================================================================================
U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 For the quarterly period ended December 31, 1999
[ ] Transition report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the transition period from ____________ to ____________
Commission file number: 33-93982-LA
Annie's Homegrown, Inc.
- --------------------------------------------------------------------------------
(Exact Name of Small Business Issuer as Specified in Its Charter)
Delaware 06-1258214
-------- ----------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
395 Main Street
Wakefield, MA 01880
----------------------------------------------------
(Address of Principal Executive Offices)
781-224-1172
--------------------------------------------------------
(Issuer's Telephone Number, Including Area Code)
NONE
- --------------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
--- ---
As of February 11, 2000, there were outstanding 4,709,768 shares of the issuer's
Common Stock, $.001 par value and 1,000,000 shares of the issuer's Preferred
Stock, $2.00 par value.
Transitional Small Business Disclosure Format (check one): Yes No X
--- ---
================================================================================
<PAGE>
ANNIE'S HOMEGROWN, INC.
INDEX
Page No.
--------
Part I. Financial Information
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Consolidated Balance Sheet as of
December 31, 1999 (unaudited) 3
Consolidated Statements of Operations for the Three and
Nine Months Ended December 31, 1998 and 1999 (unaudited) 4
Consolidated Statements of Cash Flows for the
Nine Months Ended December 31, 1998 and 1999 (unaudited) 5
Notes to Consolidated Financial Statements (unaudited) 6-9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION 9-13
Part II Other Information
ITEM 2. CHANGES IN SECURITIES 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 14-15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 15
Signatures 15
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
ANNIE'S HOMEGROWN, INC.
Consolidated Balance Sheet
Unaudited
December 31, 1999
-----------------
Assets
Current assets
Cash and cash equivalents $ 1,162,607
Accounts receivable 159,020
Inventory 1,312,248
Other current assets 4,000
-----------
Total current assets 2,637,875
Office equipment 197,416
Accumulated depreciation (108,464)
Office equipment, net 88,952
Goodwill, net of amortization 287,142
Note receivable, net of deferred gain --
Other assets 179,121
-----------
Total assets $ 3,193,090
===========
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable, trade $ 679,140
Advances from distributor 681,371
Accrued expenses 118,067
-----------
Total current liabilities 1,478,578
Commitments
Stockholders' equity
Series A convertible preferred stock, $2.00 par value
Authorized 1,000,000 shares
issued and outstanding 1,000,000 shares 2,000,000
Common stock, $.001 par value
Authorized 10,000,000 shares
issued 4,881,674 shares 4,882
Additional paid in capital 2,404,351
Accumulated deficit (2,045,635)
Notes receivable stockholders (449,086)
Treasury stock, 171,906 common shares at cost (200,000)
-----------
Total stockholders' equity 1,714,512
-----------
Total liabilities and stockholders' equity $ 3,193,090
===========
3
<PAGE>
ANNIE'S HOMEGROWN, INC.
Consolidated Statements of Operations
Unaudited
<TABLE>
<CAPTION>
Three months ended Nine months ended
December 31 December 31
----------------------------- -----------------------------
1998 1999 1998 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 2,291,719 $ 2,021,968 $ 5,488,844 $ 6,935,103
Cost of sales 1,299,578 1,083,019 3,139,103 3,809,509
----------- ----------- ----------- -----------
Gross profit 992,141 938,949 2,349,741 3,125,594
Operating expenses:
Selling 642,007 533,507 1,646,541 1,943,547
General and administrative 495,234 247,252 1,177,697 917,834
Stock compensation to directors
and employees 21,000 19,900 21,000 29,900
Slotting fees 27,395 27,166 90,710 83,107
----------- ----------- ----------- -----------
Total operating expenses 1,185,636 827,825 2,935,948 2,974,388
----------- ----------- ----------- -----------
Operating income (loss) (193,495) 111,124 (586,207) 151,206
Other income (loss)
Interest expense and other charges (44,458) (81,683) (112,292) (197,810)
Gain on sale of Raw Materials Food Co. -- -- -- 62,121
Interest and other income 6,343 32,695 10,631 44,692
----------- ----------- ----------- -----------
Income (loss) before income tax (231,610) 62,136 (687,868) 60,209
Income tax expense -- -- 1,097 --
----------- ----------- ----------- -----------
Net income (loss) $ (231,610) $ 62,136 $ (688,965) $ 60,209
=========== =========== =========== ===========
Weighted average common
shares outstanding (in 000's):
Basic 4,540 4,710 4,546 4,717
Diluted 4,540 5,720 4,546 5,727
Net income (loss) per share:
Basic (.05) .01 (.15) .01
Diluted (.05) .01 (.15) .01
</TABLE>
4
<PAGE>
ANNIE'S HOMEGROWN, INC.
