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 DECEMBER 31, 1998
[ ] 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 December 31, 1998.
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)
December 31,
1998
-----------
Current Assets:
Cash $ 96,145
Accounts receivable, net 1,110,399
Inventory, net 2,754,488
Prepaid expenses 246,580
Related party receivable 77,346
-----------
Total Current Assets 4,284,958
-----------
Property and Equipment:
Computer software 58,218
Leasehold improvements 185,269
Machinery and equipment 1,090,976
Office equipment 53,257
Printing plates 62,193
Vehicles 19,542
-----------
1,469,455
Less: accumulated depreciation (210,058)
-----------
1,259,397
-----------
Other Assets:
Deposits and other 3,290
-----------
Total Assets $ 5,547,645
===========
The Accompanying Notes are an Integral Part
of the Financial Statements
1
<PAGE>
ORGANIC FOOD PRODUCTS, INC.
BALANCE SHEETS (Continued)
LIABILITIES AND SHAREHOLDERS' EQUITY
(Unaudited)
December 31,
1998
-----------
Current Liabilities:
Notes and capitalized leases
payable - current portion $ 1,850,867
Notes payable - related parties -
current portion 497,238
Accounts payable and accrued expenses -
related parties 341,299
Accounts payable and accrued expenses 1,836,156
Accrued wages and taxes 172,310
Accrued commissions 52,446
-----------
Total Current Liabilities 4,750,316
-----------
Capital lease obligations - long-term
portion 10,828
-----------
Shareholders' Equity:
Common stock 9,851,687
Accumulated deficit (9,065,186)
-----------
786,501
-----------
Total Liabilities and Shareholders' Equity $ 5,547,645
===========
The Accompanying Notes are an Integral Part
of the Financial Statements
2
<PAGE>
<TABLE>
<CAPTION>
ORGANIC FOOD PRODUCTS, INC.
STATEMENTS OF OPERATIONS
(Unaudited) (Unaudited)
Six Months Ended Three Months Ended
December 31, December 31, December 31, December 31,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $ 5,484,930 $ 5,639,661 $ 2,643,055 $ 2,805,777
Cost of Goods Sold 4,854,877 4,082,103 2,449,228 2,212,411
----------- ----------- ----------- -----------
Gross Profit 630,053 1,557,558 193,827 593,366
----------- ----------- ----------- -----------
Sales and Marketing Expenses 1,415,748 1,575,565 610,141 870,114
Amortization and Write-off of Goodwill 1,080,382 1,050,152
General & Administrative Expenses 1,123,403 460,909 393,130 283,188
----------- ----------- ----------- -----------
3,619,533 2,036,474 2,053,423 1,153,302
----------- ----------- ----------- -----------
Loss from Operations (2,989,480) (478,916) (1,859,596) (559,936)
Interest Expense ,Net (67,323) (37,021) (35,483) (10,756)
Other Expense, Net (33,897) (30,966) (20,701) (41,241)
----------- ----------- ----------- -----------
Income (Loss) before Provision (3,090,700) (546,903) (1,915,780) (611,933)
for Income Taxes
Provision for Income Tax (Expense) 136,726 136,726
----------- ----------- ----------- -----------
Net Income (Loss) $(3,090,700) $ (410,177) $(1,915,780) $ (475,207)
=========== =========== =========== ===========
Basic and Diluted Loss per share $ (.43) $ (.06) $ (.26) $ (.07)
=========== =========== =========== ===========
Weighted Average Number
of Shares Outstanding 7,275,668 6,408,270 7,275,668 6,752,913
=========== =========== =========== ===========
The Accompanying Notes are an Integral Part
of the Financial Statements
3
</TABLE>
<PAGE>
ORGANIC FOOD PRODUCTS, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
December 31, December 31,
1998 1997
----------- -----------
Increase (Decrease) in Cash:
Net cash used by operating
activities $ (642,352) $(1,391,500)
----------- -----------
Cash flows for investing activities:
Purchase of fixed assets (107,526) (280,388)
Advances to or on behalf of shareholders (27,346) (42,000)
Cash received from sale of fixed assets -- 27,819
----------- -----------
Net cash used by investing activities (134,872) (294,569)
----------- -----------
Cash flows from financing activities:
Repayment of capital lease and notes payable (21,783) (1,828,547)
Repayment of notes payable - related parties -- (1,506,586)
Proceeds from issuance of stock -- 4,958,277
Proceeds from line of credit 1,846,156 --
Repayments on line of credit (992,589) --
----------- -----------
Net cash provided by financing activities 831,784 1,623,144
----------- -----------
Net increase (decrease) in cash 54,560 (62,925)
Cash at beginning of period 41,585 62,925
----------- -----------
Cash at end of period $ 96,145 $ 0.00
=========== ===========
The Accompanying Notes are an Integral Part
of the Financial Statements
4
<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 six and three month periods ended
December 31, 1998 are not necessarily indicative of the results that may be
expected for the entire year ending June 30, 1999. 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, 1998.
