SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE TRANSITION PERIOD FROM ______________ TO ________________
Commission File No. 333-22997
ORGANIC FOOD PRODUCTS, INC.
---------------------------
(Exact name of small business issuer as specified in its Charter)
California 94-3076294
---------- ----------
(State or other jurisdiction of incorporation (I.R.S. Employer Identification
or organization) Number)
550 Monterey Road, Suite B
Morgan Hill, California 95037
- ------------------------- -----
(Address of principal executive offices) (Zip Code)
(408) 782-1133
-------------------------
Issuer's telephone number
Check whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [ X ] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan conformed by court. Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: Common Stock, no par value, 7,275,688
shares as of September 30, 1999.
Transitional Small Business Disclosure Format: Yes [ ] No [ X ]
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- ------------------------------
ORGANIC FOOD PRODUCTS, INC.
BALANCE SHEETS
ASSETS
(Unaudited)
September 30,
1999
-----------
Current Assets:
Cash $ 300
Accounts receivable, net 534,316
Inventory, net 977,238
Prepaid expenses 64,353
Related party receivable 100,526
-----------
Total Current Assets 1,676,733
-----------
Property and Equipment:
Computer software 58,218
Leasehold improvements 185,449
Machinery and equipment 1,108,468
Office equipment 53,257
Printing plates 66,865
Vehicles 19,542
-----------
1,491,799
Less: accumulated depreciation (375,723)
-----------
1,116,076
-----------
Other Assets:
Deposits and other 33,325
-----------
Total Assets $ 2,826,134
===========
The Accompanying Notes are an Integral Part
of the Financial Statements
<PAGE>
ORGANIC FOOD PRODUCTS, INC.
BALANCE SHEETS (Continued)
LIABILITIES AND SHAREHOLDERS' DEFICIT
(Unaudited)
September 30,
1999
-----------
Current Liabilities:
Notes and capitalized leases
payable - current portion $ 969,514
Notes payable - related parties -
current portion 497,237
Accounts payable and accrued expenses -
related parties 242,479
Accounts payable and accrued expenses 2,502,054
Accrued wages and taxes 61,184
Accrued commissions 64,240
-----------
Total Current Liabilities 4,336,708
-----------
Long-Term Liabilities:
Capital lease obligations - long-term
portion 6,999
-----------
Shareholders' Deficit:
Common stock 9,851,687
Accumulated deficit (11,369,260)
-----------
(1,517,573)
-----------
Total Liabilities and Shareholders' Deficit $ 2,826,134
===========
The Accompanying Notes are an Integral Part
of the Financial Statements
<PAGE>
ORGANIC FOOD PRODUCTS, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
September 30, September 30,
1999 1998
----------- -----------
Revenues $ 1,706,698 $ 2,841,874
Cost of Goods Sold 1,475,435 2,405,648
----------- -----------
Gross Profit 231,263 436,226
----------- -----------
Sales and Marketing Expense 418,018 805,607
General and Administrative Expenses 641,892 730,273
----------- -----------
1,059,910 1,535,880
----------- -----------
Loss from Operations (828,647) (1,099,654)
Interest Expense, Net (44,663) (31,840)
Other Expense, Net (2,998) (43,426)
----------- -----------
Loss before Provision for Income Taxes (876,308) (1,174,920)
Provision for Income Tax Expense 800 -0-
----------- -----------
Net Loss $ (877,108) $(1,174,920)
=========== ===========
Basic and Diluted Loss
per share $ (.12) $ (.16)
=========== ===========
Weighted Average Number of Shares Outstanding 7,275,688 7,275,688
=========== ===========
The Accompanying Notes are an Integral Part
of the Financial Statements
<PAGE>
ORGANIC FOOD PRODUCTS, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
September 30, September 30,
1999 1998
------------- -------------
Increase (Decrease) in Cash:
Net cash provided by operating
activities $ 40,660 $ 292,355
----------- -----------
Cash flows for investing activities:
Purchase of fixed assets (3,270) (39,689)
Cash received from sale of fixed assets 1,500 1,000
----------- -----------
Net cash used by investing activities ( 1,770) (38,689)
----------- -----------
Cash flows from financing activities:
Repayment of capital lease and notes payable (205,074) (90,499)
----------- -----------
Net cash used by financing activities (205,074) (90,499)
----------- -----------
Net increase (decrease) in cash (166,184) 163,167
Cash at beginning of period 166,484 41,585
----------- -----------
Cash at end of period $ 300 $ 204,752
=========== ===========
The Accompanying Notes are an Integral Part
of the Financial Statements
<PAGE>
ORGANIC FOOD PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS
1. Interim Financial Statements:
The unaudited interim financial statements include all adjustments
(consisting of normal recurring accruals) which, in the opinion of
management, are necessary in order to make the financial statements not
misleading. Operating results for the three-month period ended September
30, 1999 are not necessarily indicative of the results that may be expected
for the entire year ending June 30, 2000. These financial statements have
been prepared in accordance with the instructions to Form 10-QSB and do not
contain certain information required by generally accepted accounting
principles. These statements should be read in conjunction with financial
statements and notes thereto included in the Company's Form 10-KSB for the
year ended June 30, 1999.