Consolidated Statements of Cash Flows
Unaudited
<TABLE>
<CAPTION>
Nine months ended
December 31,
---------------------------------
1998 1999
----------- -----------
Cash flows from operating activities:
<S> <C> <C>
Net income (loss) $ (688,965) $ 60,209
Adjustments to reconcile net income (loss) to net
cash (used in) provided by operating activities:
Depreciation and amortization 28,502 39,500
Stock compensation to directors
and employees -- 29,900
Gain on sale of Raw Materials Food Co. -- (62,121)
Changes in
Accounts receivable, trade (33,001) (93,739)
Affiliate accounts, net 29,757 24,759
Inventory (509,566) 216,568
Other assets 64,740 4,548
Accounts payable, trade 565,798 (52,960)
Accrued expenses (20,727) 31,724
Advances from distributor 203,277 (47,024)
Due to employees (16,558) (5,110)
----------- -----------
Net cash (used in) provided by
operating activities (376,743) 146,254
Cash flows from investing activities:
Acquisition of Tamarind Tree brand (332,572) (23,624)
Purchases of equipment (53,684) (18,709)
----------- -----------
Net cash (used in) investing activities (386,256) (42,333)
Cash flows from financing activities:
Net proceeds from issuance of preferred stock -- 1,850,330
Purchase of treasury stock (35,000) --
Net borrowings (payments) on line of credit 324,688 (628,269)
Borrowing on term loan 300,000 --
Payments on term loan (45,000) (210,000)
----------- -----------
Net cash (used in) provided by
financing activities 544,688 1,012,061
----------- -----------
Net (decrease) increase in cash and cash equivalents (218,311) 1,115,982
Cash and cash equivalents, beginning of period 249,669 46,625
----------- -----------
Cash and cash equivalents, end of period $ 31,358 $ 1,162,607
=========== ===========
Supplemental disclosure of cash flow information
Cash paid for interest $ 112,292 $ 205,542
=========== ===========
Cash paid for income taxes $ 1,097 $ --
=========== ===========
</TABLE>
5
<PAGE>
ANNIE'S HOMEGROWN, INC. NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1--BASIS OF PRESENTATION:
In the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments (which include only normal recurring
adjustments) necessary to present fairly the Company's financial position at
December 31, 1999, its results of operations for the three and nine month
periods ended December 31, 1998 and 1999, and its cash flows for the nine month
periods ended December 31, 1998 and 1999. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
from the accompanying consolidated financial statements. For further
information, reference should be made to the consolidated financial statements
and notes thereto included in the Company's Annual Report on Form 10-KSB for the
fiscal year ended March 31, 1999, on file with the Securities and Exchange
Commission.
NOTE 2-- Supplemental disclosure of noncash activities are as follows:
As of June 30, 1999, the Company consummated an agreement with one of the
founders of Raw Materials Food Company ("RMFC") to sell back to that founder all
of the common stock of RMFC. In payment for the common stock, the founder
returned to the Company 30,000 shares of the Company's Common Stock issued to
him as consideration for the original acquisition of RMFC and a note in the
amount of $77,000. The note bears interest at 5.79% per annum and the repayment
terms are tied to the cash flows of Raw Materials Food Company.
The Company has recognized a gain of $62,121 on the aforementioned sale of the
common stock of RMFC, which represents the amount by which the fair value of the
30,000 shares of Annie's Homegrown, Inc. exceeds the net assets sold. The
Company deferred any gain recognition relating to the $77,000 note receivable
from RMFC until such time as cash flows from RMFC's operating activities are
sufficient to fund the repayment of the note. For the nine months ended December
31, 1999, the Company recognized $10,030 in other income relating to cash
repayments on the note receivable.
NOTE 3 - EARNINGS PER SHARE RECONCILIATION
The reconciliation of the numerators and denominators of the basic and diluted
income/(loss) per common share of the Company's reported net income/(loss) is as
follows (in thousands except per share data):
<TABLE>
<CAPTION>
Three Months Ended Dec. 31, 1998 Net Loss Weighted Average Shares Per Share Data
- --------------------------------
<S> <C> <C> <C>
Basic loss per common share $(232) 4,540 $(.05)
Stock options --- --- ---
Diluted loss per common share $(232) 4,540* $(.05)
</TABLE>
*For the quarter ended December 31, 1998, stock options for shares of common
stock totaling 120 thousand were outstanding but were not included in the
calculation of diluted loss per common share because the effect was
anti-dilutive.
<TABLE>
<CAPTION>
Three Months Ended Dec. 31, 1999 Net Income Weighted Average Shares Per Share Data
- --------------------------------
<S> <C> <C> <C>
Basic income per common share $ 62 4,710 $ .01
Conversion of Preferred Stock --- 1,000 ---
Stock options --- 10 ---
Diluted income per common share $ 62 5,720* $ .01
</TABLE>
6
<PAGE>
*For the quarter ended December 31, 1999, stock options for shares of common
stock totaling 80 thousand were outstanding but were not included in the
calculation of diluted income per common share because the effect was
anti-dilutive.
<TABLE>
<CAPTION>
Nine Months Ended Dec. 31, 1998 Net Loss Weighted Average Shares Per Share Data
- -------------------------------
<S> <C> <C> <C>
Basic loss per common share $(689) 4,546 $(.15)
Stock options --- --- ---
Diluted loss per common share $(689) 4,546* $(.15)
</TABLE>
*For the nine months ended December 31, 1998, stock options for shares of common
stock totaling 120 thousand were outstanding but were not included in the
calculation of diluted loss per common share because the effect was
anti-dilutive.
<TABLE>
<CAPTION>
Nine Months Ended Dec. 31, 1999 Net Income Weighted Average Shares Per Share Data
- -------------------------------
<S> <C> <C> <C>
Basic income per common share $ 60 4,717 $.01
Conversion of Preferred Stock --- 1,000 ---
Stock options --- 10 ---
Diluted income per common share $ 60 5,727* $.01
</TABLE>
*For the nine months ended December 31, 1999, stock options for shares of common
stock totaling 80 thousand were outstanding but were not included in the
calculation of diluted income per common share because the effect was
anti-dilutive.
