<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, 1996
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 3, 1997: $6,018,785
Number of shares of Common Stock outstanding on March 3, 1997: 5,950,588.
The Exhibit Index is located on Page Number 36 .
Page 1 of 38
<PAGE>
Part I
Item 1. BUSINESS
Vestro Natural Foods Inc. ("Company") is engaged in the marketing and
distribution of natural and organic food products.
The Company, a Delaware corporation, was originally incorporated in New
York on June 13, 1947 under the name of Project Fabrication Corporation. In
1987, the Company assumed the name Vestro Foods Inc., adopting its present name
in 1994. The Company 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. Reference is 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. Reference is made to Form 8-K dated January 10, 1994 which
is incorporated herein by reference.
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.
2
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NATURAL FOOD
Westbrae Natural Foods, Inc. and Little Bear Organic Foods Inc. are the
Company's subsidiaries operating in the Natural Food industry.
Westbrae markets an extensive line of natural food products, including soy
and rice beverages, cookies, potato chips, canned beans, soups, 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 trade names Westbrae Natural, WestSoy
and Right from the Field.
Little Bear has been a leader in the natural food 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, corn chips, cheddar puffs, and licorice)
and canned products (refried beans, 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 food, 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 product line was
unique in the natural food 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.
3
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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 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
In 1996, Westbrae became the first company to sell non dairy beverages in
an aseptic half gallon size. Westbrae introduced six varieties of non dairy
beverages in this size. Also introduced during the year were Sweet Interludes
shortbread cookies in four flavors, popcorn bars in two flavors and three
varieties of canned organic vegetables.
Approximately 5% 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. Some raw materials used in the
Company's products are subject to seasonal availability.
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 a copacker could disrupt 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 a number of producers of natural and
organic 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 of the ingredients. The Company believes
it
4
<PAGE>
prices its products competitively and has a well recognized and trusted name in
its marketplace.
Sales to three customers amounted to $9,126,000 (27%), $6,275,000 (18%)and
$4,728,000 (14%), respectively, of consolidated net sales in 1996. Although
sales of several of the Company's products (i.e. soups) may be affected by
seasonal usage, the Company's overall product sales do not exhibit a high degree
of seasonality. The Company does not normally have a material backlog.
The Company currently employs 39 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.
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 its inventory. The Company believes
that this arrangement should be adequate to meet its needs for the foreseeable
future. The Company is in discussion to extend the lease term as well as
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.
Item 3. LEGAL PROCEEDINGS
None.
Item 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
None.
5
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Part II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock trades on the Nasdaq Small Cap Market tier of
the Nasdaq Stock Market under the symbol VEST. The following table sets forth
the high and low trading prices for the quarters commencing January 1, 1995
through December 31, 1996.
1995 High Low
---------------- ----- ----
First Quarter 2 1-1/4
Second Quarter 1-7/8 1-1/2
Third Quarter 2-1/2 1-5/8
Fourth Quarter 2 1-3/8
1996 High Low
---------------- ----- ----
First Quarter 2-5/8 1-1/2
Second Quarter 2-7/8 2-1/4
Third Quarter 4-1/8 2
Fourth Quarter 3-3/4 2-7/8
The Company had approximately 800 holders of record of its Common Stock as
of February 28, 1997.