2. Merger
On May 14, 1999, the Company and Spectrum Naturals, Inc. ("Spectrum")
entered into a definitive agreement to merge the companies in a stock
exchange. In addition, the Company entered into a definitive agreement to
acquire all the outstanding shares of Organic Ingredients, Inc. ("OI").
Collectively, defined as the "Merger". Under the terms of the Merger, which
will be accounted for as a reverse acquisition purchase, Spectrum will
receive approximately 75% of the post merger Common Stock of the Company,
subject to certain adjustments. The Merger was approved by the shareholders
of all of the parties, and became effective on October 6, 1999.
In connection with the Merger, the newly combined group replaced
existing lines of credit with a new $9,000,000 package with Wells Fargo
Bank. The new agreement will be collateralized by substantially all assets
of the newly combined group, and will bear interest at Norwest Bank
Minnesota prime plus 1% to 1 1/4%. Advances under the new line will be
limited to a borrowing base consisting of certain accounts receivable
and/or inventory. Included in the total borrowings will be two term notes
of $1,067,000 and $150,000 requiring payment over 60 and 18 months,
respectively, and a capital expenditure note of up to $1,500,000 to be
repaid over 60 months beginning in August 2002. Other advances will be made
under a revolving promissory note expiring in October 2000.
<PAGE>
Also in connection with the Merger, the Company completed a Private
Placement of 16 Units in October, 1999. Each Unit consisted of a $25,000
unsecured and subordinated promissory note bearing interest of 10%, plus
warrants to purchase 10,000 shares of Common Stock at $.01 per share from
January 1, 2000 to September 30, 2000. Net proceeds of approximately
$370,000 were received, after offering expenses of approximately $30,000.
The buyers of the Units were current shareholders/warrant holders of the
Company.
3. Related Party Transactions
John Battendieri, OFPI's current Chief Executive Officer and Chairman
of the Board, is also currently a director and 50% shareholder of OI. Mr.
Battendieri abstained from voting as a director of OI and OFPI upon matters
relating to each other company. Following the Merger, Mr. Battendieri will
be Vice President of Business Development and a director of the
combined-group.
Beginning is fiscal 1999, OFPI and OI have entered into joint venture
arrangements under which the two companies provide private label products
to manufacturers and retailers. Under this arrangement, OFPI and OI have
produced juice concentrates, applesauces, and fruit juices. OFPI and OI
share equally the inventory costs and gross profit under the arrangement,
except with respect to one customer in fiscal 1999 where OI received the
first 10% of the gross margin, after which OFPI and OI share the remainder
equally. There were no revenues generated under this arrangement for the
three-month period ended September 30, 1999. OFPI management believes that
the price of, and terms for, the ingredients purchased from OI under these
arrangements are fair, reasonable and consistent with prices and terms that
would be available to OFPI from third parties.
