<PAGE>
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(Mark Only One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For fiscal year ended: December 31, 1995
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For transition period from..............to............
Commission File Number 0-2246
VESTRO NATURAL FOODS INC.
----------------------------------------------------------
(Exact name of Registrant as specified in Charter)
Delaware 11-1676942
- ------------------------------- --------------------
(State of Other Jurisdiction of (IRS Employer I.D.#)
Incorporation or Organization)
1065 East Walnut Street, Carson, CA 90746
-----------------------------------------------------------------
(Address of Principal Executive Offices)
Registrant's telephone number: (310) 886-8200
- ------------------------------ --------------------
Securities Registered Pursuant to Section 12 (b) of the Act:
NONE
Securities Registered Pursuant to Section 12 (g) of the Act:
Common Stock ($.01 par value)
-----------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has 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
--- ---
Aggregate market value of the voting stock held by nonaffiliates of Registrant
as of March 5, 1996: $4,191,826
Number of shares of Common Stock outstanding on March 5, 1996: 5,950,588.
The Exhibit Index is located on Page Number 34.
Page 1 of 36
<PAGE>
Part I
Item 1. BUSINESS
Vestro Natural Foods Inc. ("Company") is engaged in the operation of niche
or specialty food the companies and products. The Company is currently focused
in the area of Natural Food Products.
The Company, a Delaware corporation, was originally incorporated in New
York on June 13, 1947 under the name of Project Fabrication Corporation. The
Company assumed the name Vestro Foods Inc., adopting its present name in 1994,
and began its program of acquiring specialty food companies during 1987 as a
result of an equity infusion of $3,420,000 (later increased to $5,000,000) by a
group of institutional investors.
On February 5, 1988, effective January 1, 1988, Westbrae Natural Foods,
Inc. ("Westbrae"), a California corporation, merged with and into a wholly owned
subsidiary of the Company. Westbrae marketed soy beverages, condiments, pasta,
and Japanese products. This subsidiary was the first in the Company's Natural
Foods core.
Effective September 29, 1989, the Company acquired 100% of the Common Stock
of Little Bear Organic Foods, Inc. ("Little Bear") a national marketer of
organic snack foods such as corn chips, salsas, popcorn, taco and tostada shells
and refried beans under the trade names Little Bear and Bearitos, to the natural
foods industry.
On December 27, 1989, the Company completed a private placement of
$9,575,000 of a new issue of 10% Exchangeable Convertible Preferred Stock ("10%
Stock") to an investment group principally comprised of institutional
investors.
Effective December 18, 1992, substantially all of the assets of the
Company's Fine Baked Products operations, Heidi's Pastry, Inc. and Jan
Holzmeister Cheesecake, Ltd., were sold to HK Acquisition Corp., a subsidiary of
Heritage Kitchens Specialty Foods, Inc. Heidi's was acquired in August, 1987
while Jan Holzmeister had been acquired effective May 1, 1990. See Management's
Discussion and Analysis of Financial Condition and Results of Operations located
elsewhere in this report. Reference is also made to Form 8-K dated December 18,
1992 which is incorporated herein by reference.
On January 10, 1994 an Exchange Agreement was executed providing for the
exchange of the Company's outstanding Series A Convertible Preferred Stock
("Series A Stock") and 10% Exchangeable Convertible Preferred Stock for
3,899,570 (after the reverse split described below) shares of the Company's
Common Stock and $1,500,000 of Subordinated Notes. In addition, $2,872,000
principal amount of Subordinated Notes were issued to the holders of the
Company's 10% Stock. See Management's Discussion and Analysis of Financial
Condition and Results of Operation. Reference is also made to Form 8-K dated
January 10, 1994 which is incorporated herein by reference.
2
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On January 21, 1994, the Company's shareholders approved an amendment to
the Company's Certificate of Incorporation to effect a reverse split of the
Company's Common Stock on the basis of one new share for each ten shares issued
and outstanding.
NATURAL FOODS
Westbrae Natural Foods, Inc. and Little Bear Organic Foods Inc. are the
Company's subsidiaries operating in the Natural Foods industry.
Westbrae markets an extensive line of natural food products, including soy
and rice beverages, cookies, potato chips, pasta, condiments, tahini, ramen
soups, soy sauce and rice cakes. Westbrae's products are sold nationally
through specialty food distributors, which in turn sell to retail natural food
stores, specialty food stores and mass market food stores. Westbrae's products
are marketed under the names Westbrae Natural, WestSoy and Ci'Bella.
Little Bear has been a leader in the natural foods industry in the use of
organic products, i.e. those grown without the use of chemical fertilizers or
pesticides. Little Bear's product lines consist of snack foods (blue, yellow
and white corn tortilla chips, popcorn, pretzels, baked chips, corn chips,
cheddar puffs, and licorice) and canned products (canned whole beans, refried
beans, soups, chili, baked beans, bean dip, salsa). Little Bear's products are
marketed under the trade names Little Bear and Bearitos.
The Company believes there is significant potential in the expansion of
Little Bear's organic product lines as well as new Westbrae products which are
organic. Little Bear and Westbrae operate in the same marketplace and sell
their products through the same distribution channels for sale nationally by
natural foods, specialty food and mass market retail stores.
In January, 1992, the Company consolidated the operations of Westbrae and
Little Bear. The product lines continue to be sold under each label, but the
sales, distribution and administration functions are performed by a unified
operating staff.
The Company has historically been a leader in its industry in the
formulation and introduction of new products. These introductions have provided
the impetus to the Company's growth.
In September, 1989, Westbrae introduced a line of potato chips made from
100% organically grown potatoes and oil. The potato chips are now available in
salted, no salt, barbecue, sour cream ranch and ripple varieties.
In March, 1990, Westbrae introduced Westsoy Lite, a reduced fat (1%) soy
beverage in three flavors, cocoa, vanilla, and plain. This
3
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product line was unique in the natural foods industry and has produced
significant sales for the Company.
In September, 1991, Westbrae introduced Westsoy Plus, a fortified (with
vitamins and calcium) soy beverage in three flavors. This product line is
considered unique and has experienced encouraging sales volume.
In 1992, Westbrae and Little Bear introduced items that fit into the
growing trend to "low fat" food products. Westbrae added a line of five Lite
Malteds to its soy beverage offerings. Little Bear brought out baked chips
(with no fat from oil) in three varieties and a Lite version of its Cheddar
Puffs.
In 1993, Westbrae and Little Bear continued their high level of product
introductions with an emphasis on "fat free" and "low fat" products. Most
significantly, a new soy drink, which is both lowfat and popularly priced, and a
product line of eight flavors of fat free soups were introduced.
In 1994, Westbrae introduced a rice drink as an addition to its non dairy
beverage line, as well as a nonfat soy beverage. At the end of the year a line
of reduced fat cookies in ten flavors was introduced. These cookies were very
well received in the market place and produced over $2.5 million of net sales in
their first year.
In 1995, the Company introduced corn chips in four varieties, the first in
the natural foods industry. To reinforce its commitment to lowfat and nonfat
products, the Company reformulated its soups, caramel corn and baked chips to
improve their taste while retaining their healthy characteristics
Approximately 10% of Westbrae's products are currently imported through one
trading company in Japan. Westbrae is subject to the risks of currency price
fluctuations on these products. During certain times of the year certain items
with long lead delivery times must be purchased in advance and inventoried to
ensure available product at reasonable prices.
