonable and consistent with prices and terms which would be available to the
Company from third parties.
Management Services Contract:
In April 1998, the Company contracted for management services from Global
Natural Brands, Inc. (Global). Under the contract, Global provides the services
of four individuals to fill the offices of Chief Executive Officer, Chief
Financial Officer, Vice President - Sales & Distribution and Vice President
Marketing for a four-year period ending June 30, 2002. The contract provides for
minimum annual cash payments to Global of $300,000, with escalations based on
certain earnings performance and acquisition attainment conditions. In addition,
up to 1,808,784 options to purchase the Company's Common Stock may vest over a
total of four years based on certain stock price and earnings improvement
performance conditions. Each set of vested options, with an exercise price of
$2.25, expires four years after date of vesting. (See Note 10). Upon any change
in ownership interest of more than 50% of the capital stock of the Company, the
balance of the minimum annual cash payments for the remaining contractual period
shall become due and payable and all stock options will vest immediately.
F-13
<PAGE>
ORGANIC FOOD PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Under the agreement, $154,135 in management fees and related relocation expenses
was incurred during the year ended June 30, 1998. Additionally, Global also
agreed to reimburse the Company $50,000 in costs related to a failed acquisition
of an unrelated third party during the year ended June 30, 1998.
4. Fixed Assets and Goodwill:
A summary of fixed assets at June 30, 1998 is as follows:
Estimated
Useful Life
Computer software and equipment 5 years $ 53,750
Leasehold improvements 7 years 182,994
Machinery and equipment 7-20 years 1,036,259
Office equipment 5 years 52,500
Printing plates 7 years 28,998
Vehicles 5 years 19,542
1,373,863
---------
Accumulated depreciation (110,856)
---------
$1,263,007
==========
During 1998, the Company determined that certain goodwill and fixed assets were
impaired, based on estimations of expected undiscounted future cash flows from
operations under current operating conditions. Discounted cash flow estimates
under the same operating assumptions indicated that there may not be sufficient
cash flows to recover the cost of the goodwill arising from the purchase of OFP,
and accordingly, goodwill of $2,182,401 was written off. The related fixed
assets were reduced by $240,024 to their fair value as estimated by appraisal
from an independent third party. The resulting total $2,422,425 loss is included
in "Loss on write-down of fixed assets and goodwill" in the accompanying
statements of operations. The affected fixed assets will be depreciated at their
new book basis over the remaining useful life. Unamortized goodwill of $923,156
relating to the February 1998 Sunny Farms acquisition (See Note 5) was not
affected, and will be reevaluated in future years on an ongoing basis.
For the years ended June 30, 1998 and 1997, depreciation expense was $210,158
and $140,988,respectively.
5. Acquisition of Sunny Farms
In February, 1998, OFPI acquired the natural fruit juice and water bottling
operations of Sunny Farms Corporation for a total of $971,171 in cash (including
costs of acquisition) and assumption of debt, and the issuance of Common Stock
F-14
<PAGE>
ORGANIC FOOD PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
of the Company valued at $1,700,000. Of the total purchase price, $850,000 of
the Common Stock portion is contingent upon certain performance conditions over
the first year after acquisition and, accordingly, has not yet been recorded.
The $963,822 excess of the remaining purchase price over identified inventory
and fixed assets of approximately $857,000 was accounted for as goodwill.
The agreement was accounted for as a purchase and, accordingly, the results of
the Sunny Farms operations are included from February 11, 1998 forward. Pro
forma unaudited estimated results of operations as if the acquisition had been
made effective July 1, 1996, beginning of the first period presented, are as
follows:
Year ended June 30,
1998 1997
----------- -----------
Revenues $15,486,000 $18,498,000
Net loss (5,059,000) (1,061,000)
Loss per share $ (.75) $ (.18)
Only the basic shares issued in February 1998 not subject to forfeit (see Note
9) are included in the above pro forma computations of loss per share.
6. Notes Payable:
At June 30, 1998 notes payable consist of the following:
Revolving line of credit with Wells
Fargo Bank for $1,000,000, interest
at the bank's prime rate plus 1%
per annum (9.5% at June 30, 1998),
interest due monthly, with
principal balance due in full in
October, 1998; collateralized by
various corporate assets. Replaced
subsequent to year end (See Note
(1) below. $ 874,853
Interest-bearing note payable to
Deere Park Capital Management a 1%
per month. 100,000
Other 17,736
----------
$ 992,589
==========
(1) On October 9, 1998, a new financing agreement with Finova Capital
Corporation was signed for a prime plus 2.5% $3,000,000 revolving line
Of credit to be secured by inventory and receivables, as well as a
$500,000 equipment line.