In connection with the February 1998 acquisition of assets related to
the juice and water bottling business of Sunny Farms Corporation, OFPI
issued in the name of Sunny Farms an aggregate of 566,667 shares of common
stock. Of these shares, 295,833 were placed in escrow, and were to be
released only upon the attainment of certain performance milestones by the
acquired business unit. Since the acquisition, Sunny Farms has filed for
bankruptcy and OFPI is negotiating with Sunny Farms' bankruptcy trustee to
determine the amount, if any, of shares of stock that should be released to
Sunny Farms from escrow, the remainder of which would be cancelled. If at
least 107,516 shares were released, Sunny Farms would own at least five
percent of OFPI's shares of stock outstanding as of September 30, 1999.
In April 1998, OFPI entered into an agreement with Global pursuant to
which Global was to provide the services of four individuals to fill the
offices of Chief Executive Officer, Chief Financial Officer, Vice President
of Sales and Distribution, and Vice President, Marketing. The contract
provided 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 issued to
Global to purchase OFPI's common stock would have vested over a five-year
period based on the achievement of certain stock price targets and earnings
milestones. The options would have been exercisable at $2.25 per share and
would have had terms of four years from the date of vesting. Upon any
change in ownership interest of more than 50% of the capital stock of OFPI,
the balance of the minimum annual cash payments for the remaining
contractual term would have become due and payable and all stock options
would have vested immediately. The management agreement with Global was
terminated in October 1998 and all options issued to Global were cancelled.
In connection with the management agreement with Global, Global purchased
222,222 shares of OFPI common stock in June 1998 for an aggregate of
$500,000, and had committed to invest an additional $500,000 before the
earlier of 30 days after completion of a qualified acquisition transaction
or April 15, 1999. The agreement targeted the value of such additional
purchases at $2.50 per share, with adjustments to account for specified
market conditions.
<PAGE>
Subsequent to June 30, 1999, in expectation of and for the purpose of
funding cash requirements with respect to the Merger, the Company completed
a Private Placement of 16 Units. Each Unit consisted of a $25,000 unsecured
and subordinated promissory note bearing interest at 10%, plus warrants to
purchase 10,000 shares of Common Stock at $.01 per share from January 1,
2000 to September 30, 2000. The buyers of the Units were current
share/warrant holders of the Company.
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.
4. Subsequent Event
See "Merger" discussed in Note 3 above.
Item 2: Management's Discussion and Analysis
On May 14, 1999, the Company and Spectrum Naturals, Inc. ("Spectrum") entered
into a definitive agreement to merge the companies in a stock exchange. In
addition, the Company entered into a definitive agreement to acquire all the
outstanding shares of Organic Ingredients, Inc. ("OI"). Collectively, defined as
the "Merger". Under the terms of the Merger, which will be accounted for as a
reverse acquisition purchase, Spectrum will receive approximately 75% of the
post merger Common Stock of the Company, subject to certain adjustments. The
Merger was approved by the shareholders of all of the parties, and became
effective on October 6, 1999.
Discussion of the operating results pertain to only the Company and is not
indicative of the newly combined company.
- --------------------------------------------------------------------------------
Results of Operations for the Three Months Ended September 30, 1999 and
September 30, 1998
- --------------------------------------------------------------------------------
Net Results
Organic Food Products, Inc. ("OFPI" or the "Company") reported a net loss of
$877,000 for the quarter ended September 30, 1999, compared to a net loss of
$1,175,000 for the quarter ended September 30, 1998, a decrease of $298,000. The
reduction in the net loss was due primarily to decreases in marketing and
administrative expenses, offset by lower net sales. Costs of goods remain high
due to excess plant capacity, low production levels and high manufacturing
overhead.
Revenues
The Company's revenues for the quarter ended September 30, 1999 were $1,707,000
compared to $2,842,000 for the quarter ended September 30, 1998, a decrease of
$1,135,000, or 39.9%. The decrease in revenues in 1999 was primarily due to the
discontinuation of the Sunny Farms juices and Napa Valley Springs water.
Further,lack of funds has resulted in shortages of those brands which are
produced by co-packers.
Cost of Goods Sold
The Company's cost of goods sold for the quarter ended September 30, 1999 was
$1,475,000, or 86.5% of sales, versus $2,406,000 or 84.7% of sales for the
quarter ended September 30, 1998. The decrease in cost of goods sold was due to
the decrease in revenue accompanied by an increase in provision for inventory
shrinkage.