2. Initial Public Offering:
During the six months ended December 31, 1997, the Company completed its
initial public offering of 1,495,000 shares of no par value common stock at
a price of $4.00 per share receiving gross proceeds of approximately
$6,000,000. The Company issued 130,000 warrants to an underwriter in
connection with its initial public offering. The warrants are exercisable
at a price of $4.80 per share, and expire approximately two and one-half
(2.5) years from the date of the August 1997 offering.
3. Related Party Transactions
During the six and three month periods ended December 31, 1998, the Company
recorded payables to Global Natural Brands totaling $380,000 and $371,000,
respectively. However, certain of these amounts are in dispute. These
related party transactions included expenses for management fees and
personal expenses. Global Natural Brands, a shareholder of the Company, was
a management group retained by the Company through October 1998 to oversee
daily operations.
4. Non-Cash Transactions
During the six and three month periods ended December 31, 1998, the Company
reclassed $37,322 previously held in accounts payable to notes payable
related parties. Additionally, goodwill in the amount of $156,867 was
recorded to reflect the estimated value of escrowed shares of common stock
which will be released and recorded as issued in 1999.
5. Subsequent Event
On February 18, 1999, the Company and Spectrum Naturals, Inc., and its'
affiliate, Spectrum Commodities, ("SNI") entered into a letter of intent to
merge the companies with or into the Company or a subsidiary of the
Company. In addition the Company entered into a letter of intent to acquire
all the outstanding shares of Organic Ingredients, Inc. in exchange for the
Company's stock. Under the terms of the anticipated merger, SNI will
receive 70% of the post merger Common Stock of the Company, subject to
certain adjustments. The merger and related acquisition are subject to
shareholder approvals and completion of definitive agreements. The
transactions are expected to be completed by early May. In the interim, the
Company and SNI have entered into an advisory services agreement until the
merger is completed.
5
<PAGE>
Item 2: Management's Discussion and Analysis
- --------------------------------------------
Results of Operations for the Six and Three Months Ended December 31, 1998 and
Six and Three Months Ended December 31, 1997.
- --------------------------------------------------------------------------------
Net Results
Organic Food Products, Inc. (OFPI or the "Company") reported a net loss for the
six and three months ended December 31, 1998 of $3,091,000 and $1,916,000
respectively, compared to net losses of $410,000 and $475,000 for the same
periods from the prior year. The losses in 1998 are attributed to the write-off
of approximately 1.0 million of goodwill for Sunny Farms, management services
fees from Global Natural Brands, organic tomato price increases over the
previous fiscal periods and increased cost of goods sold due to manufacturing
inefficiencies in the production facility.
Revenues
Revenues decreased $155,000 or 2.7% for the six months and $163,000 or 5.8% for
the three months ended December 31, 1998 compared to the same periods from the
prior fiscal year. The decrease in the year-to-date and quarterly revenues
resulted from a reduction in club store sales and a decrease in overall pasta
sauce product sales due to competitive pressures within the product category.