F-15
<PAGE>
ORGANIC FOOD PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
7. Commitments:
Inventory Purchases:
The Company is committed to purchase raw materials over the next year at
contracted prices. At June 30, 1998, these future committed purchases
aggregated approximately $1,846,000 based on the contracted prices. The
Company has no other material future commitments.
Lease Obligations:
The Company leases office, warehouse and production space in Morgan Hill,
California under a non-cancellable operating lease agreement, expiring
April, 2003. Rent expense under this lease agreement for the years ended
June 30, 1998 and 1997 was $102,590 and $78,732 respectively.
A schedule of future minimum lease payments due under the non-cancellable
operating leases at June 30, 1998, is as follows:
Year
Ending
------
1999 $ 83,585
2000 83,545
2001 85,820
2002 88,395
Subsequent 60,097
----------
$ 401,442
==========
Employment Contracts:
The Company entered into employment contracts with two (2) key employees.
The contracts were to 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 June 30, 1998, contracts were terminated by mutual agreement and
approximately $167,000 still due under one of the contracts has been
accrued.
In connection with the Sunny Farms acquisition (see Note 5), the Company
entered into employment agreements with two former employees of Sunny
Farms. The agreements expire in February, 2000 and provide for payments of
the remaining base salaries (aggregating approximately $12,000 per month)
in the event of termination other than for cause or resignation of the
employee (s).
F-16
<PAGE>
ORGANIC FOOD PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
8. Significant Concentrations:
For the years ended June 30, 1998 and 1997, the Company had one customer
which accounted for approximately seventeen percent (17%) and twenty-one
percent (21%), respectively, of the total sales volume. At June 30, 1998
and 1997, the amounts due from the customer included in accounts receivable
were $128,662 and $374,591, respectively.
For the year ended June 30, 1998, the Company had one supplier which
accounted for an aggregate of approximately twenty percent (20%) of the
total purchases. For the year ended June 30, 1997, the Company had one (1)
supplier which accounted for approximately thirty-one percent (31%) of the
total purchases. At June 30, 1998 and 1997, the amounts due to these
suppliers included in accounts payable were $84,022 and $473,658,
respectively. The Company believes that other suppliers are available who
could provide product at similar prices and terms. A change in suppliers,
however, could cause a delay in manufacturing and a possible loss of sales,
which would affect operating results adversely.
9. Shareholders' Equity:
Common Stock:
The Company completed a private placement offering during the year ended
June 30, 1997 at a gross price of $2.50 per share. The proceeds from the
offering of 823,500 shares were $1,718,288, net of costs of $340,462.
The Company completed its initial public offering of 1,495,000 shares of
its no par value common stock at a price of $4.00 per share sold (including
195,000 underwriters over-allotment shares at $3.60 per share) under its
Registration Statement and Prospectus dated August 8, 1997. Gross proceeds
of approximately $5,900,000 were received by the Company.
In connection with the management contract discussed in Note 3, Global
purchased a total of 222,222 shares of the Company's Common Stock in June,
1998 for $500,000, and has committed to invest an additional $500,000
before the earlier of 30 days after completion of an acquisition
transaction (as defined) or April 15, 1999. The agreement targeted the
value of the purchases at $2.50 per share. OFPI committed to issue
additional shares to bring the market value of the shares issued back to
the purchase amount if the market value of the Common Stock was less than
$2.50 per share for the average of the closing prices on specified trading
dates in August and September, 1998 (with a minimum assigned value of $2.25
per share). Under this provision, the Company issued 22,222 additional
shares in connection with the first $500,000 purchase, and will issue
222,222 shares in total for the second purchase. The additional shares
related to the first purchase are treated as if they were outstanding since
the June, 1998 date of sale of the initial related shares.
F-17
<PAGE>
ORGANIC FOOD PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
In connection with the February, 1998 Sunny Farms acquisition, the Company
issued a total of 425,000 shares at $4.00 per share, of which 212,500 were
placed in escrow. The release of the escrowed shares is contingent on the
attainment of certain future performance conditions.