<PAGE>
Sales and Marketing Expenses
The Company's sales and marketing expense for the quarter ended September 30,
1999 was $418,000, or 24.5% of sales, versus $806,000 or 28.4% of sales for the
quarter ended September 30, 1998. The decrease in sales and marketing expense
was due to decreases in salaries, freight out, commissions and promotional
expenses such as advertising, trade shows and in-stores demos.
General and Administrative Expenses
The Company's general and administrative expense for the quarter ended September
30, 1999 was $642,000, or 37.6% of sales, versus $730,000, or 25.7% of sales for
the period ended September 30, 1998. The decrease was largely due to
non-reoccurring expenses of $371,000 for management fees and relocation expenses
associated with retaining a management team from Global Natural Brands. This was
partially offset by higher professional services and loan fees in the current
quarter.
Net Interest Expense
The Company's net interest expense for the quarter ended September 30, 1999 was
$45,000, or 2.6% of sales, versus $32,000, 1.1% of sales for the quarter ended
September 30, 1998. The increase was due to interest accrued on unpaid portion
of notes payable and the higher interest rate charged by the current lender.
Year 2000 Compliance
Organic Food Products Inc., uses computer software that may be impacted by the
year 2000 problem, and also relies 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. In connection with the Merger, the
Company will switch to the computer hardware and software of Spectrum, which are
year 2000 compliant. In addition, the Company has reviewed plant equipment and
services upon which it relies and believes there will not be a significant
impact from the year 2000 problem.
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 completed a program to identify which pieces of equipment could be
affected and determined the affected equipment could be updated or modified to
address any potential year 2000 problem.
The Company's corporate administrative and operating systems are exclusively
PC-based using a commercially available software package. The Company will
switch to Spectrum's systems following the Merger who has received confirmation
from the software developer 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. The
survey of these service providers has been completed, the Company believes that
these providers will have year 2000-compliant systems.
For the reasons mentioned herein, the Company does not anticipate that it will
have an incomplete or untimely resolution of the year 2000 problem. Total costs
of compliance have not been significant. 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 obtaining these services from other sources. The cost of switching to
other utility providers have not been assessed.
<PAGE>
Issues similar to these also face the Company's customers and vendors. The
Company has not yet completed an assessment of year 2000 readiness of its
customers and vendors. However, based on initial discussions with certain
customers and vendors, management does not currently believe that business with
those customers and vendors will be significantly disrupted by the year 2000
problem.
Seasonality
Historically, the Company has experienced little seasonal fluctuation in
revenues. In relation to product purchasing, the Company will seasonally
contract for certain products for the entire year at harvest time, or at
planting time, to secure raw materials throughout the year. These purchases take
place annually from early spring to mid-summer, and are effected to reduce the
risk of price swings due to demand fluctuations. These annual purchases can
create overages and shortages in inventory.
Liquidity and Capital Resources
As of September 30, 1999, the Company's cash position was severely limited. The
operating losses have placed severe strains on the Company's cash position. To
remedy this situation, the Company pursued the Merger, which became effective
October 6, 1999. In connection with the Merger, the newly combined group
replaced existing lines of credit with a new $9,000,000 package with Wells Fargo
Bank. The new agreement will be collateralized by substantially all assets of
the newly combined group, and will bear interest at prime plus 1% to 1 1/4%.
Advances under the new line will be limited to a borrowing base consisting of
certain accounts receivable and/or inventory. Included in the total borrowings
will be two term notes of $1,067,000 and $150,000 requiring payment over 60 and
18 months, respectively, and a capital expenditure note of up to $1,500,000 to
be repaid over 60 months beginning in August 2002. Other advances will be made
under a revolving promissory note expiring in October 2000.
Also in connection with the Merger, the Company completed a Private Placement of
16 Units in October 1999. Each Unit consisted of a $25,000 unsecured and
subordinated promissory note bearing interest of 10%, plus warrants to purchase
10,000 shares of Common Stock at $.01 per share from January 1, 2000 to
September 30, 2000. Net proceeds of approximately $370,000 were received, after
offering expenses of approximately $30,000.
The Company believes that with the new credit facilities and proceeds for the
private placement, 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, 2000. There can be no assurances,
however, that all of the anticipated savings can be attained by year-end.