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
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<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Selected statement of operations data
Net Sales $32,583,000 $28,836,000 $24,892,000 $26,065,000 $36,847,000
Gross Profit 12,440,000 10,462,000 8,833,000 8,824,000 10,585,000
Earnings from 1,203,000 602,000 538,000 1,535,000 (3,551,000)
Continuing Operations
Earnings (loss) from $0.19 $0.10 $0.09 $0.28 ($2.60)
Continuing Operations per
Share of Common Stock
Selected Balance Sheet Data
Current Assets $6,517,000 $6,159,000 $6,336,000 $5,439,000 $6,211,000
Property, Plant and
Equipment, Net 169,000 156,000 166,000 172,000 139,000
Other Assets 7,084,000 7,452,000 7,772,000 7,663,000 7,810,000
-----------------------------------------------------------------------
TOTAL ASSETS $13,775,000 $13,767,000 $14,276,000 $13,274,000 $14,160,000
-----------------------------------------------------------------------
Current Liabilities $3,348,000 $3,691,000 $4,165,000 $2,900,000 $5,321,000
Long-term obligations 1,913,000 2,765,000 3,402,000 - -
Shareholders' Equity 8,514,000 7,311,000 6,709,000 10,374,000 8,839,000
Total Liabilities and -----------------------------------------------------------------------
Shareholders' Equity $13,775,000 $13,767,000 $14,276,000 $13,274,000 $14,160,000
-----------------------------------------------------------------------
</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, and 1992, 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 Holzmeister 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
As of 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, 1996. At
December 31, 1996, no borrowing was outstanding under this facility. This
agreement expires on April 30, 1997. The bank has made a proposal to renew the
agreement.
The Company's Senior Subordinated Notes A, totalling $1,226,000, are payable,
interest and principal, monthly through May 15, 1998. $676,000 of principal was
paid in 1996 with principal payments of $831,000 due in 1997. 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 1996, the Board of
Directors determined that, due to the Company's cash position and availability
under its credit line, interest on Subordinated Notes B would be paid.
During the year 1996, cash generated by the Company's operations was used for
principal payments of the Subordinated Notes and increased inventory levels,
largely for new products introduced during the year.
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, from time to
time, to make selected price increases which have offset the effects of rising
costs.
RESULTS OF OPERATIONS
1996 COMPARED TO 1995
Net sales for the year ended December 31, 1996 were $32,583,000, an increase of
13% from net sales of $28,836,000 in the prior year. The sales increase for the
year reflects several
8
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important marketing strategies adopted by the Company as described herein. The
Company's canned products sales grew by over 30% for the year largely due to
additional attractive offerings in this category. During 1996, Vestro
introduced canned organic vegetables and semi-condensed soups. Vestro has built
brand equity in its extensive lines of canned goods and has grown to be among
the natural food industry's leaders in this product category through significant
product introductions during the last two years.
The Company's non dairy beverage business experienced significant growth due to
the introduction of six varieties of its Westbrae non dairy beverages in a half
gallon size container. The Company is the only producer of non dairy beverages
in half gallons in the natural food marketplace and believes that consumer
acceptance of this size product should grow to mirror that of dairy milk
products. Westbrae's established non dairy products also continued their record
of year over year growth.
Gross profit of the Company was $12,440,000 or 38.2% of sales for the year
ended December 31, 1996 compared to $10,462,000 or 36.3% of sales in 1995. The
1.9% improvement in gross profit margin reflects the Company's objective of
formulating new products (and when possible, reformulating existing products) to
produce better gross margins.
Selling, general and administrative expenses were $10,822,000 or 33.2% of
sales for the year ended December 31, 1996 compared to $9,676,000 or 33.6% of
sales in 1995. The increase was due almost entirely to increased variable
expenses, principally promotional expenditures with retailers and distributors
to promote the Company's products at attractive retail prices. The Company
believes these expenditures contributed to the generation of increased revenue.
The non-variable component of the Company's selling, general and administrative
expenses remained level with the prior year.
The Company had net interest expense of $266,000 in 1996 compared to net
interest expense of $259,000 in the prior year. The interest expense arises
from regular payments on the Company's Subordinated Notes as well as short term
borrowing under the Company's line of credit. The Company had other income
(net) of $9,000 in 1996 compared to $89,000 in 1995. During 1995, the Company
recorded $83,000 of income from an adjustment to the valuation reserve recorded
against the receivable from the purchaser of the Company's Fine Baked Products
operations. This note was fully collected in 1995 and no additional income was
recognized in 1996.
The Company recorded income tax expense of $158,000 for the year ending
December 31, 1996. The Company's state net operating loss carry forward was
fully utilized early in 1996 and state income taxes were accrued on the balance
of the Company's income.
9
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Provision was also made for Federal alternative minimum tax.