The decrease in pasta sauce sales was partially offset by sales of juice
products as a result of the Sunny Farms acquisition in February 1998.
Cost of Goods Sold
The Company's cost of goods sold increased as a percentage of sales for the six
and three months ended December 31, 1998 reaching 88.5% and 92.7% respectively,
compared to 72.4% and 78.9% for the same periods from the prior year. The
increase in the year-to-date and quarterly expense resulted from organic tomato
price increases over the previous fiscal periods, manufacturing inefficiencies
in the production facility and production of low margin juice products in 1998.
Sales and Marketing Expenses
The Company's sales and marketing expense decreased as a percentage of sales for
the six and three months ended December 31, 1998 reaching 25.8% and 23.1%,
respectively, compared to 27.9% and 31.0% for the same periods from the prior
year. The decrease in the year-to-date and quarterly expense resulted from a
reduction in manufacturers charge-backs and other promotional programs.
General and Administrative Expenses
The Company's general and administrative expense increased as a percentage of
sales for the six and three months ended December 31, 1998 reaching 20.5% and
14.9%, respectively, compared to 8.2% and 10.1% for the same periods from the
prior year. The increase in the year-to-date and quarterly expense resulted from
charges for management services fees from Global Natural Brands and increases in
legal and accounting services.
Net Interest Expense
The Company's net interest expense increased as a percentage of sales for the
six and three months ended December 31, 1998 reaching 1.2% and 1.3%,
respectively, compared to .7% and .4% for the same periods from the prior year.
The increase in the year-to-date and quarterly expense resulted from increased
usage of the Company's line-of-credit facility and an increase in the interest
rate charged by FINOVA Capital versus Wells Fargo Bank.
6
<PAGE>
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. 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 compliant 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.
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 service providers has not been completed, the Company believes
that these providers will have year 2000-compliant systems.
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 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, the Company
believes it has or will achieve timely 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.
7
<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. The Company occasionally contracts for certain product purchases 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 December 31, 1998, the Company's cash position was limited. The Company
has a $3,000,000 revolving line of credit and a $500,000 equipment line.
However, the funds available to the Company are based upon discounted accounts
receivable and inventory. Thus, the Company has only been able to borrow
approximately 62% or $1,850,000 of the $3,000,000 revolving line of credit, much
of which has been used to repay prior debt commitments. The operating losses
over the past six months have significantly reduced working capital and
availability of funds under the Company's line of credit. Without the infusion
of additional capital resources, management is uncertain the Company will have
sufficient cash to support future business operations. To remedy this situation,
management implemented a cost reduction program, reducing cash expenditures in
the most recent quarter, and has explored various options to generate additional
cash.
On February 18, 1999, the Company and Spectrum Naturals, Inc., and its'
affiliate, Spectrum Commodities, (SNI") entered into a letter of intent to merge
the companies with or into the Company or subsidiary of the Company. In addition
the Company entered into a letter of intent to acquire all the outstanding
shares of Organic Ingredients, Inc. in exchange for the Company's stock. Funding
to finance the merged companies has been obtained and is believed to be
sufficient to meet the merged companies' cash needs. The merger and related
acquisition are subject to shareholder approvals and completion of definitive
agreements. The transactions are expected to be completed by early May. In the
interim, the Company is exploring bridge financing alternatives.
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, liquidity and capital
resources, 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; litigation
involving product liabilities and consumer issues; attracting and retaining
qualified management; ability of the management team to overcome problems
associated with changes in management; litigation filed by Global Natural Brands
due to the termination of their management services agreement; risk that the
transaction with Spectrum Naturals, Inc., is not consummated; and availability
of bridge financing.