The Company uses copackers to process products to the Company's
specifications. In some product lines the Company uses only one source. In the
past the Company has been able to change copackers without a significant
disruption of its business. However, the loss of copacker could cause a
temporary lapse in the Company's supply chain of those products resulting in
reduced revenue in that product line until a replacement is found.
Westbrae and Little Bear compete with several producers of natural food
products on a national basis. The principal factors of competition are believed
to be the formulation of natural and organic products and consumer confidence in
the nutritional content
4
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of the ingredients. The Company believes it prices its products competitively
and a well recognized and trusted name in its marketplace.
Sales to four customers amounted to $4,860,000 (17%), $3,674,000 (13%),
$3,170,000 (11%) and $3,016,000 (10%), respectively, of consolidated net sales
in 1995. Sales are not seasonal and the Company does not normally have a
material backlog.
The Company currently employs 36 people.
The Company owns the right to certain trademarks, tradenames, and service
marks used in its business.
The Company maintains ongoing product development programs relating to new
food products which it considers important to the growth of its business.
Operations are supervised by various federal, state and local regulatory
agencies, including the U. S. Department of Agriculture, U. S. Food and Drug
Administration, California Food and Agricultural Department, California Air
Resources and Solid Waste Management Boards, California Industrial Relations
Department, Air Pollution Control Board, Building Inspectors Office and Bureau
of Weights and Measures. The Company believes that it substantially complies
with pertinent environmental regulations and does not contemplate any
significant expenditures for environmental control facilities in the foreseeable
future.
FINE BAKED PRODUCTS
Heidi's Pastry, Inc. and Jan Holzmeister Cheesecake, Ltd. were the
subsidiaries of the Company which operated the Company's Fine Baked Products
core. Heidi's and Jan Holzmeister manufactured and marketed frozen gourmet
cakes sold primarily to hotels and restaurants. Effective December 18 1992,
substantially all of the assets of the Fine Baked Products core were sold to an
unaffiliated firm.
Item 2. PROPERTIES
Vestro Natural Foods Inc., Westbrae and Little Bear currently lease 9,600
square feet of office space in Carson, California. The lease for this property
runs to September 30, 1997 with a short term cancellation clause. In addition,
the Company currently rents 38,000 square feet of warehouse space in the same
building for the storage and shipping of their inventory. The Company believes
that this arrangement should be adequate to meet its needs for the foreseeable
future, although it is exploring alternative facility locations. Westbrae and
Little Bear also utilize public warehouses as well as the facilities of co-
packers to inventory and distribute their products.
5
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Item 3. LEGAL PROCEEDINGS
None.
Item 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
None.
Part II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is traded in the over-the-counter market and
quoted on NASDAQ under the symbol VEST. The following table sets forth high and
low bid quotations (adjusted for the 1 for 10 reverse split) for the quarters
commencing January 1, 1994 through December 31, 1995. These bids represent
quotations between market makers without adjustments for markups or markdowns as
reported by the National Quotation Bureau Inc. These prices may not represent
actual transactions.
1994 High Bid Low Bid
---------------- -------- -------
First Quarter 3-1/8 2-1/4
Second Quarter 3-7/8 2-1/2
Third Quarter 2-7/8 2-1/4
Fourth Quarter 2-3/8 1-3/4
1995 High Bid Low Bid
---------------- -------- -------
First Quarter 1-7/8 1-3/8
Second Quarter 1-5/8 1-1/2
Third Quarter 2-1/8 1-5/8
Fourth Quarter 1-3/4 1-3/8
The Company had approximately 800 holders of record of its Common Stock as
of February 28, 1996.
The Company has not paid any dividends on its Common Stock during the past
two fiscal years and does not anticipate paying a dividend this fiscal year.
6
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Item 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Selected statement of operations data
Net Sales $28,836,000 $24,892,000 $26,065,000 $36,847,000 $37,291,000
Gross Profit 10,462,000 8,833,000 8,824,000 10,585,000 11,582,000
Earnings from 602,000 538,000 1,535,000 (3,551,000) 410,000
Continuing Operations
Earnings (loss) from $0.10 $0.09 $0.28 ($2.60) ($0.46)
Continuing Operations per
Share of Common Stock
Selected Balance Sheet Data $6,159,000 $6,338,000 $5,439,000 $6,211,000 $5,621,000
Current Assets
Property, Plant and
Equipment, Net 156,000 166,000 172,000 139,000 1,160,000
Other Assets 7,452,000 7,772,000 7,683,000 7,810,000 12,849,000
-----------------------------------------------------------------------
TOTAL ASSETS $13,767,000 $14,276,000 $13,274,000 $14,160,000 $20,630,000
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Current Liabilities $3,691,000 $4,165,000 $2,900,000 $5,321,000 $4,693,000
Long-term obligations 2,765,000 3,402,000 - - 2,236,000
Shareholders' Equity 7,311,000 6,709,000 10,374,000 8,839,000 13,699,000
Total Liabilities and -----------------------------------------------------------------------
Shareholders' Equity $13,767,000 $14,276,000 $13,274,000 $14,160,000 $20,530,000
-----------------------------------------------------------------------
</TABLE>
No dividends were declared on the Company's Common stock during any of the above
periods.
Cumulative preferred dividends of $1,048,000, for each of the years ended
December 31, 1993, 1992, and 1991, not paid or declared are deducted from net
income (loss) applicable to common shareholders in the period in which they are
earned.
In 1992, results were affected by the sale of substantially all the assets of
Heidi's Pastry, Inc. and Jan Holzmelster Cheesecake, Ltd.
Selected Financial Data should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations and the
Consolidated Financial Statements of the Company located elsewhere in this
Report.
7
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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
At January 1, 1994, the Company entered into a credit agreement with a bank
to provide up to $4,000,000 of financing based upon certain percentages of the
Company's accounts receivable and inventory. Under the terms of the agreement,
the Company had $2,400,000 of borrowing capacity at December 31, 1995. At
December 31, 1995 there was $100,000 of borrowing outstanding under this
facility. This agreement expires on April 15, 1996. The bank has made a
proposal to renew the agreement.
The Company's Senior Subordinated Notes A, totalling $2,872,000, are
payable, interest and principal, monthly through May 15, 1998. $549,000 of
principal was paid in 1995 with principal payments of $675,000 due in 1996.
Senior Subordinated Notes B, totalling $1,500,000, are payable, interest only,
quarterly through May 15, 1998. Principal payments will then be made quarterly
through November 15, 1999. Interest on both series is payable at 8% per annum.
Payments of interest or principal on the Senior Subordinated Notes B are subject
to a limitation that the total principal and interest paid on both series in any
fiscal quarter cannot exceed 30% of net income. During 1995, the Board of
Directors determined that, due to the Company's cash balances, interest on
Subordinated Notes B would be paid.
During the year 1995, the Company experienced negative cash flow of
$1,297,000. In addition to the principal payments of debt, this was largely
caused by increased accounts receivable and inventory levels necessary to meet
the increased sales level. In addition increased inventory was required for new
products introduced during the year.
During 1995, the Company collected $167,000 of principal on the note
receivable from HK Acquisition Corp. This was the final payment from the sale
of the Company's Fine Baked Products operations.
The Company anticipates that cash flow from operations together with its
current cash balance and the availability under its credit line should be
sufficient to support its operating needs for at least the current fiscal year.
INFLATION
In general, the impact of inflation on the Company's operations has not
been and is not expected to be significant. The Company has been able to make
selected price increases which have more than offset the effects of rising
costs.