The agreement also provided for issuance of additional shares if the market
price of the Company's shares was not at least $4.00 per share for the
average of the closing prices on specified trading dates in August, 1998
(with a minimum assigned value of $3.00 per share).
As a result of the market price guarantee, the Company issued an additional
166,667 shares (of which 83,333 shares are held in escrow) in connection
with the purchase. The additional shares not subject to forfeiture are
treated as if they were outstanding for the entire period since the Sunny
Farms acquisition date.
10. Stock Options and Warrants:
Options:
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 and
directors. 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 generally vest ratably over
four or five year periods for employees, and up to two years for directors.
At June 30, 1998, there were 625,000 shares reserved for options to be
granted under the plan.
The following table shows activity in outstanding options during 1998 and 1997:
1998 1997
--------------------- --------------------
Weighted
Averge Average
Exercise Exercise
Shares Price Shares Price
Outstanding, beginning of year 625,000 $ 2.11 483,000 $ 2.00
Granted - employees and directors 40,000 $ 3.34 142,000 $ 2.50
Granted - management services 1,808,784 $ 2.25 - -
Canceled or Expired (131,000) $ 2.50 - -
Outstanding, end of year 2,342,784 $ 2.26 625,000 $ 2.11
========= ====== ======= ======
Options exercisable at year end 283,000 $ 2.00 311,000 $ 2.10
========= ====== ======= ======
Weighted average fair value of options
granted during the year - employee
and director shares only $ 1.75 $ 0.29
====== ======
F-18
<PAGE>
ORGANIC FOOD PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
The following table shows information for options outstanding or exercisable as
of June 30, 1998:
<TABLE>
<CAPTION>
Outstanding Exercisable
Weighted Weighted
Average Average
Remaining Average Remaining Average
Contractual Exercise Contractual Exercise
Shares Life Price Shares Life Price
--------- ---------- ------- ------- --------- --------
Range of Exercise Prices
<S> <C> <C> <C> <C> <C> <C>
$2.00 to $2.99 2,302,724 6.6 $ 2.24 283,000 6.8 $ 2.00
$3.00 to $3.34 40,000 10.0 $ 3.34 - - -
--------- ---- ------ ------- --- ------
2,342,724 6.3 $ 2.26 283,000 6.8 $ 2.00
========= ==== ====== ======= === ======
</TABLE>
In 1998, the Company also granted options for 1,808,784 shares at $2.25 per
share to the management company providing executive management services (see
Note 3). The options vest over a four year period beginning April 15, 1998, and
are exercisable for four years after vesting. Vesting of each year's options is
dependent upon performance conditions relating to improvement in earnings and
share price for which targets are to be established yearly. The fair value of
the options will be recorded as expense upon attainment or probability of
attainment of the performance target over the service period. However, as of
June 30, 1998, no such targets have been set by OFPI and the management company,
and, accordingly, no amounts have been included in expense.
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. 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 at the grant dates consistent
with the method of SFAS 123, the Company's net income(loss) and earnings (loss)
per share for the years ended June 30, 1998 and 1997, would have been adjusted
to the pro forma amounts presented below:
June 30, June 30,
1998 1997
---- ----
Net income (loss)
As reported $(4,619,233) $ 55,167
Pro forma $(4,622,802) $ 13,987
Earnings (loss) per share
As reported $ (.69) $ .01
Pro forma $ (.69) $ -
F-19
<PAGE>
ORGANIC FOOD PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
The fair value of option grants are estimated on the date of grant utilizing the
Black-Scholes option-pricing model, with the following assumptions for grants in
the years ended June 30, 1998 and 1997, respectively: expected life of five
years, expected volatility of 50.4% and 14.4%, risk-free interest rates of 5.6%
and 8%, and no dividend yield. The fair value at date of grant for director and
employee options for 1998 and 1997 approximated $1.75 and $.29 per share,
respectively. The fair value of the 1998 management company options, estimated
as of September 23,1998, the date of this report, approximated $.50 per share.
Warrants:
The Company issued warrants to an underwriter in connection with a private
placement offering in 1995. As of June 30, 1998, 150,000 warrants were
outstanding at exercise prices of $2.00 per share, expiring on December 31,
2002.
In addition, the Company issued warrants to individuals in connection with
various ten percent (10%) promissory note agreements in 1997. As of June 30,
1998, 200,666 warrants were outstanding at exercise prices of $3.00 per share,
expiring on December 31, 1999.
