-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HI0AYA60EoJMfaKA79Gi9GSQV/1oVlxeJtsj+TW4l9yTaHrIqOI4zCWHQsohrl+9 p40+mIkMPWyYvI1n9+AS7g== 0000912057-97-023846.txt : 19970711 0000912057-97-023846.hdr.sgml : 19970711 ACCESSION NUMBER: 0000912057-97-023846 CONFORMED SUBMISSION TYPE: SB-2/A PUBLIC DOCUMENT COUNT: 14 FILED AS OF DATE: 19970710 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ORGANIC FOOD PRODUCTS INC CENTRAL INDEX KEY: 0001034992 STANDARD INDUSTRIAL CLASSIFICATION: CANNED, FRUITS, VEG & PRESERVES, JAMS & JELLIES [2033] IRS NUMBER: 943076294 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SB-2/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-22997 FILM NUMBER: 97638729 BUSINESS ADDRESS: STREET 1: 550 MONTEREY RD CITY: MORGAN HILL STATE: CA ZIP: 95037 BUSINESS PHONE: 4087821133 MAIL ADDRESS: STREET 1: 550 MONTEREY RD CITY: MORGAN HILL STATE: CA ZIP: 95037 SB-2/A 1 FORM SB-2/A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 10, 1997. REGISTRATION NO. 333-22997 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------------ AMENDMENT NO. 1 TO FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 AS AMENDED ------------------------ ORGANIC FOOD PRODUCTS, INC. (Exact Name of Small Business Issuer As Specified In Its Charter) CALIFORNIA 2033 94-3076294 (State or other jurisdiction (Primary Standard Industrial (IRS Employer of Classification Code No.) I.D. Number) incorporation or organization)
550 MONTEREY ROAD MORGAN HILL, CA 95037 (408) 782-1133 (Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices) FLOYD R. HILL, CHIEF EXECUTIVE OFFICER ORGANIC FOOD PRODUCTS, INC. 550 MONTEREY ROAD MORGAN HILL, CA 95037 (408) 782-1133 (Name, address, including zip code, and telephone number, including area code, of agent for service) ------------------------------ COPIES OF ALL COMMUNICATIONS TO: Gary A. Agron, Esq. Dennis J. Doucette, Esq. 5445 DTC Parkway, Suite 520 Luce, Forward, Hamilton & Scripps LLP Englewood, CO 80111 600 West Broadway, Suite 2600 (303) 770-7254 San Diego, CA 92101 (303) 770-7257 (Fax) (619) 236-1414 (619) 232-8311 (Fax) APPROXIMATE DATE OF COMMENCEMENT OF THE OFFERING: AS SOON AS PRACTICABLE AFTER THE DATE OF THE OFFERING. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If delivery of the Prospectus is expected to be made pursuant to Rule 434, check the following box: / / ------------------------------ CALCULATION OF REGISTRATION FEE
TITLE OF EACH CLASS AMOUNT TO PROPOSED AMOUNT OF OF SECURITIES BE MAXIMUM PRICE OFFERING REGISTRATION TO BE REGISTERED REGISTERED PER SECURITY PRICE FEE Common Stock, no par value(1)............... 1,495,000 Shares $4.00 $5,980,000 $1,813 Representatives' Warrants(2)................ 130,000 Warrants $.0007 $100 $-0- Common Stock, no par value, underlying Representatives' Warrants(2).............. 130,000 Shares $4.80 $624,000 $189 Totals...................................... $6,604,000 $2,002(3)
(1) Includes the overallotment option granted to the Representatives of 195,000 shares. (2) Pursuant to Rule 416 of the Securities Act of 1933, as amended, the number of shares issuable upon exercise of the Representatives' Warrants is subject to adjustment in accordance with anti-dilution provisions of such Warrants. (3) A fee of $2,309 was previously paid. Accordingly, no additional fee is required. ------------------------------ THE REGISTRANT HEREBY AMENDS THE REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. (EXHIBIT INDEX LOCATED ON PAGE OF THIS FILING) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SUBJECT TO COMPLETION PRELIMINARY PROSPECTUS DATED JULY 10, 1997 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. 1,300,000 SHARES OF COMMON STOCK ORGANIC FOOD PRODUCTS, INC. [LOGO] Organic Food Products, Inc. (the "Company") is offering 1,300,000 shares of its no par value common stock (the "Common Stock") at $4.00 per share (the "Offering") through Sentra Securities Corporation, Spelman & Co., Inc. and Paradise Valley Securities, Inc. as the representatives (the "Representatives") of the underwriters named herein (the "Underwriters"). The initial offering price of the Common Stock was determined by negotiations between the Company and the Representatives, and such price is not necessarily related to the Company's financial condition, net worth or other established criteria of value. See "Underwriting." There is no current trading market for the Company's Common Stock and no assurance that a trading market will develop upon completion of the Offering. The Company has applied to have the Common Stock listed on the NASDAQ SmallCap Market (the "SmallCap Market"). THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------------ THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND SUBSTANTIAL DILUTION AND SHOULD BE CONSIDERED ONLY BY PERSONS ABLE TO SUSTAIN A TOTAL LOSS OF THEIR INVESTMENT. SEE "RISK FACTORS."