8
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RESULTS OF OPERATIONS
1995 COMPARED TO 1994
Net sales for the year ended December 31, 1995 were $28,840,000 an increase
of 16% over net sales of $24,892,000 in the prior year. A major contribution to
the increased level was the introduction of Chocolate Chip Classic and Cookie
Jar Classic reduced fat cookies. These cookies, in ten flavors, accounted for
over $2.5 million of net sales in 1995. The Company's nondairy beverages also
experienced a significant increase of 19% over 1994.
Gross profit of the Company was $10,462,000 or 36.3% of sales for the year
ended December 31, 1995 compared to $8,833,000 or 35.5% of sales in 1994.
Margins on the Company's non dairy beverages improved somewhat from 1994,
offsetting increased costs of Japanese products due to the weakened dollar early
in the year.
Selling, general and administrative expenses were $9,676,000 or 33.6% of
sales for the year ended December 31, 1995 compared to $8,168,000 or 32.8% of
sales in 1994. The increase was due largely to marketing expenses incurred to
promote the Company's products. In 1995 the Company began its first consumer
magazine advertising program with placements in seven healthy lifestyle
magazines. In addition, the Company sponsored a promotion in conjunction with
Dr. Earl Mindell's book "The Soy Miracle." The Company provided displays to
most natural food stores in the country and gave the book to consumers who
purchased the Company's soy beverages.
The Company had net interest expense of $259,000 in 1995 compared to net
interest expense of $257,000 in the prior year. The Company had other income
(net) of $89,000 in 1995 compared to $148,000 in 1994. In both years, this
arose largely from an adjustment to the valuation reserve recorded against the
receivable from the purchaser of the Company's Fine Baked Products operations,
$83,000 in 1995 and $256,000 in 1994.
The Company recorded income tax expense of $14,000, which represents
alternative minimum tax, in the year ended December 31, 1995 while there was
$18,000 of income tax expense for the year ended December 31, 1994.
As a result of the above items, the Company recorded net income of $602,000
for the year ended December 31, 1995. In the year ended December 31,1994, the
Company had net income of $538,000.
1994 COMPARED TO 1993
Net sales for the year ended December 31, 1994 were $24,892,000 compared to
$26,065,000 in the prior year. During the second half of 1994, the Company
encountered severe shortages in meeting customer orders. During this period,
the Company redesigned most of
9
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its labels to meet new FDA standards as well as a graphic redesign of its two
largest product lines. Because of high demand at packaging suppliers, the
Company was unable to time the receipt of new packaging with the exhaustion of
the old. In addition, capacity restrictions at a major copacker limited the
Company's ability to obtain products. During the second half of 1994, the
Company experienced out of stocks in the amount of 11.4% of net sales, about
three times the prior rate. In addition, the Company's efforts in redesigning
labels, obtaining packaging and filling "out of stocks" limited its ability to
pursue product sales and to introduce new products to the extent it normally
does.
Gross profit of the Company was $8,833,000 or 35.5% of sales for the year
ended December 31, 1994 compared to $8,824,000 or 33.9% of sales in 1993.
During 1994, the Company took a charge of $237,000 (1.0% of net sales) for
estimated losses on the sale of certain slow moving inventory and contingencies
related to several discontinued products.
Selling, general and administrative expenses were $8,168,000 or 32.8% of
sales for the year ended December 31, 1994 compared to $7,123,000 or 27.3% of
sales in 1993. The increase was due largely to higher levels of promotional
allowances, by 2.4% of net sales, as well as to the addition of several
salespeople in the Eastern and Southeastern regions of the country and increased
marketing personnel. In addition, the Company recorded a charge of $182,000
related to the settlement of the former Chief Executive Officer's Stock Purchase
Agreement and the costs of recruitment of a successor.
The Company had net interest expense of $257,000 in 1994 compared to net
interest expense of $113,000 in the prior year. The interest expense in 1994
was a result of the issuance of 8% interest bearing Subordinated Notes to the
former holders of the Company's 10% Stock in partial exchange for the stock.
The Company had other income (net) of $148,000 in 1994 compared to ($14,000) in
1993. During 1994, the Company recorded $256,000 of income from an adjustment
to the valuation reserve recorded against the receivable from the purchaser of
the Company's Fine Baked Products operations.
The Company recorded income tax expense of $18,000, which represents
alternative minimum tax, in the year ended December 31, 1994 while there was
$39,000 of income tax expense for the year ended December 31, 1993.
As a result of the above items, the Company recorded net income of $538,000
for the year ended December 31, 1994. In the year ended December 31, 1993, the
Company had net income of $1,535,000.
10
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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and financial statement schedules required by Item
8 of this report are set forth on pages 15 through 27.
Item 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
Part III
Item 10. EXECUTIVE OFFICERS OF THE COMPANY
Listed below are the executive officers of the Company. All officers serve
at the pleasure of the Board of Directors. There are no family relationships
among any officers or directors of the Company.
Name Age Position
---- --- --------
Robert J. Cresci 52 Chairman of the Board
B. Allen Lay 61 President and Chief Executive
Officer
Stephen Schorr 50 Vice President,
Finance, Secretary,
Treasurer and Chief
Financial Officer.
Mr. Cresci has been a Managing Director of Pecks Management Partners Ltd.,
an investment management firm, since September 1990. Mr. Cresci currently
serves on the boards of Bridgeport Machines, Inc., Serv-Tech, Inc., EIS
International, Inc., Sepracor, Inc., Elements, Inc., Garnet Resources
Corporation, HarCor Energy, Inc., Meris Laboratories, Inc. and several private
companies.
Mr. Lay was elected President and Chief Executive Officer of the Company on
January 12, 1995. Mr. Lay has been a Director of the Company since 1987. Mr.
Lay has served as a General Partner of Southern California Ventures, a venture
capital firm, since May, 1983. He is a director of PairGain Technologies (OTC),
Physical Optics Corp., Kofax Imaging, ViaSat Inc. and Medclone Inc. Mr. Lay was
Chairman and C.E.O. of Meridian Data Inc. from July, 1993 to December, 1994.
Mr. Schorr joined the Company in July, 1988 as Vice President, Finance. He
is an Officer and Director of each of the Company's subsidiaries. From
December, 1982 through June, 1988, he held the positions of Vice President,
Finance and Corporate Controller of Linear Corporation, a manufacturer of
electronic components.
11
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SIGNIFICANT EMPLOYEES
Andrew Jacobson, 35, is President of Westbrae and Little Bear. From 1985-
1992, Mr. Jacobson was employed by Tree of Life Inc. a major national natural
products distributor, in several executive capacities culminating as Director of
Sales of Tree of Life West prior to joining Westbrae and Little Bear in
November, 1992. Mr. Jacobson is a member of the Board of Directors of the
National Nutritional Foods Association.
Item 11. EXECUTIVE COMPENSATION
Item 12. SHARE OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Except for information regarding the Company's executive officers (See Item
10), the information called for by Items 10 through 13 is incorporated in this
Report by reference to the definitive Information Statement for the Company's
1996 Annual Meeting of Shareholders.
12
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Part IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) The following documents are filed as part of this report.