As a result of the above items, the Company recorded net income of
$1,203,000 or $.19 per share for the year ended December 31, 1996. In the year
ended December 31, 1995, the Company had net income of $602,000 or $.10 per
share.
1995 COMPARED TO 1994
Net sales for the year ended December 31, 1995 were $28,836,000 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
Classic reduced fat cookies. These cookies, in ten flavors, accounted for over
$2.5 million of net sales in 1995. The Company's non dairy 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
or $.10 per share for the year ended December 31, 1995. In the year ended
December 31,1994, the Company had net income of $538,000 or $.09 per share.
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
---- --- --------
B. Allen Lay 62 Chairman of the Board,
President and Chief Executive
Officer.
Stephen Schorr 51 Vice President,
Finance, Secretary,
Treasurer and Chief
Financial Officer.
Mr. Lay was elected President and Chief Executive Officer of the Company on
January 12, 1995 and Chairman of the Board on August 6, 1996. 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., Helisys 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, 36, is President of Westbrae and Little Bear. From 1985
to 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 in November, 1992. Mr.
Jacobson is a member of the Board of Directors of the National Nutritional Foods
Association.
Myron Cooper, 63, is Vice President, Technical Services of Westbrae and
Little Bear. Prior to joining Vestro in 1988, Mr. Cooper held executive
positions in operations, marketing, product development and qulity control with
Kellogg's, Fairmont Foods and Hain Pure Food Company. Mr. Cooper holds a Ph. D.
in Food Science and Biochemistry. He is Vice President of the Soy Foods of
America Association and a member of the California Organic Advisory Board.
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
1997 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 SHEETS
DECEMBER 31, 1996 and 1995.......... 15
CONSOLIDATED INCOME STATEMENTS
FOR THE YEARS ENDED DECEMBER 31,
1996, 1995, and 1994................ 16
CONSOLIDATED STATEMENTS OF SHAREHOLDERS'
EQUITY FOR THE YEARS ENDED
DECEMBER 31, 1996, 1995, and 1994... 17
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996,
1995, and 1994...................... 18
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS........................... 19-29
2. FINANCIAL STATEMENT SCHEDULES
All financial statement 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
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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, 1996 and 1995, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1996, 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 25, 1997
14
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VESTRO NATURAL FOODS INC.
CONSOLIDATED BALANCE SHEET
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1995
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,000 $ 192,000
Accounts receivable, trade - net of allowance
for doubtful accounts of $52,000 and $49,000 2,105,000 2,084,000
Inventories (Note 1) 3,779,000 2,910,000
Prepaid expenses 632,000 973,000
----------- -----------
Total current assets 6,517,000 6,159,000
----------- -----------
Properties (Note 1):
Machinery and equipment 667,000 566,000
Leasehold improvements 16,000 15,000
----------- -----------
683,000 581,000
Less accumulated depreciation and amortization 514,000 425,000
----------- -----------
169,000 156,000
----------- -----------
Excess of cost over net assets of businesses
acquired - net of accumulated amortization
of $1,583,000 and $1,370,000 (Note 1) 6,694,000 6,907,000
Other assets 395,000 545,000
----------- -----------
Total assets $13,775,000 $13,767,000
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,713,000 $ 2,409,000
Accrued liabilities (Note 10) 786,000 507,000
Current portion of long-term debt (Note 3) 849,000 775,000
----------- -----------
Total current liabilities 3,348,000 3,691,000
Long-term debt, net of current portion (Note 3) 1,913,000 2,765,000
----------- -----------
Total liabilities 5,261,000 6,456,000
----------- -----------
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 (8,304,000) (9,507,000)
----------- -----------
Total shareholders' equity 8,514,000 7,311,000
----------- -----------
Total liabilities and shareholders' equity $13,775,000 $13,767,000
----------- -----------
----------- -----------
</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,
1996 1995 1994
<S> <C> <C> <C>
Net sales $ 32,583,000 $ 28,836,000 $ 24,892,000
Cost of goods sold 20,143,000 18,374,000 16,059,000
------------ ------------ ------------