NOTE 4 - TAMARIND TREE ACQUISITION
On August 27, 1998, the Company acquired certain assets of The Tamarind Tree
Ltd. ("Tamarind Tree"). Tamarind Tree produced and marketed an ethnic line of
heat and serve vegetarian food entrees. The assets acquired consisted of the
Tamarind Tree brand, including the registered trademark, "The Taste of India,"
intellectual property relating to the brand and other tangible and intangible
assets that were used in Tamarind Tree's business.
The purchase price was comprised of cash in the amount of $200,000, an advance
against royalties in the amount of $75,000, future royalties and overrides and
paid acquisition costs. The royalties are payable by the Company to Tamarind
Tree for five years at the rate of 6% annually on "adjusted net sales."
Additionally, overrides are payable by the Company to Tamarind Tree for five
years at the rate of 2% of all sales of certain products and sales in excess of
a certain minimum amount of other products. The royalty payments will be
accounted for as additional consideration for the purchase of the assets and
will be recorded as additional goodwill as the future royalties are earned.
The Company financed the acquisition of Tamarind Tree by entering into a
$300,000 term loan with Fremont Financial Corporation. The interest rate on the
loan was prime rate plus 3% and called for 20 monthly principal payments of
$15,000 commencing October 1, 1998. The loan was secured by all of the assets of
the Company including a security interest in the Tamarind Tree Brand as well as
guaranteed by the two largest stockholders of the Company. At December 31, 1999,
the note has been fully repaid as a result of the Homegrown Holdings Corp.
transaction (See note 7).
The operating results of Tamarind Tree have been included in the consolidated
statements of operations from the date of acquisition. Proforma combined results
of operations of the Company and Tamarind Tree on the basis that the acquisition
had taken place on April 1, 1997 are not presented since the effects are not
material.
7
<PAGE>
NOTE 5 - LINE OF CREDIT
On August 27, 1998, the Company signed an amendment to its Line of Credit
agreement with Fremont Financial Corporation increasing its line of credit from
$600,000 to $900,000. Amounts available under this agreement are either 75% or
90% of certain categories of the Company's accounts receivable and 50% of a
certain category of inventory. The Line of Credit was secured by all the assets
of the Company as well as guaranteed by the two largest stockholders of the
Company. At December 31, 1999 the line of credit has been fully repaid and the
agreement was terminated as a result of the Homegrown Holdings Corp. transaction
(See note 7).
NOTE 6 - COST REDUCTION
In July 1999, the Company's Board of Directors approved a cost reduction plan,
which is expected to eliminate approximately $300,000 in expenses for the fiscal
year ended March 31, 2000. The plan called for a reduction in personnel, some of
which took place in the quarter ending June 30, 1999 with the balance completed
in July 1999. Severance accruals associated with the personnel cuts totaled
$61,682. The plan also called for a consolidation of the Company's operations
into its Wakefield, Massachusetts office. This consolidation was completed in
June 1999. In July 1999, the Company and Liberty Richter, Inc. modified the
master distribution agreement to permit the Company to sell its products
directly to supermarket chains that do not buy through distributors in the New
England and West Coast regions.
NOTE 7 - Homegrown Holdings Corp. Transaction
On November 30, 1999, pursuant to a Special Meeting of its Stockholders, Annie's
Homegrown, Inc. amended its Certificate of Incorporation to authorize one
million shares of Preferred Stock, par value $2.00 ("Preferred Stock").
On December 2, 1999, Homegrown Holdings Corp., a Delaware corporation that was
previously unaffiliated with the Company ("Homegrown Holdings"), purchased one
million shares of Series A Convertible Preferred Stock for $2 million. The
Series A Convertible Preferred Stock, in the aggregate, has voting rights
equivalent to one million shares of Common Stock. The Series A Convertible
Preferred Stock carries the rights to be converted into an equal number of
shares of Common Stock and participates in dividends at the same rate as the
Common Stock. In the event of a liquidation, the Series A Convertible Preferred
Stock has the liquidation preference of par value plus 10% per annum. Certain
mergers, consolidations and sales of assets are treated as liquidations.
In connection with the Purchase Agreement, the Company also executed a $1
million five-year promissory note in favor of Homegrown Holdings, with interest
at the rate of 9% per annum, and provided a five-year warrant to purchase
1,500,000 shares of the Company's Common Stock with an exercise price ranging
from $2.00 per share to $4.00 per share, varying over time and subject to a $.50
per share reduction if the Company's financial performance for the year ending
March 31, 2000 does not meet specified criteria. The promissory note will be
subordinated to any bank debt or institutional lenders that may now or hereafter
exist. The warrant was independently valued at $372,000. Total costs incurred by
the Company for this transaction were approximately $197,000. The costs were
allocated between the debt and equity based on their respective fair values. The
promissory note and the warrant are currently being held in escrow pursuant to
an Escrow Agreement pending the Company's receipt of the loan proceeds from
Homegrown Holdings.