In connection with its August, 1997 IPO, the Company issued 130,000 warrants to
purchase shares of common stock at $4.80 per share, expiring in August, 2002.
Also in 1998, the Company issued warrants at $2.625 per share expiring in
February, 2003 in exchange for services related to the Sunny Farms acquisition.
(See Note 5).
11. Income Taxes and Deferred Income Taxes:
A reconciliation of the Federal statutory rate to the tax provision of the
corresponding years is as follows:
1998 1997
---------- ----------
Tax benefit (expense) at effective
Federal statutory rate $1,564,800 $ (8,800)
Non deductible expense (10,900) (2,600)
Valuation limitation on deferred
tax assets (1,749,600) -
State income taxe expense (benefit),
net of Federal effect 210,900 (4,600)
---------- ----------
$ 15,200 $ (16,000)
========== ==========
F-20
<PAGE>
ORGANIC FOOD PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Deferred tax assets at June 30, 1998 are as follows:
Net operating losses $ 888,200
Goodwill amortization and
write-down 712,700
Depreciation and fixed asset
write-down 11,900
Allowances against receivables 110,300
State income taxes, net of Federal
benefits 234,000
Other 42,700
----------
Total 1,999,800
Valuation allowance (1,999,800)
----------
Net $ --
===========
Since the Company could not determine it was more likely than not that the
deferred tax assets would be realized, a 100% valuation allowance has been
provided.
At June 30, 1998, the Company had Federal and state net operating loss
carryforwards available to offset future Federal and state taxable income,
in the approximate amounts of $2,612,000 and $1,426,000, expiring through
June 30, 2013 and 2003, respectively. Should the Company's ownership change
by more than 50%, the annual amount of net operating loss carryforward,
available for future use would be limited.
F-21
<PAGE>
ORGANIC FOOD PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
12. Statements of Cash Flows:
Non-Cash Investing and Financing Activities:
The Company recognized investing and financing activities that affected
assets and liabilities, but did not result in cash receipts or payments.
These non-cash activities are as follows:
Year Ended Year Ended
June 30 June 30
1998 1997
Write-off of goodwill $2,182,401 --
Issuance of stock for a portion of Sunny
Farms acquisition $850,000 --
Deferred offering costs charged to $421,338 --
Shareholder's equity
Write-down of fixed assets $240,024 --
Stock issued for director expenses $34,401 $14,157
Inventory financed through the issuance
of a note payable -- $222,523
Asset additions financed through the
issuance of notes payable -- $141,186
Interest imputed on a discounted note
payable -- $118,410
Asset additions financed through capital
lease obligations -- $ 23,752
F-22
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
- --------------------------------------------------------------------------------
On June 18, 1998 Organic Food Products, Inc. (the "Company") elected to
terminate its relationship with Semple & Cooper, LLP, as the Company's
independent public accountants. Semple & Cooper's reports on the financial
statements for the past two years (1) did not contain an adverse opinion or a
disclaimer opinion, (2) nor were they qualified or modified as to uncertainty,
audit scope, or accounting principles.
On July 17, 1998, the Company appointed BDO Seidman, LLP, as its
independent auditor. The Company did not consult with BDO with respect to the
application of accounting principles to a specified transaction, either
completed or proposed, or the type of audit report that might be rendered on the
Company's financial statements, nor did the Company consult with BDO regarding
the subject of any disagreement with its former independent public accountants
or with respect to any events required to be reported pursuant to paragraph
(a)(1)(v) or Item 304 with respect to such former independent accountants.
The decision to change accountants was approved by the audit committee of
the Company.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
- --------------------------------------------------------------------------------
Directors and Executive Officers
The name, age, position, and term of office of each of the Company's
executive officers and directors are set forth below:
Held
Position
Name Age Position Since
---- --- -------- --------
James F. Swallow 54 Chief Executive Officer
and Director 1998
David J. O'Gorman 49 Chief Financial Officer 1998
John Battendieri 51 Director 1996
Kenneth A. Steel Jr. (1) 40 Director 1996
Charles B. Bonner (1) (2) 56 Director 1996
Charles R. Dyer (2) 54 Director 1996
- -----------------
(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.
16
<PAGE>
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:
James F. Swallow is the former Chief Operating Officer of Select Beverages,
Inc., 1995-1997, and former managing director of Swedish operations for A.T.