Gross profit 12,440,000 10,462,000 8,833,000
Selling, general and administrative expenses 10,822,000 9,676,000 8,168,000
------------ ------------ ------------
Income from operations 1,618,000 786,000 665,000
Interest expense (266,000) (259,000) (257,000)
Other income, net 9,000 89,000 148,000
------------ ------------ ------------
Income before provision for income taxes 1,361,000 616,000 556,000
Provision for income taxes (Note 4) 158,000 14,000 18,000
------------ ------------ ------------
Net income $ 1,203,000 $ 602,000 $ 538,000
------------ ------------ ------------
------------ ------------ ------------
Earnings per common share (Note 1) $.19 $.10 $.09
---- ---- ----
---- ---- ----
Weighted average common shares outstanding 6,275,125 6,067,376 6,260,130
------------ ------------ ------------
------------ ------------ ------------
</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, 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 (9,507,00O) (444,000)
Net income for the year 1,203,000
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 1996 $ $ $ 60,000 $ 17,202,000 $ (8,304,000) $ (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,
1996 1995 1994
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,203,000 $ 602,000 $ 538,000
----------- ----------- -----------
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation 90,000 76,000 71,000
Amortization of intangibles 213,000 213,000 213,000
Compensation expense under stock
purchase and stock option plans 52,000 52,000 238,000
Provision (reversal) for doubtful accounts
and note 3,000 (59,000) (220,000)
Provision for slow-moving inventory
and discontinued products 60,000 77,000 237,000
Changes in operating assets and liabilities,
net of effect of business disposition:
(Increase) decrease in accounts receivable (24,000) (333,000) 105,000
Increase in inventories (929,000) (440,000) (664,000)
Decrease (increase) in prepaid expenses 341,000 (530,000) 80,000
(Decrease) increase in accounts payable (696,000) (563,000) 813,000
Increase (decrease) in accrued liabilities 227,000 (189,000) (225,000)
----------- ----------- -----------
Total adjustments (663,000) (1,696,000) 648,000
----------- ----------- -----------
Net cash provided by (used in)
operating activities 540,000 (1,094,000) 1,186,000
----------- ----------- -----------
Cash flows from investing activities:
Capital expenditures (103,000) (66,000) (65,000)
Proceeds from note receivable 167,000 379,000
Decrease (increase) in other assets 150,000 107,000 (322,000)
----------- ----------- -----------
Net cash provided by (used in)
investing activities 47,000 208,000 (8,000)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from borrowings on bank note payable 36,000 38,000
(Repayment of) proceeds from borrowings
on revolving line of credit (100,000) 100,000
Repayments under long-term debt (714,000) (549,000) (422,000)
Payment in connection with
recapitalization (Note 5) (94,000)
Proceeds from stock purchase plan 66,000
----------- ----------- -----------
Net cash used in financing activities (778,000) (411,000) (450,000)
----------- ----------- -----------
Increase (decrease) in cash and cash equivalents (191,000) (1,297,000) 728,000
Cash and cash equivalents, beginning of year 192,000 1,489,000 761,000
----------- ----------- -----------
Cash and cash equivalents, end of year $ 1,000 $ 192,000 $ 1,489,000
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
18
<PAGE>
VESTRO NATURAL FOODS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Vestro Natural Foods Inc., a Delaware corporation, is engaged in the
ownership and operation of specialty food businesses. Its products are
sold under the tradenames Westbrae, Westsoy, Little Bear and Bearitos.
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, 1996 and 1995,
inventories consist of:
1996 1995
Finished goods $ 2,598,000 $ 2,541,000
Raw materials and supplies 1,181,000 369,000
------------ ------------
$ 3,779,000 $ 2,910,000
------------ ------------
------------ ------------
19
<PAGE>
VESTRO NATURAL FOODS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
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
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS
109). Under the liability method specified by SFAS 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.
STOCK OPTIONS
The Company adopted Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123) in 1996. As permitted
by SFAS 123, the Company continues to measure compensation cost in
accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" (APB 25) but provides pro forma disclosures of
net income and earnings per common share as if the fair value method (as
defined in SFAS 123) had been applied beginning in 1995.