1. FINANCIAL STATEMENTS
The following Consolidated Financial Statements of Vestro Natural
Foods Inc. and subsidiary companies are incorporated by reference
in Part II, Item 8:
Pages
-------
REPORT OF INDEPENDENT ACCOUNTANTS..... 14
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1995 and 1994.......... 15
CONSOLIDATED INCOME STATEMENT
FOR THE YEARS ENDED DECEMBER 31,
1995, 1994, and 1993................ 16
CONSOLIDATED STATEMENT OF SHAREHOLDERS'
EQUITY FOR THE YEARS ENDED
DECEMBER 31, 1995, 1994, and 1993... 17
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995,
1994, and 1993...................... 18
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS........................... 19-27
2. FINANCIAL STATEMENT SCHEDULES
All financial statements schedules are omitted because they
are not applicable, or because the information required
is either immaterial or included in the Consolidated
Financial Statements and notes thereto.
13
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Shareholders of
Vestro Natural Foods Inc.
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page 13 present fairly, in all material
respects, the financial position of Vestro Natural Foods Inc. and its
subsidiaries at December 31, 1995 and 1994, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1995, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
Costa Mesa, California
March 26, 1996
14
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VESTRO NATURAL FOODS INC.
CONSOLIDATED BALANCE SHEET
- -------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31,
1995 1994
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 192,000 $ 1,489,000
Accounts receivable, trade - net of
allowance for doubtful
accounts of $49,000 and $37,000 2,084,000 1,776,000
Inventories (Note 10) 2,910,000 2,547,000
Prepaid expenses 973,000 443,000
Note receivable (Note 2) 83,000
---------- ---------
Total current assets 6,159,000 6,338,000
---------- ---------
Properties (Note 1):
Machinery and equipment 566,000 506,000
Leasehold improvements 15,000 9,000
---------- ---------
581,000 515,000
Less accumulated depreciation and amortization 425,000 349,000
---------- ---------
156,000 166,000
---------- ---------
Excess of cost over net assets of businesses
acquired - net of accumulated amortization
of $1,370,000 and $1,157,000 (Note 1) 6,907,000 7,120,000
Other assets 545,000 652,000
---------- ---------
Total assets $13,767,000 $14,276,000
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $2,409,000 $2,972,000
Accrued liabilities (Note 10) 507,000 644,000
Current portion of long-term debt (Note 3) 775,000 549,000
---------- ----------
Total current liabilities 3,691,000 4,165,000
Long-term debt, net of current portion (Note 3) 2,765,000 3,402,000
---------- ----------
Total liabilities 6,456,000 7,567,000
---------- ----------
Commitments and contingencies (Notes 3 and 9)
Shareholders' equity (Notes 5 and 6):
Common stock, $.01 par value, 30,000,000
shares authorized;
5,950,588 shares issued and outstanding 60,000 60,000
Additional paid-in capital 17,202,000 17,202,000
Note receivable under stock purchase plan (444,000) (444,000)
Accumulated deficit (9,507,000) (10,109,000)
---------- ----------
Total shareholders' equity 7,311,000 6,709,000
---------- ----------
Total liabilities and
shareholders' equity $13,767,000 $14,276,000
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
15
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VESTRO NATURAL FOODS INC.
CONSOLIDATED INCOME STATEMENT
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
1995 1994 1993
<S> <C> <C> <C>
Net sales $ 28,836,000 $ 24,892,000 $ 26,065,000
Cost of goods sold 18,374,000 16,059,000 17,241,000
------------- ------------- -------------
Gross profit 10,462,000 8,833,000 8,824,000
Selling, general and administrative
expenses 9,676,000 8,168,000 7,123,000
------------- ------------- -------------
Income from operations 786,000 665,000 1,701,000
Interest expense (259,000) (257,000) (113,000)
Other income (expense), net 89,000 148,000 (14,000)
------------- ------------- -------------
Income before provision for income
taxes 616,000 556,000 1,574,000
Provision for income taxes (Note 4) 14,000 18,000 39,000
------------- ------------- -------------
Net income $ 602,000 $ 538,000 $ 1,535,000
------------- ------------- -------------
------------- ------------- -------------
Earnings per common share (Note 1) $.10 $.09 $.28
---- ---- ----
---- ---- ----
Weighted average common shares
outstanding 6,067,376 6,260,130 1,739,072
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
16
<PAGE>
VESTRO NATURAL FOODS INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NOTE
10% RECEIVABLE
SERIES A CONVERTIBLE UNDER
CONVERTIBLE EXCHANGEABLE ADDITIONAL STOCK
PREFERRED PREFERRED COMMON PAID-IN ACCUMULATED PURCHASE
STOCK STOCK STOCK CAPITAL DEFICIT PLAN
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1992 $ 1,140,000 $ 8,768,000 $ 166,000 $ 10,947,000 $ (12,182,000)
One-for-ten reverse stock split (149,000) 149,000
Net income for the year 1,535,000
------------ ------------ ------------ ------------- ------------- -----------
Balance at December 31, 1993 1,140,000 8,768,000 17,000 11,096,000 (10,647,000)
Exchange of 3,899,570 shares
of common stock for
preferred stock (Note 5) (1,140,000) (8,768,000) 39,000 5,403,000
Issuance of 659,750 shares of
common stock under stock
purchase plan (Note 6) 7,000 1,228,000 $ (784,000)
Repurchase of 263,900 shares
under stock purchase plan (3,000) (525,000) 340,000
Net income for the year 538,000
------------ ------------ ------------ ------------- ------------- -----------
Balance at December 31, 1994 60,000 17,202,000 (10,109,000) (444,000)
Net income for the year 602,000
------------ ------------ ------------ ------------- ------------- -----------
Balance at December 31, 1995 $ $ $ 60,000 $ 17,202,000 $ (9,507,000) $ (444,000)
------------ ------------ ------------ ------------- ------------- -----------
------------ ------------ ------------ ------------- ------------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
17
<PAGE>
VESTRO NATURAL FOODS INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
1995 1994 1993
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 602,000 $ 538,000 $ 1,535,000
---------- ---------- ------------
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation 76,000 71,000 80,000
Amortization of intangibles 213,000 213,000 214,000
Compensation expense under stock
purchase and stock option plans 52,000 238,000
(Reversal) provision for doubtful
accounts and note (59,000) (220,000) 70,000
Provision for slow-moving inventory
and discontinued products 77,000 237,000 32,000
Changes in operating assets and liabilities,
net of effect of business disposition:
(Increase) decrease in accounts receivable (333,000) 105,000 (460,000)
Increase in inventories (440,000) (664,000) (532,000)
(Increase) decrease in prepaid expenses (530,000) 80,000 (371,000)
(Decrease) increase in accounts payable (563,000) 813,000 (168,000)
Decrease in accrued liabilities (189,000) (225,000) (58,000)
---------- ---------- ------------
Total adjustments (1,696,000) 648,000 (1,193,000)
---------- ---------- ------------
Net cash provided by (used in)
operating activities (1,094,000) 1,186,000 342,000
---------- ---------- ------------
Cash flows from investing activities:
Capital expenditures (66,000) (65,000) (113,000)
Proceeds from note receivable 167,000 379,000 205,000
Decrease (increase) in other assets 107,000 (322,000) (155,000)
---------- ---------- ------------
Net cash provided by (used in)
investing activities 208,000 (8,000) (63,000)
---------- ---------- ------------
Cash flows from financing activities:
Proceeds from borrowings on note payable 38,000
Proceeds from borrowings on revolving
line of credit 100,000
Repayments under note payable (549,000) (422,000)
Repayments under revolving line of credit (886,000)
Payments of obligations to former
shareholders of acquired business (1,309,000)
Payment in connection with
recapitalization (Note 5) (94,000)
Proceeds from stock purchase plan 66,000
---------- ---------- ------------
Net cash used in financing activities (411,000) (450,000) (2,195,000)
---------- ---------- ------------
Increase (decrease) in cash and cash
equivalents (1,297,000) 728,000 (1,916,000)
Cash and cash equivalents, beginning
of year 1,489,000 761,000 2,677,000
---------- ---------- ------------
Cash and cash equivalents, end of year $ 192,000 $ 1,489,000 $ 761,000
---------- ---------- ------------
---------- ---------- ------------
</TABLE>
See accompanying notes to consolidated financial statements.