UNDERWRITING DISCOUNTS PROCEEDS TO PRICE TO PUBLIC AND COMMISSIONS(1) COMPANY(2) Per Share................................ $4.00 $.40 $3.60 Total(3)................................. $5,200,000 $520,000 $4,680,000
(1) Excludes a nonaccountable expense allowance payable to Sentra Securities Corporation and Spelman & Co., Inc. of $156,000 ($179,400 if the Overallotment Option is exercised) and the issuance of warrants to the Representatives (the "Representatives' Warrants") to purchase up to 130,000 shares of Common Stock at a price of $4.80 per share. The Company has granted certain registration rights with respect to the Common Stock underlying the Representatives' Warrants and has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933 (the "1933 Act"). See "Underwriting." (2) Before deducting costs of the Offering estimated to be $456,000, including the nonaccountable expense allowance. See "Underwriting." (3) Assumes no exercise of the Representatives' option (the "Overallotment Option"), exercisable within 30 days from the date of this Prospectus, to purchase from the Company up to 195,000 additional shares of Common Stock on the same terms as the Common Stock offered hereby solely to cover overallotments, if any. If the Overallotment Option is exercised in full, the total Price to Public, Underwriting Discounts and Proceeds to Company will be $5,980,000, $598,000 and $5,382,000, respectively. See "Underwriting." -------------------------- The shares of Common Stock are offered by the several Underwriters named herein on a firm commitment basis, subject to prior sale, when, as and if delivered to and accepted by the Underwriters and subject to certain conditions, including the right of the Underwriters to reject orders in whole or in part. The Underwriters are committed to purchase and pay for all shares of Common Stock if any shares of Common Stock are taken. It is expected that delivery of the certificates representing the Common Stock will be made against payment therefor in San Diego, California, on or about three business days from the date of this Prospectus. SENTRA PARADISE VALLEY SECURITIES CORPORATION SPELMAN & CO., INC. SECURITIES, INC.
The date of this Prospectus is 1997. CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN SUCH SECURITIES, AND THE IMPOSITION OF A PENALTY BID, IN CONNECTION WITH THE OFFERING. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." 2 PROSPECTUS SUMMARY THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED IN THIS PROSPECTUS AND IS QUALIFIED IN ITS ENTIRETY BY THE DETAILED INFORMATION AND FINANCIAL STATEMENTS THAT APPEAR ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES THAT THE OVERALLOTMENT OPTION AND THE REPRESENTATIVES' WARRANTS HAVE NOT BEEN EXERCISED. EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE MATTERS SET FORTH IN THIS PROSPECTUS INCLUDE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO RISKS AND UNCERTAINTIES THAT MAY CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY. THESE RISKS AND UNCERTAINTIES ARE DETAILED THROUGHOUT THE PROSPECTUS AND WILL BE FURTHER DISCUSSED FROM TIME TO TIME IN THE COMPANY'S PERIODIC REPORTS FILED WITH THE COMMISSION. THE FORWARD-LOOKING STATEMENTS INCLUDED IN THE PROSPECTUS SPEAK ONLY AS OF THE DATE HEREOF. THE COMPANY The Company was incorporated in California in July 1987 as S&D Foods, Inc. In November 1995, it changed its name to Garden Valley Naturals, Inc. and following its June 1996 merger with Organic Food Products, Inc. ("OFP"), changed its name to Organic Food Products, Inc. The term "Company" used throughout this Prospectus refers to the merged operations of Garden Valley Naturals, Inc. and OFP. Since 1987, the Company has manufactured and marketed pesticide-free ("organic") and preservative-free ("all natural") pasta sauces, salsas and condiments under the brand names "Garden Valley Naturals" and "Parrot." The Company began marketing its Parrot line of salsas in 1987, its Garden Valley Naturals line of condiments in 1991 and its Garden Valley Naturals line of pastas and salsas in 1994. In June 1996, the Company merged with OFP, which also marketed a line of organic food products (including pasta sauces and salsas, together with dry cut pastas and organic children's meals) under the "Millina's Finest" brand name. See "Certain Transactions." In June 1996, the Company restructured its Garden Valley Naturals, Parrot and Millina's Finest product lines by (i) eliminating all nonorganic products, (ii) eliminating salsas and ketchups sold under the Millina's Finest brand name, and (iii) adding pasteurized organic fruit juices and organic frozen entrees to its product offerings. In addition to its current products, the Company will introduce a line of organic grill sauces and organic salad dressings in September 1997. See "Business--Products." All of the Company's products (with the exception of its organic mustards) are manufactured at the Company's 24,000 square foot processing and warehouse facility in Morgan Hill, California. See "Business--Manufacturing Facilities and Suppliers." The Company sells its products either directly or through distributors or independent commissioned food brokers and specialty food brokers to (i) health food and specialty food stores, (ii) club stores (including Price/Costco and BJ's), and (iii) retail chain and independent grocery stores (including Safeway, A&P, Waldbaum's, Trader Joe's, Stop