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.
20
<PAGE>
VESTRO NATURAL FOODS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
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.
3. DEBT OBLIGATIONS
REVOLVING LINE OF CREDIT
In April 1994, the Company executed a revolving credit agreement with a
financial institution. The original agreement established an expiration
date of April 30, 1996. In 1996, the Company executed an amendment which
extended the expiration to April 30, 1997 and revised certain other terms
of the credit agreement. The terms of the credit agreement, as amended,
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 plus 0.5% with a
Company option to have all or portion of the principal balance bear
interest at LIBOR plus 2.5%; (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.
Upon execution of the agreement, the Company paid a loan fee of $40,000.
Upon execution of the 1996 amendment, the Company paid an additional fee of
$10,500. 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 1996, 1995 and 1994. Outstanding borrowings under the
revolving credit agreement were $-0- and $100,000 at December 31, 1996 and
1995, respectively.
In addition to revising terms of the existing revolving line of credit, the
1996 amendment provided an additional credit facility to the Company. The
Company was permitted to borrow up to $150,000 through December 31, 1996
for capital expenditures. The outstanding borrowing under this additional
credit facility was $36,000 at December 31, 1996 which is included in long-
term debt in the financial statements. This balance bears interest at the
bank's prime rate plus 0.75% and is due in equal monthly installments
through December 31, 1998.
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.
21
<PAGE>
VESTRO NATURAL FOODS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
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 are payable as follows:
YEAR ENDED
DECEMBER 31,
1997 $ 831,000
1998 908,000
1999 987,000
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.
4. INCOME TAXES
The income tax provision for the years ended December 31, 1996 and 1995
consists of:
1996 1995
Current income taxes:
Federal $ 81,000 $ 7,000
State 77,000 7,000
--------- ---------
158,000 14,000
--------- ---------
Deferred income taxes:
Federal
State
--------- ---------
--------- ---------
$ 158,000 $ 14,000
--------- ---------
--------- ---------
22
<PAGE>
VESTRO NATURAL FOODS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
The differences between the tax provision calculated based on the statutory
and effective tax rates for the year ended December 31, 1996 and 1995 are
as follows:
1996 1995
Computed income taxes, at 34% $ 463,000 $ 209,000
State income tax, net of federal
income tax benefit 51,000 5,000
Goodwill and other nondeductible
expenses 76,000 77,000
Utilization of NOL carryforwards (516,000) (231,000)
Other 84,000 (46,000)
--------- ---------
$ 158,000 $ 14,000
--------- ---------
--------- ---------
Deferred tax assets (liabilities) comprise the following:
DECEMBER 31,
1996 1995
Deferred tax assets:
Net operating loss carryforwards $ 1,190,000 $ 1,716,000
Asset reserves 114,000 89,000
Accrued expenses 276,000 219,000
Deferred tax asset valuation
allowance (1,546,000) (1,995,000)
----------- -----------
34,000 29,000
----------- -----------
----------- -----------
Deferred tax liabilities:
Properties (34,000) (29,000)
----------- -----------
Net deferred tax asset
(liability) $ - $ -
----------- -----------
----------- -----------
The Company has net operating loss carryforwards for federal income tax
purposes of approximately $3,457,000 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.
23
<PAGE>
VESTRO NATURAL FOODS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
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
The Company adopted a stock option plan in 1996 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
2006. As of December 31, 1996, 74,500 options are outstanding under this
plan, none of which are currently exercisable.
In 1996, 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 $1.50 per share and
the remaining 60,000 were granted at $2.25 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.
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.
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,
1996, 133,333 of these options are exercisable.
24
<PAGE>
VESTRO NATURAL FOODS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
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 $32,000, $26,000 and $26,000 to the Savings
Plan during the years ended December 31, 1996, 1995 and 1994, respectively.
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 for each the
years ended December 31, 1996 and 1995.
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, 1996, 149,500 options are outstanding under this
plan, 58,375 of which are currently exercisable.