In a related transaction, Homegrown Holdings entered into certain agreements,
also dated December 2, 1999 (the "Stock Collar Agreements"), with the Company's
co-founders, Mr. Andrew Martin and Ms. Ann Withey, which provided a stock collar
in favor of Homegrown Holdings on certain of Mr. Martin's and Ms. Withey's
shares of Common Stock of the Company. Specifically, Mr. Martin subjected all of
his shares of Common Stock to his Stock Collar Agreement. In connection with his
Stock Collar Agreement, Mr. Martin executed an Irrevocable Proxy, dated December
2, 1999, in favor of Homegrown Holdings to vote all of his shares of Common
Stock. Ms. Withey subjected 900,000 of her shares of Common Stock to the Stock
Collar Agreement and executed an Irrevocable Proxy, dated December 2, 1999, in
favor of Homegrown Holdings with respect to 852,903 of her shares. As a result
of these transactions, Homegrown Holdings currently has the right to vote
approximately 75% of the Company's outstanding shares.
8
<PAGE>
Mr. Martin and Ms. Deborah Churchill Luster resigned from the Board of Directors
effective as of December 2, 1999. Ms. Withey remains on the Board of Directors.
As part of an agreement with Mr. Martin regarding the termination of his
employment with the Company, Mr. Martin executed a Separation Agreement with the
Company, dated December 2, 1999, providing for severance payments to him in
consideration for a full release of any claims that he may have had against the
Company. In connection with his Separation Agreement, Mr. Martin also
rescheduled his debt to the Company arising out of certain advances and loans
previously made to him by the Company. Mr. Martin's rescheduled obligations are
evidenced by an Omnibus Secured Promissory Note in the principal amount of
$274,630, dated December 2, 1999, which calls for interest at the rate of 9% per
annum. The Omnibus Secured Promissory Note is secured by Mr. Martin's right to
payment under his Stock Collar Agreement with Homegrown Holdings.
Effective as of December 2, 1999, Mr. Paul Nardone was appointed the Company's
Chief Executive Officer to replace Mr. Martin.
Ms. Luster also executed a Separation Agreement with the Company, dated December
2, 1999. The Separation Agreement provided for severance payments to her as a
result of termination of her employment with the Company, in consideration for a
release of any claims that she may have had against the Company. In connection
with her Separation Agreement, Ms. Luster also rescheduled her debt to the
Company, originally incurred as a result of certain loans previously made to her
by the Company. Ms. Luster's rescheduled obligations are evidenced by an Omnibus
Secured Promissory Note in the amount of $87,794, dated December 2, 1999,
bearing interest at the rate of 9% per annum and secured by her shares of the
Company's Common Stock.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS.
OVERVIEW
Annie's Homegrown, Inc. sells premium totally natural products to the natural
food, specialty food and supermarket trades. The pasta products include ten
macaroni and cheese dinners under the Annie's brand name, four canned pasta
meals, and five Annie's Pasta Meals that combine different pasta shapes with
five sauce recipes. The Company, from its Tamarind Tree acquisition, sells eight
different heat and serve vegetarian food entrees in the Indian cuisine
tradition. The Company also has an agreement with a specialty retailer to
provide a private label house brand using the Company's all natural white
cheddar cheese formula together with elbow macaroni.
Most of the Company's products are distributed in the continental United States
by Liberty Richter, Inc. ("Liberty"). Pursuant to a master distribution
agreement, the Company sells its products to Liberty who in turn resells the
products to natural and specialty food stores and supermarket chains via
distributors. In July 1999, the Company and Liberty modified the agreement to
permit the Company to sell its products directly to supermarket chains that do
not buy through distributors in the New England and West Coast regions.
FORWARD LOOKING STATEMENTS
From time to time, information provided by the Company, statements made by its
employees or information included in its filings with the Securities and
Exchange Commission (including this Form 10-QSB) may contain statements which
are not historical facts, so called "forward looking statements", which involve
risks and uncertainties. Forward looking statements are made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
When used in this Form 10-QSB, the terms "anticipates", "expects", "estimates",
"believes" and other similar terms as they relate to the Company or its
management are intended to identify such forward looking statements. In
particular, statements made in Item 2., Management's Discussion and Analysis,
relating to the sufficiency of funds for the Company's working capital
requirements during 2000 and the
9
<PAGE>
Company's expectation that future cash flow will continue to be provided from
operations are forward looking statements. The Company's actual future results
may differ significantly from those stated in any forward looking statements.
Factors that may cause such differences include, but are not limited to: (i)
competitive factors in the market place; (ii) reliance on the Company's master
distributor agreement with Liberty and relative mix of sales through
distributors and direct to supermarkets; (iii) fluctuation in quarterly and
annual operating results due to seasonality (e.g. macaroni and cheese is
consumed mostly during colder months of the year) and based on the Company's
promotional schedule; (iv) dependence on key personnel; (v) availability and
cost of capital; (vi) consumers' tastes and preferences on current products as
well as acceptance of new product introductions; and (vii) general economic
conditions, among others. These factors, and others, are discussed from time to
time in the Company's filings with the Securities and Exchange Commission
including the Company's annual report on Form 10-KSB for the year ended March
31, 1999.
RESULTS OF OPERATIONS
NINE MONTHS ENDED DECEMBER 31, 1998 COMPARED TO NINE MONTHS ENDED DECEMBER 31,
1999
NET SALES. Net sales increased by $1,446,259 or 26.35% from $5,488,844 in 1998
to $6,935,103 in 1999. The net sales increase was the result of increases in
continuing product sales (17.94%), Tamarind Tree sales (8.36%) and new products
(0.05%).