Kearney, a global management consultant, 1993-1994. He has also been a manager
of the Chicago branch of Sonoco Products Company, 1978-1980, and has held
operations management positions with Proctor & Gamble, 1975-1978. He has a BS in
general engineering from the U.S. Air Force Academy and an MBA from California
State University.
David J. O'Gorman is a former Senior Vice President, Finance and
Administration & Chief Financial Officer of the Chicago Mercantile Exchange,
1983-1993. In addition, he was one of the founding staff members of the Chicago
Board Options Exchange, 1972-1979, where he served as Treasurer. He also served
as the Vice President of Operations and Chief Financial Officer for the New York
Futures Exchange, 1979-1982. He received degrees in Accounting and Finance from
Southern Illinois University.
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. Mr. Battendieri sells organic ingredients to
the Company through Organic Ingredients, Inc., a company in which he holds a 50%
ownership interest. See "Item 12."
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.
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.
17
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
- --------------------------------
The following table discloses compensation paid to certain of the Company's
executive officer for the year's ended June 30, 1998 and 1997:
<TABLE>
<CAPTION>
All Other
Name and Principal Options/
Position Year Salary $ SARS (#) Compensation ($)
-------- ---- ---------- -------- ----------------
<S> <C> <C> <C> <C>
James F. Swallow 1998 $ 1(3) 1,808,784(3)
Chief Executive Officer
Floyd R. Hill 1998 $123,000
Chief Executive Officer 1997 $110,000 200,000(1)
John Battendieri 1998 $110,000 $168,000 (2)
President 1997 $110,000 $250,000 (2)
</TABLE>
(1) See "1995 Stock Option Plan" and Item 11
(2) 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.
(3) Mr. Swallow is an employee of Global Natural Brands Ltd. (Global), which
provides executive management services to the Company (see Item 12. Certain
Relationships and Related Transactions). During 1998, the Company incurred
$154,135 in management fees and expenses with Global. The agreement with
Global provides for the grant of up to 1,808,784 options subject to certain
performance conditions. The options are attributed to Mr. Swallow
beneficially through his ownership interest in Global.
18
<PAGE>
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 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, all of which have vested. Mr. Hill's agreement was
renegotiated on February 19, 1998 at which time he resigned as Chief Executive
Officer. Subsequent to that renegotiation, Mr. Hill left the Company and amounts
due under the February 19th agreement have been accrued at year end.
Upon completion of the merger with OFPI, the Company and Mr. Battendieri (OFP's
then President and currently the Company's OFPI's President) entered into a
three-year employment agreement expiring June, 1999, which provides for an
annual salary of $110,000. The contract originally called for non-interest
bearing loans of $7,000 per month during the full term of the employment
agreement repayable the earlier of August 11, 1999 or upon termination of the
employment agreement. As of June 30, 1998, the aggregate $168,000 loaned to Mr.
Battendieri under the agreement was forgiven by the Company. 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. They have also 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.
19
<PAGE>
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 June 30, 1998, 534,000 stock options were outstanding under the plan
for officers, directors and employees (400,000 for executive officers and
directors) at exercise prices of $2.00 to $3.34 per share.
Option Grants in Last Fiscal Year
The following table sets forth the options granted to the executive officer
named below for the year ended June 30, 1998. During the year, there were no
exercises of stock options by the executive officers named below:
INDIVIDUAL GRANTS
---------------------------------------------- Potential
Number % of Total Realizable
Of Securities Options Value on 6/30/98
Underlying Granted Exercise Alternative
Options to Employees or Base Expiration Grant Date
Granted in 1998 Price Date Value
------- ------- ----- ---- -----
James F. Swallow 1,808,784 (1) N/A (2) $2.25 Variable (3) N/A (4)
(1) Includes options granted to Global, attributed to Mr. Swallow through his
partial ownership of Global.
(2) These options are granted to Global, a management company, and not to
individual employees.
(3) Options vest only upon attainment of certain performance conditions over a
four year period beginning April 15, 1998. Each batch of options that
actually vests will expire four years after vesting.
(4) Options will be measured upon actual attainment of the performance
conditions, which correspond to the vesting dates (first vesting date April
15, 1999).
Aggregated option exercises in last fiscal year and fiscal year end option
values:
Number of Securities Value of Unexercised
Underlying Unexercisable In-the-money
Options at June 30, 1998 Options at June 30, 1998
------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
James F. Swallow 0 1,808,784 0 $2,030,282
Floyd R. Hill 300,000 0 $287,500 0
(1) Includes 1,808,784 shares granted to Global, and attributed to Mr. Swallow
through his partial ownership of Global.