18
<PAGE>
VESTRO NATURAL FOODS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Vestro Natural Foods Inc., a Delaware corporation, is engaged in the
acquisition, ownership and operation of specialty food businesses. Its
products are sold under the tradenames Westbrae, Westsoy, Little Bear,
Bearitos and CiBella.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Vestro
Natural Foods Inc. and its subsidiaries (the Company), all of which are
wholly-owned. All significant intercompany accounts and transactions have
been eliminated in consolidation.
USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
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 respective reporting periods. Actual results could differ from
those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company values financial instruments as required by Statement of
Financial Accounting Standards No. 107, "Disclosure about Fair Values of
Financial Instruments" (SFAS 107). The carrying amounts of cash and cash
equivalents, accounts and other receivables, accounts payable, accrued
liabilities and debt approximate fair value.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents for
purposes of the consolidated statement of cash flows.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of trade receivables.
The credit risk exists because the Company's sales are concentrated to a
relatively small number of customers within the natural foods industry.
The Company maintains reserves for potential credit losses and such losses
have been within management's expectations.
INVENTORIES
Inventories are valued at the lower of cost or market, cost being
determined on a first-in, first-out basis. At December 31, 1995 and 1994,
inventories consist of:
1995 1994
Finished goods $ 2,541,000 $ 2,311,000
Raw materials and supplies 369,000 236,000
----------- -----------
$ 2,910,000 $ 2,547,000
----------- -----------
----------- -----------
19
<PAGE>
VESTRO NATURAL FOODS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
- --------------------------------------------------------------------------------
PROPERTIES
Properties are stated at cost less accumulated depreciation. Machinery and
equipment are depreciated using a straight-line basis over the estimated
useful life of the asset ranging from five to seven years. Leasehold
improvements are amortized on a straight-line basis over the lesser of the
useful lives or the term of the lease.
INTANGIBLE ASSETS
The excess of the cost over the fair value of net assets of purchased
businesses (goodwill) is amortized on a straight-line basis, generally over
40 years. The Company evaluates whether there has been any impairment of
goodwill based upon management's estimate of future net income, on an
undiscounted basis, over the remaining useful life of goodwill.
INCOME TAXES
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." Under the
liability method specified by SFAS No. 109, the deferred tax liability is
determined based on the difference between the financial statement and tax
bases of assets and liabilities as measured by the enacted tax rates which
will be in effect when these differences reverse. Deferred tax expense is
the result of changes in the liability for deferred taxes. The adoption
did not have a material effect on the financial statements.
EARNINGS PER SHARE
Earnings per share are based upon the weighted average number of common
shares and common stock equivalents outstanding. Assumed exercise of
contingent shares, convertible preferred stock, outstanding warrants and
options have been considered in the computation of per share data to the
extent they are dilutive. Cumulative preferred dividends including those
not paid or declared ($1,048,000 for the year ended December 31, 1993) are
deducted from net income applicable to common shareholders in the period in
which they are earned. The weighted average number of shares used in the
calculation of earnings per share for the three years ended December 31,
1995 are 6,067,376, 6,260,130 and 1,739,072, respectively.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1993 and 1994 statements to
conform to the 1995 presentation.
2. BUSINESS DIVESTITURES
DIVESTITURE OF THE NET ASSETS OF HEIDI'S PASTRY, INC. AND JAN HOLZMEISTER
CHEESECAKE, LTD.
Effective December 18, 1992, the Company sold substantially all of the
assets of Heidi's Pastry, Inc., a bakery and wholesale distributor of
gourmet pastries, and Jan Holzmeister Cheesecake, Ltd., a producer of
cheesecakes. The sales price included $4,200,000 in cash, a note
receivable valued at $411,000, and the assumption of certain related
liabilities and obligations. A cash payment for the remaining balance of
the note receivable was received during 1995.
20
<PAGE>
VESTRO NATURAL FOODS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
- --------------------------------------------------------------------------------
3. DEBT OBLIGATIONS
REVOLVING LINE OF CREDIT
In April 1994, the Company executed a revolving credit agreement with a
financial institution. The terms of the credit agreement provide: (1)
borrowings up to 80% of eligible accounts receivable plus 30% of eligible
inventory (up to $1,000,000) less all outstanding commercial and standby
letters of credit; (2) a maximum outstanding credit balance of $4,000,000;
(3) interest rate at the bank's prime rate; (4) a requirement to maintain a
non-interest bearing deposit of $200,000 or pay a fee calculated at the
prime rate plus 3% on the difference between the average daily deposit and
the $200,000 requirement; and (5) a term expiring April 30, 1996.
Upon execution of the agreement, the Company paid a loan fee of $40,000.
In addition, the Company was required to reimburse such expenses as filing,
recording and search fees, appraisal fees, title report fees, legal and
audit fees. These expenses were not significant for the years ended
December 1995 and 1994. Outstanding borrowings under the revolving credit
agreement were $100,000 at December 31, 1995.
The revolving line of credit is secured by substantially all of the
Company's assets. The agreement contains various covenants which restrict
the Company from incurring additional indebtedness and require the Company
to maintain certain financial ratios.
NOTES PAYABLE
In connection with the exchange agreement (see Note 5) with the holders of
the Company's 10% convertible exchangeable preferred stock, the Company
issued $4,372,000 in notes payable bearing interest at 8% per annum. The
Senior Subordinated Notes A (Notes A) were issued in consideration of the
dividends in arrears at the time of the agreement, which amounted to
approximately $2,872,000. Principal and interest on Notes A are due
monthly through May 15, 1998. The Senior Subordinated Notes B (Notes B)
total $1,500,000. Interest on Notes B is payable monthly through May 15,
1998, subject to the limitation that the total principal and interest paid
under both Notes A and B does not exceed 30% of net income. Any interest
payments that are deferred due to this provision are payable in the next
quarter that such provision will permit. Principal payments on Notes B are
due quarterly beginning August 15, 1998 through 1999. The aggregate
principal maturities of Notes A and B and various other notes payable in
the aggregate amount of $38,000 are payable as follows:
YEAR ENDED
DECEMBER 31,
1996 $675,000
1997 869,000
1998 908,000
1999 988,000
The agreement also contains various covenants which restrict the Company
from incurring additional indebtedness and property liens without the
consent of the holders of a majority of the notes payable.