GROSS PROFIT. As a percentage of net sales, gross profit increased from 42.81%
in 1998 to 45.07% in 1999. This increase was a result of the product mix as well
as lower raw material costs.
SELLING EXPENSES. Selling expenses increased by $297,006 or 18.04% from
$1,646,541 in 1998 to $1,943,547 in 1999 but decreased as a percentage of net
sales from 30.00% in 1998 to 28.02% in 1999. The decrease in selling expenses as
a percentage of net sales reflected fewer promotions on continuing product sales
and fewer new product introductions.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
decreased by $259,863 or 22.07% from $1,177,697 in 1998 to $917,834 in 1999 and
decreased as a percentage of net sales from 21.46% in 1998 to 13.23% in 1999.
The decrease in general and administrative expenses is a result of the cost
reductions approved by the Board of Directors, a reduction in professional fees
relating to having an investment banker in 1998 but not in 1999 offset by
severance payments ($61,682). Specifically, the cost reduction plan reduced
expenses including: personnel and related benefits, consultants, office
expenses, postage, rent, and telephone expense.
SLOTTING FEES. Slotting expenses decreased by $7,603 or 8.38% from $90,710 in
1998 to $83,107 in 1999, and decreased as a percentage of net sales from 1.65%
in 1998 to 1.20% in 1999. According to the Company's plan, a modest amount of
slotting fees was spent to expand the Company's distribution into new markets.
These slotting fees are required by most supermarkets and are expensed at the
time of product introduction.
STOCK COMPENSATION TO DIRECTORS AND EMPLOYEES. Stock compensation to directors
and employees increased by $8,900 from $21,000 in 1998 to $29,900 and increased
as a percentage of sales from 0.38% in 1998 to 0.43% in 1999. The increase was a
result of issuing non qualified options to two employees in 1999.
INTEREST EXPENSE AND OTHER CHARGES. Interest expense and other charges increased
by $85,518 from $112,292 in 1998 to $197,810 in 1999 and increased as a
percentage of sales from 2.05% in 1998 to 2.85% in 1999. The increase in
interest expense and other charges is the result of higher borrowings under the
Line of Credit from a financial institution as well as borrowings from the term
loan entered into during August 1998.
INTEREST AND OTHER INCOME. Interest and other income increased by $34,061from
$10,631 in 1998 to $44,692 in 1999 and increased as a percentage of sales from
0.19% in 1998 to 0.64% in 1999.The increase was a result of recognizing interest
income on notes receivable from stockholders and recognizing income relating to
cash repayments on the RMFC note receivable.
10
<PAGE>
THREE MONTHS ENDED DECEMBER 31, 1998 COMPARED TO THREE MONTHS ENDED DECEMBER 31,
1999
NET SALES. Net sales decreased by $269,751 or 11.77% from $2,291,719 in 1998 to
$2,021,968 in 1999. The net sales decrease was the result of running a fall
promotion in 1998. No corresponding promotion was run in 1999.
GROSS PROFIT. As a percentage of net sales, gross profit increased from 43.29%
in 1998 to 46.44% in 1999. This increase was a result of the product mix as well
as lower raw material costs.
SELLING EXPENSES. Selling expenses decreased by $108,500 or 16.9% from $642,007
in 1998 to $533,507 in 1999 and decreased as a percentage of net sales from
28.01% in 1998 to 26.39% in 1999. The selling expense decrease was the result of
running a fall promotion in 1998. No corresponding promotion was run in 1999.The
decrease in selling expenses as a percentage of net sales also reflected fewer
promotions on continuing product sales and fewer new product introductions.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
decreased by $247,982 or 50.07% from $495,234 in 1998 to $247,252 in 1999 and
decreased as a percentage of net sales from 21.61% in 1998 to 12.23% in 1999.
The decrease in general and administrative expenses is a result of the cost
reductions approved by the Board of Directors, a reduction in professional fees
relating to having an investment banker in 1998 but not in 1999. Specifically,
the cost reduction plan reduced expenses including: personnel and related
benefits, consultants, office expenses, postage, rent, and telephone expense.
SLOTTING FEES. Slotting expenses decreased by $229 or 0.84% from $27,395 in 1998
to $27,166 in 1999, and increased as a percentage of net sales from 1.20% in
1998 to 1.34% in 1999. According to the Company's plan, a modest amount of
slotting fees was spent to expand the Company's distribution into new markets.
These slotting fees are required by most supermarkets and are expensed at the
time of product introduction.
STOCK COMPENSATION TO DIRECTORS AND EMPLOYEES. Stock compensation to directors
and employees decreased by $1,100 from $21,000 in 1998 to $19,900 and increased
as a percentage of sales from 0.92% in 1998 to 0.98% in 1999. The decrease was a
result of not compensating the directors in 1999 offset by issuing non qualified
options to two employees in 1999.
INTEREST EXPENSE AND OTHER CHARGES. Interest expense and other charges increased
by $37,225 from $44,458 in 1998 to $81,683 in 1999 and increased as a percentage
of sales from 1.94% in 1998 to 4.04% in 1999. The increase in interest expense
and other charges is the result of higher borrowings under the Line of Credit
from a financial institution.