8
<PAGE>
New Applicable Accounting Pronouncements
Effective July 1, 1998, the Company adopted the Provisions of Statement of
Financial Accounting Standards (SFAS) No. 130, Reporting Comprehensive Income.
SFAS 130, which 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, had no impact on the
financial condition or results of the Company upon adoption. The Company
currently has no transactions that would be classified as elements of
comprehensive income not reported in the Statement of Operations.
Effective July 1, 1998, the Company also adopted the provisions of SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information. This
Statement 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 had no impact on the
Company's financial condition or results of operation upon adoption.
Related Party Transactions
During the quarter ended December 31, 1998, Global Natural Brands billed the
Company $9,290. However, certain of these amounts are in dispute. These related
party transactions included expenses for personal expenses. Global Natural
Brands, a shareholder of the Company, was a management group retained by the
Company through October 1998 to oversee daily operations. The management
services agreement with Global Natural Brands was terminated on October 26,
1998. Please see Item 1, Legal Proceedings of this report and Form 8-K filed on
October 29, 1998 for additional information.
9
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
- -------------------------
Litigation
On October 26, 1998, the Company terminated the Management Services
Agreement between it and Global Natural Brands, Ltd. ("Global"). On that same
day, Global, James F. Swallow, David J. O'Gorman, J. Bradley Barbeau, and Ronald
Balsbaugh (the "Global Group"), employees of Global, filed a complaint against
the Company, Charles Dyer, John Battendieri, Charles Bonner, and Kenneth Steel,
as directors of the Company, in the Santa Clara County Superior Court, Case No.
CV777541. The complaint includes claims for damages for breach of the Management
Services Agreement between the Company and Global in the amount of $306,032.08,
plus other unspecified amounts, unpaid wages, and injunctive relief to enjoin
the Company from terminating the Management Services Agreement and the
employment of the Global Group and from refusing to pay Global and Global Group.
On October 26, 1998, the Court denied Global's and the Global Group's
application for a temporary restraining order. On November 23, 1998, the Company
requested mediation under the Management Services Agreement. On December 1,
1998, the Court denied Global's and the Global Group's motion for preliminary
injunction. On January 5, 1999, the Court denied Global's application for an
attachment. Global has also requested binding arbitration under the Management
Services Agreement. The Company intends to defend itself vigorously in these
actions.
Item 2. Changes in Securities
- -----------------------------
None.
Item 3. Defaults Upon Senior Securities
- ---------------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
- -----------------------------------------------------------
None.
Item 5. Other Information
- -------------------------
Charles Dyer resigned from the Board of Directors as of November 30, 1998
to devote more time to his personal business. The seat remains vacant.
Item 6. Exhibits and Reports on Form 8-K
- ----------------------------------------
- - Form 8-K/ filed October 29, 1998 to report the termination of the management
services agreement between the Company and Global Natural Brands, Ltd.
10
<PAGE>
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: February 19, 1999
ORGANIC FOODS PRODUCTS, INC.
By: /s/ Richard R. Bacigalupi
-------------------------------------
Richard R. Bacigalupi
Chief Financial Officer
11
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> DEC-31-1998
<CASH> 96,145
<SECURITIES> 0
<RECEIVABLES> 1,490,096
<ALLOWANCES> 379,697
<INVENTORY> 2,754,488
<CURRENT-ASSETS> 4,284,958
<PP&E> 1,469,455
<DEPRECIATION> 210,058
<TOTAL-ASSETS> 5,547,645
<CURRENT-LIABILITIES> 4,750,316
<BONDS> 0
0
0
<COMMON> 9,851,657
<OTHER-SE> (9,065,186)
<TOTAL-LIABILITY-AND-EQUITY> 5,547,645
<SALES> 5,484,930
<TOTAL-REVENUES> 5,484,930
<CGS> 4,854,877
<TOTAL-COSTS> 4,854,877
<OTHER-EXPENSES> 330,897
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 67,325
<INCOME-PRETAX> (3,090,700)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,090,700)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,090,700)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