N' Shop, Edward's, Lucky's and Big Y). See "Business--Distribution and Marketing." The Company's business strategy is to (i) increase revenues by offering additional organic food products through the Company's existing distribution network, (ii) reduce costs and improve operating efficiencies by using the Company's excess manufacturing capabilities to increase the volume of products it manufactures for itself as well as for others, (iii) expand the Company's current geographic and retail store distribution by offering the Company's products in new markets and increasing distribution in existing markets, and (iv) specialize exclusively in the marketing of organic food products. Proceeds of the Offering will be used for these and other purposes. See "Business--Strategy" and "Use of Proceeds." The Company's executive offices are located at 550 Monterey Road, Morgan Hill, CA 95037, telephone (408) 782-1133. 3 THE OFFERING Offering Price.................... $4.00 per share of Common Stock Common Stock Outstanding(1)....... 5,297,913 shares Common Stock Offered.............. 1,300,000 shares Common Stock Outstanding after the Offering(1)..................... 6,597,913 shares Use of Proceeds................... The net proceeds of the Offering will be primarily used to purchase raw materials and equipment, for repayment of debt, for marketing expenses and working capital. See "Use of Proceeds." NASDAQ SmallCap Symbol............ OFPI Transfer and Warrant Agent........ Corporate Stock Transfer, Inc.
- ------------------------ (1) Excludes exercise of: (i) the Overallotment Option, (ii) the Representatives' Warrants, (iii) outstanding stock options to purchase up to 625,000 shares of Common Stock issued under the Company's 1995 Stock Option Plan, and (iv) common stock purchase warrants to purchase up to 550,000 shares of Common Stock. See "Dilution," "Capitalization," "Description of Securities" and "Underwriting." 4 SUMMARY FINANCIAL INFORMATION The financial information of the Company set forth below for the two years ended June 30, 1995 and 1996 has been derived from the Company's audited financial statements included herein. Interim information for the nine months ended March 31, 1996 and 1997 has been derived from unaudited financial statements, which are also included herein. The results of operations for the nine months ended March 31, 1997 are not necessarily indicative of the results to be expected for the year ending June 30, 1997. The financial information should be read in conjunction with the financial statements, related notes and other financial information included elsewhere in this Prospectus.
UNAUDITED NINE MONTHS ENDED MARCH YEAR ENDED JUNE 30, 31, --------------------------- -------------------------- 1996 1995 1997 1996 ------------- ------------ ------------ ------------ INCOME STATEMENT DATA: Net sales............................................... $ 7,641,539 $ 5,027,278 $ 9,067,049 $ 5,651,707 Gross profit............................................ 1,819,202 1,276,968 2,981,910 1,409,201 Operating income (loss)................................. (637,288) 134,515 588,140 100,069 Interest expense........................................ 349,560 121,704 152,340 167,892 Net income (loss)....................................... $ (983,462) $ 23,418 $ 343,422 $ (65,391) ------------- ------------ ------------ ------------ ------------- ------------ ------------ ------------ Weighted average shares outstanding..................... 5,767,663 5,767,663 5,767,663 5,767,663 Net income (loss) per share............................. $ (.17) $ -- $ .06 $ (.01)
UNAUDITED AT MARCH 31, AS 1997 ADJUSTED(1) ------------ ------------- BALANCE SHEET DATA: Working capital (deficit)........................................................... $ (212,305) $ 3,843,975 Total assets........................................................................ 7,961,873 11,485,873 Long-term debt...................................................................... 409,974 409,974 Total liabilities................................................................... 5,057,140 4,357,140 Shareholders' equity................................................................ $2,904,733 $ 7,128,733
- ------------------------ (1) As adjusted to give effect to the receipt and application of the estimated net proceeds of the Offering without giving effect to exercise of the Overallotment Option, the Representatives' Warrants or other outstanding stock options or common stock purchase warrants. See "Use of Proceeds" and "Description of Securities." 5 RISK FACTORS Prospective purchasers of the Common Stock should carefully consider the following risk factors and other information contained in this Prospectus before making an investment in the Common Stock. Information contained in this Prospectus includes "forward-looking statements" which can be identified by the use of forward-looking terminology such as "believes," "expects," "may," "should" or "anticipates" or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy. See, e.g., "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business--Strategy." No assurance can be given that the future results addressed by the forward-looking statements will be achieved. The following matters constitute cautionary statements identifying important factors with respect to such forward-looking statements, including certain risks and uncertainties that could cause