INTEREST AND OTHER INCOME. Interest and other income increased by $26,352 from
$6,343 in 1998 to $32,695 in 1999 and increased as a percentage of sales from
0.28% in 1998 to 1.62% in 1999.The increase was a result of recognizing interest
income on notes receivable from stockholders and recognizing income relating to
cash repayments on the RMFC note receivable.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations to date through a public offering of
Common Stock, private sale of equity and convertible debt securities, a line of
credit and term loan from a financial institution and cash generated from
operations. At December 31, 1999, the Company had a working capital surplus of
$1,159,297, which is an increase of $1,764,867 from a working capital deficit of
$605,570 at March 31, 1999. The increase in the working capital was attributable
to the sale of Preferred Stock to Homegrown Holdings Corp. as described below.
Most of the Company's sales are made to Liberty under contract terms allowing
certain rights of return on unsold product held by Liberty. That contract calls
for Liberty to pay the Company based on terms relating to the receipt of the
Company's products by Liberty. The Company defers recognition of such sales
until the product is sold by Liberty to distributors. As a result, if Liberty
pays the Company before Liberty sells the products to a third party, the Company
accounts for such amount as an advance from Liberty. If Liberty sells the
products to a third party before it pays the Company, the Company accounts for
such amount as a receivable from Liberty.
11
<PAGE>
Net cash provided by operating activities for the nine months ended December 31,
1999 was $146,254 resulting primarily from net income and a decrease in
inventory offset by an increase in accounts receivable, a decrease in accounts
payable and a decrease in advances from distributor.
Net cash used in investing activities consisted of capital expenditures totaling
$42,333, which related to additional purchase price in the form of the ongoing
royalty in connection with the purchase of the Tamarind Tree brand and the
purchase of plates and dies for the new products and the purchase of office
equipment.
The Company negotiated a line of credit with a financial institution for
$600,000, which closed on February 3, 1998 ("Line of Credit"). The Line of
Credit was for a term of two years and was secured by all of the assets of the
Company and guaranteed by the two largest stockholders of the Company. In August
1998, the Company increased the Line of Credit to $900,000 and signed a Term
Loan for an additional $300,000 to purchase the Tamarind Tree brand. At December
31, 1999, the Company had fully paid the line of credit and the term loan and
terminated its relationship with the financial institution. The Company is
currently in the process of securing a new line of credit with its bank.
On December 2, 1999, Homegrown Holdings Corp., a Delaware corporation that was
previously unaffiliated with the Company ("Homegrown Holdings"), purchased one
million shares of Series A Convertible Preferred Stock for $2 million. The
Series A Convertible Preferred Stock, in the aggregate, has voting rights
equivalent to one million shares of Common Stock. The Series A Convertible
Preferred Stock carries the rights to be converted into an equal number of
shares of Common Stock and participates in dividends at the same rate as the
Common Stock.
In connection with this transaction, the Company also executed a $1 million
five-year promissory note in favor of Homegrown Holdings, with interest at the
rate of 9% per annum, and provided a five-year warrant to purchase 1,500,000
shares of the Company's Common Stock with an exercise price ranging from $2.00
per share to $4.00 per share, varying over time and subject to a $.50 per share
reduction if the Company's financial performance for the year ended March 31,
2000 does not meet specified criteria. The promissory note will be subordinated
to any bank debt or institutional lenders that may now or hereafter exist. The
warrant was independently valued at $372,000. Total costs incurred by the
Company for this transaction were approximately $197,000. The costs were
allocated between the debt and equity based on their respective values. The
promissory note and the warrant are currently being held in escrow pursuant to
an Escrow Agreement pending the Company's receipt of the loan proceeds from
Homegrown Holdings.
The Company's strategy is to continue to expand its supermarket distribution
nationally in addition to developing new and unique all natural and organic food
products to sell to its existing customer base.
The Company anticipates that the funds available from the sale of Preferred
Stock, the Term Loan from Homegrown Holdings Corp. together with funds generated
from operations, will be sufficient to meet its liquidity needs for the next
twelve months. However, the Company could need additional capital in the future
and a new line of credit to fully implement its aforementioned business
strategy. If such capital is unavailable either because of general market
conditions or the results of the Company's operations, the Company will have to
continue to scale back either its investments in new products, or its national
supermarket expansion, or both.
As of June 30, 1999, the Company consummated an agreement with one of the
founders of Raw Materials Food Company ("RMFC") to sell back to that founder all
of the common stock of RMFC. In payment for the common stock, the founder
returned to the Company 30,000 shares of the Company's common stock issued to
him as consideration for the original acquisition of RMFC and a note in the
amount of $77,000.
The Company has recognized a gain of $62,121 on the aforementioned sale of the
common stock that represents the amount by which the fair value of the 30,000
shares of Annie's Homegrown, Inc. exceeds the net assets sold. The Company has
deferred any gain recognition relating to the $77,000 note receivable from RMFC
until such time as cash flows from RMFC's operating activities are sufficient to
fund the repayment of the note. For the nine months ended December 31, 1999, the
Company recognized $10,030 in other income relating to cash repayments on the
note receivable.