25
<PAGE>
VESTRO NATURAL FOODS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
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, 1996, 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, 1996 and their respective
exercise price ranges:
<TABLE>
<CAPTION>
SHARES PRICES
<S> <C> <C>
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
Granted 194,500 1.50 - 3.00
Forfeited and expired -
--------- -------------
Shares under option, December 31, 1996 953,875 $ 1.29 - 3.00
--------- -------------
--------- -------------
</TABLE>
The options issued during 1996 in accordance with the 1996 stock option
plan were granted for 10 year periods. All other options were granted for
5 year periods. 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% annually. The following
table summarizes information about stock options outstanding at December
31, 1996:
WEIGHTED-AVERAGE
SHARES REMAINING SHARES
EXERCISE PRICE OUTSTANDING CONTRACTUAL LIFE EXERCISABLE
$1.29 329,875 1.0 263,900
$1.38 149,500 3.2 58,375
$1.50 60,000 4.1 60,000
$1.63 60,000 3.1 60,000
$1.88 220,000 3.6 193,333
$2.25 60,000 4.5 60,000
$3.00 74,500 9.8 -0-
----------- ---------------- -----------
$1.29-$3.00 953,875 3.2 695,608
----------- ---------------- -----------
----------- ---------------- -----------
26
<PAGE>
VESTRO NATURAL FOODS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
Had compensation cost been determined on the basis of fair value
pursuant to SFAS 123 net income and earnings per common share
would have been as follows:
DECEMBER 31,
1996 1995
Net income:
As reported $ 1,203,000 $ 602,000
----------- -----------
----------- -----------
Pro forma $ 1,030,000 $ 371,000
----------- -----------
----------- -----------
Earnings per common share:
As reported $ .19 $ .10
----------- -----------
----------- -----------
Pro forma $ .16 $ .07
----------- -----------
----------- -----------
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes model with the following assumptions used for grants
during both periods: no dividend yield; expected volatility of 39%; risk
free interest rates of 6.5% in 1996 and 7.1% in 1995; and expected option
lives of 3-7 years.
At December 31, 1996 the Company has reserved 953,875 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, $196,000 and $161,000 for the
years ended December 31, 1996, 1995 and 1994, respectively.
8. SALES TO MAJOR CUSTOMERS
In 1996 sales to three customers accounted for $9,126,000, $6,275,000 and
$4,728,000 or approximately 27%, 18% and 14% of total revenue,
respectively. 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.
27
<PAGE>
VESTRO NATURAL FOODS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
9. COMMITMENTS AND CONTINGENCIES
LEASES
As of December 31, 1996, 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
1997 $ 152,000
1998 3,000
----------
Total $ 155,000
----------
----------
Rental expense related to operating leases amounted to $201,000, $207,000
and $228,000 for the years ended December 31, 1996, 1995 and 1994,
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.
10. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
1996 1995
Compensation expense and related benefits $ 455,000 $ 288,000
Income Taxes Payable 147,000
Other 184,000 219,000
---------- ----------
$ 786,000 $ 507,000
---------- ----------
---------- ----------
28
<PAGE>
VESTRO NATURAL FOODS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
11. CONSOLIDATED STATEMENT OF CASH FLOWS - SUPPLEMENTAL DISCLOSURES
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid during 1996, 1995 and 1994 amounted to $268,000,
$268,000 and $257,000, respectively.
Cash paid for income taxes during 1996, 1995 and 1994 amounted to
$4,000, $8,000 and $8,000, 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
------------
------------
29
<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 Company's Form 8-K filed on
February 19, 1988.
(3.2) CERTIFICATE OF INCORPORATION, DATED APRIL 1, 1987.
Incorporated by reference to the Company's
Information Statement filed on May 26, 1987.
(3.3) BY-LAWS. Incorporated by reference to the
Company'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 Company'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
Company'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, REVERE FUND, AMONG OTHERS AND VESTRO
NATURAL FOODS INC. Incorporated by reference to
the Company'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
30
<PAGE>
reference to the Company's Form 8-K dated January
10, 1994.