During the three months ended September 30, 1999, the Company used $166,000 in
cash from operating activities, compared to providing $163,000 for the same
period in 1998. The increase use of cash resulted primarily from increased
repayment of debt, partially offset by less cash provided from operations.
Business Risks and Uncertainties
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, 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.
<PAGE>
New Applicable Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS 133 requires
companies to recognize all derivatives contracts as either assets or liabilities
in the balance sheet and to measure them at fair value. If certain conditions
are met, a derivative may be specifically designated as a hedge, the objective
of which is to match the timing of gain or loss recognition on hedging
derivative with the recognition of (i) the changes in the fair value of the
hedged asset or liability that are attributable to the hedged risk or (ii) the
earnings' effect of the hedged forecasted transaction. For a derivative not
designated as a hedging instrument, the gain or loss is recognized in income in
the period of change. SFAS 133 is effective for all fiscal quarters of fiscal
years beginning after June 15, 2000.
Historically, the company has not entered into derivatives contracts either
to hedge existing risks of for speculative purposes. Accordingly, the Company
does not expect adoption of this new standard on July 1, 2000 to affect its
financial statements.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
- -------------------------
Litigation
- ----------
In November 1998, Global Natural Brands, Inc. ("Global") and its four
principals filed a lawsuit against the Company and its four principals, alleging
unpaid wages and seeking money damages and injunctive relief. Global had
provided managerial services to the Company from April 1998 to October 1998,
when its services were terminated by the Company. In January 1999, Global
amended its complaint by including securities fraud claim, among other causes of
action. Meanwhile, Global sought to obtain a temporary restraining order, a
preliminary injunction and a writ of attachment against Organic without success.
In May 1999, the Company and its principals cross-complained against Global and
its principals, seeking damage for breach of contract, breach of fiduciary duty,
fraud, negligence and a declaratory relief for indemnity and contribution, plus
punitive damages. In June 1999, the parties mediated this dispute to no avail.
Having tendered Global's claim to its E&O liability carrier, Organic and its
principals are in the process of obtaining coverage from the carrier and will
vigorously defend against this lawsuit.
On August 26, 1999, the Court denied the Company's motion for bond and Global's
motions to compel arbitration and for sanctions. Consequently, this dispute is
still pending before the Santa Clara Superior Court.
Item 2. Changes in Securities
- -----------------------------
None.
Item 3. Defaults Upon Senior Securities
- ---------------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
- -----------------------------------------------------------
Registrant's Joint Proxy Registration Statement on Form S-4, file No.
333-83675, declared effective July 30, 1999.
Item 5. Other Information
- -------------------------
None.
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
- ----------------------------------------
(a) Exhibits:
None
(b) Reports on Form 8-K:
- - Form 8-K/A filed October 21, 1999 to file change of control in
connection with the merger of Spectrum Organic Naturals, Inc. and
Organic Ingredients, Inc. with and into Organic Food Products, Inc..
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: November 22, 1999
ORGANIC FOODS PRODUCTS, INC.
By: /s/ RICHARD R. BACIGALUPI
-----------------------------
Richard R. Bacigalupi
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> SEP-30-1999
<CASH> 300
<SECURITIES> 0
<RECEIVABLES> 1,395,554
<ALLOWANCES> 861,237
<INVENTORY> 977,238
<CURRENT-ASSETS> 1,676,733
<PP&E> 1,491,799
<DEPRECIATION> 375,723
<TOTAL-ASSETS> 2,826,134
<CURRENT-LIABILITIES> 4,336,708
<BONDS> 0
0
0
<COMMON> 9,851,687
<OTHER-SE> (11,369,260)
<TOTAL-LIABILITY-AND-EQUITY> 2,826,134
<SALES> 1,706,698
<TOTAL-REVENUES> 1,706,698
<CGS> 1,475,435
<TOTAL-COSTS> 1,475,435
<OTHER-EXPENSES> 2,998
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 44,663
<INCOME-PRETAX> (876,308)
<INCOME-TAX> 800
<INCOME-CONTINUING> (877,108)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> (877,108)
<EPS-BASIC> (.16)
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