12
<PAGE>
In July 1999, the Company's Board of Directors approved a cost reduction plan,
which is expected to eliminate approximately $300,000 in expenses for the fiscal
year ended March 31, 2000. The plan called for a reduction in personnel, some of
which took place in the quarter ending June 30, 1999 with balance completed in
July 1999. Severance payments associated with the personnel cuts totaled
$61,682. The plan also called for a consolidation of the Company's operations
into its Wakefield, Massachusetts office. This consolidation was completed in
June 1999. In July 1999, the Company and Liberty modified the master
distribution agreement to permit the Company to sell its products directly to
supermarket chains that do not buy through distributors in the New England and
West Coast regions.
YEAR 2000 COMPLIANCE
Management is aware of the potential software anomalies associated with the year
2000 date change. The Company has evaluated the potential issues that need to be
addressed in connection with its operations. An inventory of the Company's
computer systems and software has been made and assessment and testing of the
systems and software is completed. The Company is not aware at this time of any
significant year 2000 issues in its own systems. The Company contacted Liberty,
the Company's master distributor, to ensure that Liberty hasd appropriate plans
in place to properly address the year 2000 issue. Liberty informed the Company
that its systems are year 2000 compliant. The Company also contacted its
principal suppliers to assess their year 2000 compliance. Based on the results
of these communications, the Company decided not to seek alternative suppliers.
Costs of addressing the year 2000 issue are not expected to have a material
effect upon the Company's financial position, results of operations, or cash
flows in future periods. The Company believes it has adequate plans in place to
address the year 2000 issue. However, there can be no assurance that the systems
of other companies, on which the Company's systems and operations rely, will be
converted on a timely basis and will not have a material effect on the Company,
nor can there be an assurance that the Company will not encounter a material
disruption as a result of the year 2000 problem.
As of the date of this filing, the Company has not experienced any significant
year 2000 problems with its internal systems or equipment, nor has the Company
detected any year 2000 problems affecting its customers or suppliers.
OTHER MATTERS
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5 (SOP 98-5), "Reporting on the Costs of Start-Up
Activities". The statement is effective for fiscal years beginning after
December 15, 1998. The statement requires costs of start-up activities and
organization costs to be expensed as incurred. The Company adopted SOP 98-5
effective April 1, 1999. The adoption of SOP 98-5 had no impact on the
consolidated financial statements.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities" (SFAS 133). The
statement requires companies to recognize all derivatives as either assets or
liabilities with the instruments measured at fair value. The accounting for
changes in fair value gains and losses depends on the intended use of the
derivative and its resulting designation. The statement is effective for all
fiscal quarters of fiscal years beginning after June 15, 2000. The Company will
adopt SFAS 133 by April 1, 2001. Adoption of SFAS 133 is not expected to have a
material impact on the consolidated financial statements.
13
<PAGE>
PART II
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES.
(b) The Company amended its Certificate of Incorporation on November 30, 1999
to authorize 1,000,000 shares of Preferred Stock, $2.00 par value. In
connection with the Homegrown Holdings transaction, the Company designated
and issued to Homegrown Holdings 1,000,000 shares of Series A Convertible
Preferred Stock. The Series A Convertible Preferred Stock has the same
voting rights as Common Stock, is convertible into an equal number of
shares of Common Stock, participates in dividends at the same rate as
Common Stock, and has a liquidation preference over the Common Stock of par
value plus 10% per annum. Certain mergers, consolidations and sales of
assets are treated as liquidations.
(c) On December 2, 1999, the Company sold 1,000,000 shares of Series A
Convertible Preferred Stock, $2.00 par value, to Homegrown Holdings for $2
million. The Series A Convertible Preferred Stock has the rights described
in paragraph (b) above. The Company also executed a $1 million five-year
subordinated promissory note in favor of Homegrown Holdings and a five-year
warrant to purchase 1,500,000 shares of the Company's Common Stock with an
exercise price ranging from $2.00 per share to $4.00 per share, varying
over time and subject to a $.50 per share reduction if the Company's
financial performance for the year ending March 31, 2000 does not meet
specified criteria. The promissory note and the warrant are being held in
escrow pursuant to an Escrow Agreement pending the Company's receipt of the
loan proceeds from Homegrown Holdings. The Company relied upon Rule 506 of
Regulation D promulgated under the Securities Act of 1933 in connection
with this sale of securities.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(a) The Company held a Special Meeting in Lieu of an Annual Meeting of
Stockholders on November 30, 1999.