21
<PAGE>
VESTRO NATURAL FOODS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
- --------------------------------------------------------------------------------
4. INCOME TAXES
The income tax provision for the years ended December 31, 1995 and 1994
consists of:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Current income taxes:
Federal $ 7,000 $10,000
State 7,000 8,000
------- -------
14,000 18,000
------- -------
Deferred income taxes:
Federal
State
------- -------
------- -------
$14,000 $18,000
------- -------
------- -------
</TABLE>
The differences between the tax provision calculated based on the statutory
and effective tax rates for the year ended December 31, 1995 and 1994 are
as follows:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Computed income taxes, at 34% $207,000 $189,000
State income tax, net of federal
income tax benefit 5,000 5,000
Goodwill and other nondeductible
expenses 78,000 77,000
Utilization of NOL carryforwards (183,000) (203,000)
Realization of previously unrecognized
tax benefits (99,000) (52,000)
Alternative minimum tax 7,000 10,000
Other, net (1,000) (8,000)
-------- --------
$ 14,000 $ 18,000
-------- --------
-------- --------
</TABLE>
Deferred tax assets (liabilities) comprise the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1995 1994
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 1,719,000 $ 1,891,000
Asset reserves 89,000 108,000
Accrued expenses 212,000 217,000
Deferred tax asset valuation
allowance (1,991,000) (2,183,000)
---------- -----------
29,000 33,000
---------- -----------
Deferred tax liabilities:
Properties (29,000) (33,000)
---------- -----------
Net deferred tax asset (liability) $ - $ -
---------- -----------
---------- -----------
</TABLE>
22
<PAGE>
VESTRO NATURAL FOODS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
- -------------------------------------------------------------------------------
The Company has net operating loss carryforwards for federal and state
income tax purposes of approximately $4,740,000 and $173,000,
respectively, which expire in varying amounts through 2009. The amount
of net operating loss deductions available to the Company to offset
future taxable income may be limited due to certain income tax
regulations related to a change in ownership of the Company.
5. CAPITAL STOCK
On January 21, 1994, the shareholders approved an amendment to the
Company's certificate of incorporation reducing the authorized common
shares to 30,000,000 and authorized a one-for-ten reverse stock split. A
total of 14,924,729 shares of common stock were retired in connection with
the split. The stated par value of each share was not changed from $.01.
A total of $149,000 was reclassified from the Company's common stock
account to additional paid-in capital account, representing the par value
of the shares retired. All references in the financial statements to
average number of shares outstanding, per share amounts and stock option
plan data have been restated to reflect the split.
On January 10, 1994, the Company consummated an exchange agreement with the
holders of the Series A convertible preferred stock whereby all shares were
retired and dividends in arrears eliminated in exchange for $21,000 in cash
and 534,800 shares of the Company's common stock. At the time of the
exchange, dividends in arrears amounted to $297,000.
On January 10, 1994, the Company consummated an exchange agreement with the
holders of the 10% convertible exchangeable preferred stock whereby all
shares were retired and dividends in arrears eliminated in exchange for
$73,000 in cash, 3,364,770 shares of the Company's common stock, and notes
payable in the amount of $4,372,000 (see Note 3). At the time of the
exchange, dividends in arrears amounted to $2,872,000.
6. INCENTIVE COMPENSATION AND STOCK PURCHASE AND OPTION PLANS
In 1995, the Company granted nonqualified stock options to purchase 120,000
shares of the Company's common stock to an officer of the Company. Of the
options, 60,000 were granted at an exercise price of $1.63 per share and
the remaining 60,000 were granted at $1.88 per share. The options were
granted at market value of the Company's common stock and as such no
compensation expense was recorded. These options were 100% exercisable
upon issuance.
23
<PAGE>
VESTRO NATURAL FOODS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
- --------------------------------------------------------------------------------
In 1995, the Company granted nonqualified stock options to purchase 160,000
shares of the Company's common stock at an exercise price of $1.88 per
share to the Directors of the Company. The options were granted at market
value of the Company's common stock and as such no compensation expense was
recorded. The options vest over a three-year period with up to two years
credit given to individual Directors for prior service. As of December 31,
1995, 80,000 of these options are exercisable.
Effective January 1, 1994, the Company adopted a 401(k) Savings Plan
covering substantially all employees. Monthly contributions to the Savings
Plan are made by the Company based upon the employee's contributions to the
plan. The Company contributed $26,000 to the Savings Plan during each of
the years ended December 31, 1995 and 1994.
In 1994, the Company entered into a bonus arrangement with two key
executive officers. In connection with the arrangement, the officers
participate in an incentive compensation plan which provides a bonus based
on pre-tax earnings in excess of predetermined targets. The incentive
compensation bonus was $7,000 for the year ended December 31, 1994. This
arrangement expired on December 31, 1994.
On January 10, 1994, the Company consummated a stock purchase plan under
which 659,750 shares of the Company's common stock were issued to an
executive officer for total consideration of $850,000, consisting of
$66,000 in cash and a $784,000 note receivable, bearing interest at 5.75%,
due December 31, 1997. The purchase plan provides the Company with the
right to repurchase shares in the event that the officer's employment is
terminated prior to a five-year vesting period. Following the officer's
resignation in January 1995, the Company was entitled to repurchase 395,850
shares with a corresponding reduction in the amount of the note receivable
due from the former officer. The Company entered into a severance
agreement with the former officer which entitled the officer to purchase an
additional 131,950 shares with a note receivable. The Company recorded the
repurchased shares and the severance agreement in the financial statements
as of December 31, 1994. The Company also recognized earned compensation
expense of $198,000 during the year ended December 31, 1994, representing
the difference between the sale price and the fair market value of these
shares as of the date of the stock purchase plan and of the severance
agreement. Nonqualified stock options to purchase 494,812 shares of the
Company's common stock were also forfeited upon the former officer's
resignation.
In 1993, the Company granted nonqualified stock options to purchase 329,875
shares of the Company's common stock at an exercise price of $1.29 per
share to an officer of the Company's subsidiary. In connection with the
nonqualified stock options granted below the fair market value of the
Company's common stock at the date of grant, the Company will amortize
$194,000 to compensation expense over a five-year vesting period.
Amortization recorded to compensation expense was $52,000 and $40,000 for
the years ended December 31, 1995 and 1994, respectively.
24
<PAGE>
VESTRO NATURAL FOODS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
- --------------------------------------------------------------------------------
The Company adopted a stock option plan in 1988 under which employees may
be granted options to purchase up to 150,000 shares of the Company's common
stock at prices not less than the fair market value of the common stock on
the date of grant. Stock options may be granted under the plan through
1998. As of December 31, 1995, 149,500 options are outstanding under this
plan, 21,000 of which are currently exercisable.
The Company adopted a nonqualified stock option plan in 1987 under which
certain employees and directors may be granted options to purchase up to
270,000 shares of the Company's common stock at prices not less than the
fair market value of common stock on the date of grant. Stock options may
be granted under the plan through 1997. As of December 31, 1995, there are
no options outstanding under this plan.
The following table sets forth the options granted, forfeited and exercised
during the three years ended December 31, 1995 and their respective
exercise price ranges:
<TABLE>
<CAPTION>
SHARES PRICES
<S> <C> <C>
Shares under option, December 31, 1992 267,354 $ 4.00 - $ 6.00
Granted 824,687 1.29 - 2.58
Forfeited and expired (166,354) 4.00 - 6.00
------- ----------------------
Shares under option, December 31, 1993 925,687 1.29 - 6.00
Granted 56,500 2.75
Forfeited and expired (520,812) 2.58 - 6.00
------- ----------------------
Shares under option, December 31, 1994 461,375 1.29 - 6.00
Granted 405,500 1.38 - 1.88
Forfeited and expired (107,500) 1.38 - 6.00
------- ----------------------
Shares under option, December 31, 1995 759,375 $ 1.29 - $ 1.88
------- ----------------------
------- ----------------------
</TABLE>
All options granted are for a five-year period. Except as noted above,
options granted to officers and employees are not generally exercisable for
a period of one year after date of grant and thereafter become exercisable
at 25% per year.