(4.5) FORM OF SENIOR SUBORDINATED NOTE A
Incorporated by reference to the Company's Form
8-K dated January 10, 1994.
(4.6) FORM OF SENIOR SUBORDINATED NOTE B
Incorporated by reference to the Company'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 Company'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 Company'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 Company'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
Company's Form 10-Q for the 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 Company'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 Company's Form
10-Q for the quarter ending June 30, 1990, Item 6.
31
<PAGE>
(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 Company'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 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. Incorporated by
reference to the company's Form 10-K dated
December 31, 1995.
(10.15) 1996 INCENTIVE STOCK PLAN OF VESTRO NATURAL
32
<PAGE>
FOODS INC. DATED JUNE 20, 1996.
Incorporated by reference to the Company's
Information Statement dated May 15, 1996.
(11) Computation of Earnings per Share.
(22) Subsidiaries of the Company.
(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.
33
<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, 1997 By:/s/ B. Allen Lay
-------------- ---------------------------
B. Allen Lay
Principal Executive Officer
and Director
Dated:March 28, 1997 By:/s/ Stephen Schorr
-------------- ---------------------------
Stephen Schorr
Vice President Finance
34
<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, 1997 By:/s/ Stephen Monticelli
---------------------------
Stephen Monticelli
Dated: March 28, 1997 By:/s/ Jay J. Miller
---------------------------
Jay J. Miller
Dated: March 28, 1997 By:/s/ Henry W. Poett III
---------------------------
Henry W. Poett III
Dated: March 28, 1997 By:/s/ Donald R. Stroben
---------------------------
Donald R. Stroben
35
<PAGE>
EXHIBIT INDEX
Exhibit Description Page No.
- ------- ----------------------------------------- ---------------
11 Computation of Earnings per Share 37
22 Subsidiaries of the Registrant 38
36
<PAGE>
EXHIBIT 11
VESTRO NATURAL FOODS INC.
Computation of Earnings Per Common Share
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Primary earnings:
Net income $1,203,000 $ 602,000 $ 538,000
Weighted average number of
common shares outstanding 5,950,588 5,950,588 6,088,600
Effect of common stock
equivalents 324,537 116,788 171,530
---------- ---------- ----------
Weighted average common
shares outstanding
as adjusted (a) 6,275,125 6,067,376 6,260,130
---------- ---------- ----------
Primary earnings per common
share $ .19 $ .10 $ .09
Assuming full dilution:
Net income $1,203,000 $ 602,000 $ 538,000
Weighted average number of
common shares outstanding 5,950,588 5,950,588 6,088,600
Effect of common stock
equivalents 330,245 117,912 171,530
---------- ---------- ----------
Weighted average common
shares outstanding as
adjusted (a) 6,280,833 6,068,500 6,260,130
---------- ---------- ----------
Earnings per common
share assuming full
dilution $ .19 $ .10 $ .09
</TABLE>
(a) Taking into effect the one for ten reverse stock split.
37
<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%
38
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,000
<SECURITIES> 0
<RECEIVABLES> 2,157,000
<ALLOWANCES> 52,000
<INVENTORY> 3,779,000
<CURRENT-ASSETS> 6,517,000
<PP&E> 683,000
<DEPRECIATION> 514,000
<TOTAL-ASSETS> 13,775,000
<CURRENT-LIABILITIES> 3,348,000
<BONDS> 0
0
0
<COMMON> 16,818,000
<OTHER-SE> (8,304,000)
<TOTAL-LIABILITY-AND-EQUITY> 13,775,000
<SALES> 32,583,000
<TOTAL-REVENUES> 32,583,000
<CGS> 20,143,000
<TOTAL-COSTS> 10,822,000
<OTHER-EXPENSES> (9,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 266,000
<INCOME-PRETAX> 1,361,000
<INCOME-TAX> 158,000
<INCOME-CONTINUING> 1,203,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,203,000
<EPS-PRIMARY> .19
<EPS-DILUTED> .19
</TABLE>