20
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
The following table sets forth information concerning the holdings of
Common Stock by each person who, as of the date June 30, 1998, holds of record
or is known by the Company to hold beneficially or of record, more than 5% of
the Company's Common Stock, by each director, and by all directors and executive
officers as a group. All shares are owned beneficially and of record. The
address of all persons (unless otherwise noted in the footnotes below) is in
care of the Company at 550 Monterey Road, Morgan Hill, California.
Name Amount of Ownership Percent of Class
---- ------------------- ----------------
Floyd R. Hill(1) 451,200 5.5
John Battendieri 2,102,499 25.9
Kenneth A. Steel(2) 380,019 4.6
Charles B. Bonner(3) 25,000 *
Charles R. Dyer(4) 47,000 *
Dean E. Nicholson 450,000 5.5
Steven A. Reedy 450,000 5.5
James F. Swallow (5) 222,222 2.7
All officers and directors
as a group (6 persons)
(2)(3)(4)(5)(6) 2,776,740 34.1
- -------
* Less than 1%
(1) Includes options to purchase 200,000 shares of Common Stock at $2.00 per
share and 100,000 shares of Common Stock at $2.50 per share granted under
the 1995 Stock Option Plan.
(2) Includes options to purchase 30,000 shares of Common Stock at $2.00 per
share and 20,000 shares of Common Stock at $2.50 per share granted under
the 1995 Stock Option Plan. Includes 25,328 warrants owned by Mr. Steel and
an additional 25,328 owned beneficially by Mr. Steel belonging to his
brother, Robert Steel, to purchase Common Stock at $2.625 per share.
(3) Includes stock options to purchase 20,000 shares of Common Stock at $2.00
per share and 20,000 shares of Common Stock at $2.50 per share granted
under the 1995 Stock Option Plan.
(4) Includes stock options to purchase 25,000 shares of Common Stock at $2.50
per share granted through the 1995 Stock Option Plan.
(5) Includes 222,222 shares beneficially owned by Mr. Swallow through his
ownership in Global Natural Brands, Ltd. (Global). Does not include
1,808,784 option granted to Global which are subject to performance
requirements and have not vested.
(6) Includes 222,222 shares owned beneficially by executive officers Mr.
Swallow, and Mr. David O'Gorman, and by Mr. Ronald B. Balsbaugh, Mr. J.
Bradley Barbeau, and through their ownership of Global.
21
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
In April 1998, the Company contracted for management services from Global
Natural Brands, Inc. (Global). Under the contract, Global provides the services
of four individuals to fill the offices of Chief Executive Officer, Chief
Financial Officer, Vice President - Sales & Distribution and Vice President
marketing. The contract provides for minimum annual cash payments to Global of
$300,000, with escalations based on certain earnings performance and acquisition
attainment conditions. In addition, up to 1,808,784 options to purchase the
Company's Common Stock may vest over a total of five years based on certain
stock price and earnings improvement performance conditions. Each set of vested
options, with an exercise price of $2.25, expires four years after date of
vesting. Upon any change in ownership interest of more than 50% of the capital
stock of the Company, the balance of the minimum annual cash payments for the
remaining contractual period shall become due and payable and all stock options
will vest immediately.(See Note 10 to the financial statements).
In connection with the agreement, Global purchased 222,222 shares of the
Company's Common Stock in June 1998 for $500,000, and has committed to invest an
additional $500,000 before the earlier of 30 days after completion of an
acquisition transaction (as defined) or April 15, 1999. The agreement targeted
the value of the purchases at $2.50 per share. OFPI committed to issue
additional shares to bring the market value of the shares issued back to the
purchase amount if the market value of the Common Stock is less than $2.50 per
share for the average of the closing prices for the 20 trading days after August
11, 1998, the end of the lock-up period related to the private and public sale
of securities held by Sentra Securities Corporation in connection with the
Company's 1997 IPO (with a minimum assigned value of $2.25 per share). Under
this provision, the Company issued 22,222 additional shares in connection with
the first $500,000 purchase, and will issue 222,222 shares in total for the
second purchase.