At December 31, 1995 the Company has reserved 759,375 shares of common
stock for the exercise of outstanding stock options.
7. RELATED PARTY TRANSACTIONS
The Company leases certain office and warehouse space in Carson, California
from a partnership which includes a Director of the Company. Total rent
expense paid to the partnership was $196,000, $161,000 and $147,000 for the
years ended December 31, 1995, 1994 and 1993, respectively.
25
<PAGE>
VESTRO NATURAL FOODS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
- --------------------------------------------------------------------------------
8. SALES TO MAJOR CUSTOMERS
In 1995 sales to four customers accounted for $4,860,000, $3,674,000,
$3,170,000 and $3,016,000 or approximately 17%, 13%, 11% and 11% of total
revenue, respectively. In 1994 sales to three customers accounted for
$3,650,000, $3,625,000 and $2,592,000 or approximately 15%, 15% and 10% of
total revenue, respectively. In 1993 sales to two customers accounted for
$3,803,000 and $3,172,000 or approximately 15% and 12% of total revenue,
respectively.
9. COMMITMENTS AND CONTINGENCIES
LEASES
As of December 31, 1995, the Company and its subsidiaries are obligated
under various agreements to lease facilities and equipment. Future minimum
rentals under noncancellable operating leases are as follows:
OPERATING
YEAR ENDING DECEMBER 31, LEASES
1996 $ 201,000
1997 152,000
1998 3,000
---------
Total $ 356,000
---------
---------
Rental expense related to operating leases amounted to $207,000, $228,000
and $194,000 for the years ended December 31, 1995, 1994 and 1993,
respectively.
LEGAL PROCEEDINGS
Management has received information furnished by legal counsel on the
current status of all outstanding legal proceedings and the development of
these matters to date. Based upon this review, it is the opinion of
management that adequate provision has been made for all reasonably
estimable costs and that the ultimate aggregate liability, if any, should
not materially affect the Company's financial position or results of
operations.
26
<PAGE>
VESTRO NATURAL FOODS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
- --------------------------------------------------------------------------------
10. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
1995 1994
Relocation costs $ 100,000 $ 140,000
Salaries and related benefits 69,000 65,000
Employee bonuses 78,000 7,000
Other 260,000 432,000
--------- ---------
$ 507,000 $ 644,000
--------- ---------
--------- ---------
11. CONSOLIDATED STATEMENT OF CASH FLOWS - SUPPLEMENTAL DISCLOSURES
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid during 1995, 1994 and 1993 amounted to $268,000,
$257,000 and $113,000, respectively.
Cash paid for income taxes during 1995, 1994 and 1993 amounted to
$8,000, $8,000 and $14,000, respectively.
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
YEAR ENDED DECEMBER 31, 1994
Notes payable exchanged in retirement of preferred stock and
dividends in arrears $ 4,372,000
-----------
-----------
Note receivable recorded in connection with stock purchase plan,
net of reduction for shares repurchased $ 444,000
-----------
-----------
27
<PAGE>
3. EXHIBITS
(b) No reports on Form 8-K were filed during the last
quarter of the fiscal year.
(c) (3.1) CERTIFICATE OF DESIGNATION, VOTING POWERS,
PREFERENCES AND RIGHT OF THE SERIES OF THE
PREFERRED STOCK OF VESTRO NATURAL FOODS INC.
TO BE DESIGNATED SERIES A CONVERTIBLE
PREFERRED STOCK EFFECTIVE JANUARY 28, 1988.
Incorporated by reference to the Registrant's
Form 8-K filed on February 19, 1988.
(3.2) CERTIFICATE OF INCORPORATION, DATED APRIL 1,
1987. Incorporated by reference to the
Registrant's Information Statement filed on
May 26, 1987.
(3.3) BY-LAWS. Incorporated by reference to the
Registrant's Form 8-B Report filed on July
16, 1987.
(4.1) STOCK PURCHASE AGREEMENT BY AND AMONG
EQUITABLE LIFE ASSURANCE SOCIETY OF THE
UNITED STATES, STATE EMPLOYEE'S RETIREMENT
FUND OF THE STATE OF DELAWARE, ICI AMERICAN
HOLDINGS INC., THRESHOLD FUND II, L.P.,
SCOTTISH INVESTMENT TRUST REVERE FUND, AMONG
OTHERS AND VESTRO NATURAL FOODS, INC.
Incorporated by reference to the Registrant's
Form 8-K dated December 27, 1989.
(4.2) CERTIFICATE OF DESIGNATION OF 10% CONVERTIBLE
EXCHANGEABLE PREFERRED STOCK OF VESTRO
NATURAL FOODS, INC. Incorporated by
reference to the Registrant's Form 8-K dated
December 27, 1989.
(4.3) REGISTRATION RIGHTS AGREEMENT BY AND AMONG
EQUITABLE LIFE ASSURANCE SOCIETY OF THE
UNITED STATES, STATE EMPLOYEES' RETIREMENT
FUND OF THE STATE OF DELAWARE, ICI AMERICAN
HOLDINGS INC., THRESHOLD FUND II, L.P.,
SCOTTISH INVESTMENT TRUST,
28
<PAGE>
REVERE FUND, AMONG OTHERS AND VESTRO NATURAL
FOODS INC. Incorporated by reference to the
Registrant's Form 8-K dated December 27,
1989.
(4.4) EXCHANGE AGREEMENT; dated as of
October 28, 1993, among the holders of the
Company's Preferred Stock and Vestro Natural
Foods Inc. Incorporated by reference to the
Registrant's Form 8-
K dated January 10, 1994.
(4.5) FORM OF SENIOR SUBORDINATED NOTE A
Incorporated by reference to the Registrant's
Form 8-K dated January 10, 1994.
(4.6) FORM OF SENIOR SUBORDINATED NOTE B
Incorporated by reference to the Registrant's
Form 8-K dated January 10, 1994.
(10.1) 1988 STOCK OPTION PLAN OF VESTRO NATURAL
FOODS INC. DATED MAY 23, 1988. Incorporated
by reference to the Registrant's Form 10-Q
for the quarter ending June 30, 1988, Item 6.
(10.2) MANAGEMENT AGREEMENT BETWEEN VESTRO NATURAL
FOODS INC., AND ALANE CORPORATION DATED
DECEMBER 15, 1989. Incorporated by reference
to the Registrant's Form 10-K for the year
ended December 31, 1989.
(10.3) AGREEMENT AND PLAN OF MERGER EFFECTIVE MAY 1,
1990, BY AND BETWEEN JAN HOLZMEISTER
CHEESECAKE, LTD., VESTRO NATURAL FOODS INC.
AND JHC ACQUISITION CORPORATION.
Incorporated by reference to the Registrant's
Form 10-Q for the quarter ending June 30,
1990, Item 6.
(10.4) AGREEMENT RESPECTING MERGER EFFECTIVE MAY 1,
1990 BY AND BETWEEN JAN HOLZMEISTER
CHEESECAKE, LTD., VESTRO NATURAL FOODS INC.
AND JHC ACQUISITION CORPORATION.
Incorporated by reference to the Registrant's
Form 10-Q for the
29
<PAGE>
quarter ending June 30, 1990, Item 6.