(b) The following directors were elected at the meeting: Ann E. Withey, Andrew
M. Martin, Deborah Churchill Luster, Paul Nardone and Ronald L. Cheney.
(c) The following matters were voted upon at the Special Meeting:
1. Election of Directors
---------------------
NOMINEE VOTES FOR VOTES WITHHELD
Ann E. Withey 4,206,001 6,701
Andrew M. Martin 3,943,384 269,318
Deborah Churchill Luster 4,108,758 103,944
Paul Nardone 4,205,586 7,116
Ronald L. Cheney 4,205,701 7,001
2. Ratification of the Selection of KPMG LLP as Auditors for the Fiscal
--------------------------------------------------------------------
Year Ending March 31, 2000
--------------------------
Votes For Votes Against Abstentions
4,209,097 1,166 2,439
3. Approval of the Company's 1999 Omnibus Stock Option Plan
--------------------------------------------------------
Votes For Votes Against Abstentions Broker Non-Votes
4,154,387 49,585 5,580 3,150
14
<PAGE>
4. Approval of the Company's 1999 Non-Employee Directors' Stock Option
-------------------------------------------------------------------
Plan
----
Votes For Votes Against Abstentions Broker Non-Votes
4,151,508 52,439 5,880 2,875
5. Amend the Company's Certificate of Incorporation, as amended, to
----------------------------------------------------------------
authorize 1,000,000 Shares of Preferred Stock, $2.00 par value per
------------------------------------------------------------------
share, and to allow the Board of Directors to designate the rights and
----------------------------------------------------------------------
preferences of various series of that Preferred Stock from time to time
-----------------------------------------------------------------------
Votes For Votes Against Abstentions Broker Non-Votes
3,919,163 269,839 20,550 3,150
The Company's principal stockholders, Mr. Martin and Ms. Withey, voted
their shares on proposal #5 in the same proportion as the votes cast by
all the other stockholders voting on this proposal.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit Number
--------------
11 Statement re: computation of per share earnings
27 Financial Data Schedule
(b) Reports on Form 8-K.
A report on Form 8-K was filed on December 23, 1999 detailing the
transaction with Homegrown Holdings Corp.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Annie's Homegrown, Inc.
-----------------------
(Registrant)
Date: February 14, 2000 /s/ Paul B. Nardone
---------------------------------
Paul B. Nardone
President and Chief Executive Officer
Date: February 14, 2000 /s/ Neil Raiff
----------------------------
Neil Raiff
Chief Financial Officer & Treasurer
15
EXHIBIT 11
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
ANNIE'S HOMEGROWN, INC.
COMPUTATION OF EARNINGS PER COMMON SHARE
(IN 000S EXCEPT FOR PER SHARE DATA)
THREE MONTHS ENDED DECEMBER 31, 1998
Basic Computation
- -----------------
Net loss per statement of operations $ (232)
=======
Weighted average number of common
shares outstanding 4,540
Basic loss per common share $ (.05)
=======
Diluted Computation
- -------------------
Net loss per statement of operations $(232)
======
Weighted average number of common
shares outstanding 4,540
Stock options 120
Weighted average number of common
shares as adjusted 4,660
Diluted loss per common share $ (.05)
========
<PAGE>
ANNIE'S HOMEGROWN, INC.
COMPUTATION OF EARNINGS PER COMMON SHARE (CONTINUED)
(IN 000S EXCEPT FOR PER SHARE DATA)
THREE MONTHS ENDED DECEMBER 31, 1999
Basic Computation
- -----------------
Net income per statement of operations $ 62
=======
Weighted average number of common
shares outstanding 4,710
Basic income per common share $ .01
=======
Diluted Computation
- -------------------
Net income per statement of operations $ 62
=======
Weighted average number of common
shares outstanding 4,710
Weighted average number upon conversion
Of Preferred Stock 1,000
Stock options 90
Weighted average number of common
shares as adjusted 5,800
Diluted income per common share $ .01
========
<PAGE>
ANNIE'S HOMEGROWN, INC.
COMPUTATION OF EARNINGS PER COMMON SHARE
(IN 000S EXCEPT FOR PER SHARE DATA)
NINE MONTHS ENDED DECEMBER 31, 1998
Basic Computation
- -----------------
Net loss per statement of operations $ (689)
=======
Weighted average number of common
shares outstanding 4,546
Basic loss per common share $ (.15)
=======
Diluted Computation
- -------------------
Net loss per statement of operations $ (689)
=======
Weighted average number of common
shares outstanding 4,546
Stock options 120
Weighted average number of common
shares as adjusted 4,666
Diluted loss per common share $ (.15)
=======
<PAGE>
ANNIE'S HOMEGROWN, INC.
COMPUTATION OF EARNINGS PER COMMON SHARE (CONTINUED)
(IN 000S EXCEPT FOR PER SHARE DATA)
NINE MONTHS ENDED DECEMBER 31, 1999
Basic Computation
- -----------------
Net income per statement of operation $ 60
======
Weighted average number of common
shares outstanding 4,717
Basic income per common share $ .01
======
Diluted Computation
- -------------------
Net income per statement of operations $ 60
=======
Weighted average number of common
shares outstanding 4,717
Weighted average number upon conversion
Of Preferred Stock 1,000
Stock options 90
Weighted average number of common
shares as adjusted 5,807
Diluted income per common share $ .01
=======
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-END> DEC-31-1999
<CASH> 1,162,607
<SECURITIES> 0
<RECEIVABLES> 159,020
<ALLOWANCES> 0
<INVENTORY> 1,312,248
<CURRENT-ASSETS> 2,637,875
<PP&E> 197,416
<DEPRECIATION> 108,464
<TOTAL-ASSETS> 3,193,090
<CURRENT-LIABILITIES> 1,478,578
<BONDS> 0
<COMMON> 4,882
0
2,000,000
<OTHER-SE> (290,370)
<TOTAL-LIABILITY-AND-EQUITY> 3,193,090
<SALES> 6,935,103
<TOTAL-REVENUES> 6,935,103
<CGS> 3,809,509
<TOTAL-COSTS> 2,974,388
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 197,810
<INCOME-PRETAX> 60,209
<INCOME-TAX> 0
<INCOME-CONTINUING> 60,209
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 60,209
<EPS-BASIC> .01
<EPS-DILUTED> .01
</TABLE>