Under the terms of Mr. Battendieri's June, 1996 employment agreement, the
Company was required to advance to Mr. Battendieri non-interest bearing loans of
$7,000 per month during the full term of his employment agreement, which expires
in June 1999. As of June 30, 1998, this portion of the agreement was eliminated
and future payments were discontinued. The balance of the non-interest bearing
note ($168,000) was written off effective June 30, 1998.
Organic Ingredients, Inc. ("OGI"), a company 50% owned by Mr. Battendieri,
the Company's President, supplies certain organic ingredients used primarily in
the Company's fruit juice products. Total purchases from OGI amounted to
$564,450 during fiscal year 1998. The price of, and terms for, the ingredients
are fair, reasonable and consistent with prices and terms which would be
available to the Company from third parties.
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.
22
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
- ------------------------------------------
(a) Exhibits:
Exhibit No. Title
- ----------- -----
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)
1.05 Form of Amended Selected Dealer Agreement (1)
1.06 Form of Amended Representatives' Warrant (1)
1.07 Form of Lock-Up Agreement (1)
2.01 January 21, 1998 Agreement of Purchase and Sale of Assets
between the Registrant and Sunny Farms Corporation (2)
2.02 February 10, 1998 Amendment to Agreement of Purchase and Sale of
Assets between the Registrant and Sunny Farms Corporation (2)
3.01 Articles of Incorporation of the Registrant, as amended (1)
3.02 Bylaws of the Registrant (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 (1)
10.07 Stock Redemption Agreement with Messrs. Nicholson and Reedy (1)
10.08 Settlement Agreement with Mr. Nicholson (1)
10.09 First Amendment to Stock Redemption Agreement (1)
10.10 Amendment to Promissory Notes issued to Messrs. Nicholson and
Reedy (1)
10.11 Form of Subscription Agreement, Promissory Note and Warrant for
Bridge Loan (1)
10.12 Management Services Agreement between the Registrant and Global
Natural Brands, Ltd., effective April 15, 1998 (3)
10.13 1995 Stock Option Plan (4)
10.14 Incentive Stock Option Agreement (4)
10.15 Non-qualified Stock Option Agreement (4)
27.01 Financial Data Schedule (1)
(1) Incorporated by reference to the Registrant's Registration Statement on Form
SB-2, File No. 333-22997, declared effective on August 11, 1997.
(2) Incorporated by reference to exhibits filed with the Registrant's Form 8-K
on February 25, 1998.
(3) Incorporated by reference to exhibits filed with the Registrant's Form 8-K
on May 19, 1998.
(4) Incorporated by reference to exhibits filed with the Registrant's Form S-8
on August 26, 1998.
23
<PAGE>
(b) Reports on Form 8-K during the quarter ended June 30, 1998:
- - Report on Form 8-K/A filed on April 27, 1998 to report pro forma financial
information and file financial statements required under Item 7 (related to the
February 25, 1998 Form 8-K which reported the acquisition of certain assets of
Sunny Farms Corporation).
- - Report on Form 8-K filed on May 19, 1998 which reported the signing of a
management services agreement with Global Natural Brands, Ltd.
- - Report on Form 8-K filed June 22, 1998 to report the termination of the
Company's relationship with Semple & Cooper, LLP, the Company's Certifying
Accountants (a form 8-K/A was subsequently filed July 23, 1998 to report the
appointment of BDO Seidman, LLP, as the Company's new Certifying Accountants).
24
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
has duly caused this Report to be signed on its behalf by the undersigned,
thereunto duly authorized, in Morgan Hill, California, on October 8, 1997.
ORGANIC FOOD PRODUCTS, INC.
By: /s/ David J. O'Gorman
------------------------------------------
David J. O'Gorman
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Report has been signed below by the following persons on the dates
indicated.
Signature Title Date
--------- ----- ----
/s/ James F. Swallow Chief Executive Officer October 7, 1998
- - ----------------------------- and Director
James F. Swallow
/s/ David J. O'Gorman Chief Financial Officer October 7, 1998
- - -----------------------------
David J. O'Gorman
/s/ John Battendieri Director October 7, 1998
- - -----------------------------
John Battendieri
/s/ Kenneth A. Steel Jr. Director October 7, 1998
- - -----------------------------
Kenneth A. Steel, Jr.
/s/ Charles B. Bonner Director October 7, 1998
- - -----------------------------
Charles B. Bonner
/s/ Charles R. Dyer Director October 7, 1998
- - --------------------------------------------
Charles R. Dyer
25
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<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> JUN-30-1998
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