(10.5) EMPLOYMENT AGREEMENT DATED MAY 15, 1990,
BETWEEN JHC ACQUISITION CORPORATION AND
ROBERT KLEIN. Incorporated by reference to
the Registrant's Form 10-Q for the quarter
ending June 30, 1990, Item 6.
(10.6) CONSULTING AGREEMENT DATED MAY 15, 1990 BY
AND AMONG ROBERT KLEIN, JAN HOLZMEISTER
CHEESECAKE, LTD. AND JHC ACQUISITION
CORPORATION. Incorporated by reference to
the Registrant's Form 10-Q for the quarter
ending June 30, 1990, Item 6.
(10.7) WARRANTS TO PURCHASE 400,000 SHARES OF COMMON
STOCK DATED MAY 23, 1990, ISSUED TO THE
STOCKHOLDERS OF JAN HOLZMEISTER CHEESECAKE,
LTD. Incorporated by reference to the
Registrant's Form 10-Q for the quarter ending
June 30, 1990, Item 6.
(10.8) CONSULTING AGREEMENT BETWEEN VESTRO NATURAL
FOODS INC., ALANE CORPORATION AND ALFRED
STROGOFF dated March 31, 1992. Incorporated
by reference to the Company's Form 10K dated
December 31, 1992.
(10.9) ASSET PURCHASE AGREEMENT EFFECTIVE DECEMBER
18, 1992 BY AND AMONG VESTRO NATURAL FOODS
INC., HEIDI'S PASTRY INC., JAN HOLZMEISTER
CHEESECAKE LTD. AND HK ACQUISITION
CORPORATION. Incorporated by reference to
the Company's Form 8-K dated December 18,
1992.
(10.10) SETTLEMENT CONTRACT AND RELEASE BETWEEN
JENNIFER MUELLER, VESTRO ACQUISITION
CORPORATION, VESTRO NATURAL FOODS INC. AND
LITTLE BEAR ORGANIC FOODS, INC. effective
December 31, 1992. Incorporated by reference
to the Company's Form 10K dated December 31,
1992.
(10.11) STOCK PURCHASE AGREEMENT, AS OF JULY
29, 1993 BY AND BETWEEN VESTRO NATURAL
30
<PAGE>
FOODS INC. AND ALLAN DALFEN. Incorporated by
reference to the Company's Form 10K dated
December 31, 1993.
(10.12) STOCK OPTION AGREEMENT AS OF JULY 29, 1993 BY
AND BETWEEN VESTRO NATURAL FOODS INC. AND
ALLAN DALFEN. Incorporated by reference to
the Company's Form 10K dated December 31,
1993.
(10.13) STOCK OPTION AGREEMENT AS OF JULY 29, 1993 BY
AND BETWEEN VESTRO NATURAL FOODS INC. AND
ANDREW JACOBSON. Incorporated by reference
to the Company's Form 10K dated December 31,
1993.
(10.14) SEVERANCE AND SETTLEMENT AGREEMENT DATED AS
OF FEBRUARY 28, 1995 BETWEEN VESTRO NATURAL
FOODS INC. AND ALLAN DALFEN.
(11) Computation of Earnings per Share
(22) Subsidiaries of the Registrant
(27) Financial Data Schedule
(28.1) PROMISSORY NOTE DATED DECEMBER 18, 1992, OF
HK ACQUISITION CORPORATION Incorporated by
reference to the Company's Form 8-K dated
December 18, 1992.
31
<PAGE>
Pursuant to the requirement of Section 13 or 15 (d) 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.
VESTRO NATURAL FOODS INC.
Dated: March 28, 1996 By: /s/ B. Allen Lay
-------------- ----------------------
B. Allen Lay
Principal Executive Officer
and Director
Dated: March 28, 1996 By: /s/ Stephen Schorr
-------------- ----------------------
Stephen Schorr
Vice President Finance
32
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
Dated: March 28, 1996 By: /s/ Jay J. Miller
---------------------------
Jay J. Miller
Director
Dated: March 28, 1996 By: /s/ Stephen Monticelli
---------------------------
Stephen Monticelli
Director
Dated: March 28, 1996 By: /s/ Noel Perry
---------------------------
Noel Perry
Director
Dated: March 28, 1996 By: /s/ Henry W. Poett III
---------------------------
Henry W. Poett III
Director
33
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION PAGE NO.
- ------- ----------------------------------------- ---------------
11 Computation of Earnings per Share 35
22 Subsidiaries of the Registrant 36
27 Financial Data Schedule 37
34
<PAGE>
EXHIBIT 11
VESTRO NATURAL FOODS INC.
Computation of Earnings Per Common Share
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Primary earnings:
Net income $ 602,000 $ 538,000 $1,535,000
Less: preferred stock dividend - - (1,048,000)
Net income applicable ------- --------- ----------
to common stock $ 602,000 $ 538,000 $ 487,000
Weighted average number of
common shares outstanding 5,950,588 6,088,600 1,658,303
Effect of common stock
equivalents 116,788 171,530 80,769
Weighted average --------- --------- ---------
common shares outstanding
as adjusted (a) 6,067,376 6,260,130 1,739,072
--------- --------- ---------
Primary earnings per common
share $ .10 $ .09 $ .28
Assuming full dilution:
Net income $ 602,000 $538,000 $1,535,000
Less: preferred stock dividend - - (1,048,000)
------- ------- ---------
Net income applicable $ 602,000 $538,000 $ 487,000
to common stock ------- ------- ---------
Weighted average number of
common shares outstanding 5,950,588 6,088,600 1,658,303
Effect of common stock
equivalents 117,912 171,530 81,321
Weighted average --------- --------- ---------
common shares outstanding as
adjusted (a) 6,068,500 6,260,130 1,739,624
--------- --------- ---------
Earnings per common
share assuming full
dilution $ .10 $ .09 $ .28
</TABLE>
(a) Taking into effect the one for ten reverse stock split.
35
<PAGE>
EXHIBIT 22
SUBSIDIARIES
NAME JURISDICTION OF PERCENTAGE
INCORPORATION OWNED
- -------------------------------- --------------- ----------
Westbrae Natural Foods, Inc. California 100%
Little Bear Organic Foods, Inc. California 100%
Pastry Shell, Inc.* California 100%
Millcrest Products Corp.* California 100%
Magar Properties, Inc.* California 100%
Monterey Agricultural Products, Inc.* California 100%
Process Plants Corp.* California 100%
Vestro Acquisition Corp.* Delaware 100%
* Inactive
36
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 192,000
<SECURITIES> 0
<RECEIVABLES> 2,133,000
<ALLOWANCES> 49,000
<INVENTORY> 2,910,000
<CURRENT-ASSETS> 6,159,000
<PP&E> 581,000
<DEPRECIATION> 425,000
<TOTAL-ASSETS> 13,767,000
<CURRENT-LIABILITIES> 3,691,000
<BONDS> 0
0
0
<COMMON> 16,818,000
<OTHER-SE> (9,507,000)
<TOTAL-LIABILITY-AND-EQUITY> 13,767,000
<SALES> 28,836,000
<TOTAL-REVENUES> 28,836,000
<CGS> 18,374,000
<TOTAL-COSTS> 9,676,000
<OTHER-EXPENSES> (89,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 259,000
<INCOME-PRETAX> 616,000
<INCOME-TAX> 14,000
<INCOME-CONTINUING> 602,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 602,000
<EPS-PRIMARY> $0.10
<EPS-DILUTED> $0.10
</TABLE>