actual results to vary materially from the future results addressed in such forward-looking statements. Other factors could also cause actual results to vary materially from the future results addressed in such forward-looking statements. LIMITED PROFITABILITY; SIGNIFICANT ACCUMULATED DEFICIT; FUTURE OPERATING RESULTS. Although the Company achieved increasing levels of revenues for the years ended June 30, 1995 and 1996 and the nine months ended March 31, 1997, the Company reported a loss for the year ended June 30, 1996 and limited profitability in other periods. Moreover, at March 31, 1997 the Company had an accumulated deficit of $1,066,988. Future events, including unanticipated expenses, increased price competition, unfavorable general economic conditions or decreased consumer demand for organic food products, could have a material adverse effect on the Company's future operating results. There can be no assurance that the Company's revenue growth will continue in the future or that its operations will be profitable. See "Financial Statements." COST OF RAW MATERIALS; RISK OF MARKET PRICE FLUCTUATIONS; DEPENDENCE UPON SUPPLIERS. The Company's operating results and financial condition may be adversely affected by market fluctuations in the cost and availability of its raw materials, particularly whole and processed organic tomatoes. Raw materials costs are determined by a constantly changing market upon which the Company has no control. The Company often enters into fixed price contracts to purchase a portion of its organic tomatoes. Nevertheless, cost fluctuations in the open market could increase the Company's product costs (for products not covered by fixed price contracts) and adversely affect its operations. Moreover, market price declines for raw materials which are covered by fixed price contracts would increase the Company's product costs relative to its competitors and reduce its gross profits on finished goods. While many raw materials are available from a number of sources, the Company currently purchases its organic tomato products from only three suppliers and has written agreements covering only a portion of its anticipated tomato product purchases. Two suppliers each accounted for 10% or more of the Company's total purchases for the nine months ended March 31, 1997. Any interruption in raw materials supply (caused by factors such as drought, insect infestation or the like) would interrupt the Company's production and adversely affect its operations. Overcontracting for organic tomatoes or other raw materials in order to fix prices could cause cash flow difficulties until the excess raw materials are processed and sold. For instance, a portion of the proceeds of the Offering has been allocated to pay for tomato paste contracted in prior years. See "Use of Proceeds" and "Business--Manufacturing Facilities and Suppliers." COMPETITION. The organic food and health food industries in general and the pasta sauce and pasta, salsa, condiment and fruit juice businesses in particular are highly competitive, and there are numerous multinational, national, regional and local firms that currently compete, or are capable of competing, with the Company. Multinational nonorganic (i) pasta sauce competitors include Prego, Ragu, Classico and Newman's Own, (ii) salsa competitors include Pace, El Paso and La Victoria, (iii) condiment competitors include Heinz, French's and Guilden's, and (iv) fruit juice competitors include Minute Maid and Del Monte. The Company also competes with national cut pasta manufacturers such as RF, Ronzoni and DeBoles, smaller organic or natural pasta sauce and organic salsa competitors such as Simply Natural, Muir Glen and Enrico and smaller fruit juice competitors such as Odwalla and Knudsen. Most of the 6 Company's competitors are larger than the Company and have more financial, marketing and management resources, and brand name recognition, than the Company. See "Business--Competition." DEPENDENCE UPON MAJOR CUSTOMERS. One customer accounted for approximately 40% of the Company's revenues for the year ended June 30, 1996, and two customers accounted for approximately 35% of the Company's revenues for the nine months ended March 31, 1997. A loss of any of these customers would have a material adverse effect on the Company's operations. See "Business--Distribution and Marketing." LIMITED EXPERIENCE WITH CLUB STORES AND CHAIN GROCERY STORES. Although the Company has sold its products to health food stores since 1987, sales to club stores and chain grocery stores commenced in December 1994 and August 1995, respectively. There can be no assurance that (i) the Company will be able to maintain or expand its sales to club stores and chain grocery stores or (ii) sales will be sufficient to offset slotting fees or in-store demonstration fees incurred to obtain shelf space in club stores and chain grocery stores. See "Business--Distribution and Marketing." PRODUCT LIABILITY. Food processors are subject to significant liability should the consumption of their products cause injury, illness or death. Although the Company carries product liability insurance, with limits per occurrence of up to $2,000,000, there can be no assurance that this insurance will be adequate to protect against product liability claims or that insurance coverage will continue to be available at reasonable prices. POSSIBLE FLUCTUATIONS IN OPERATING RESULTS. The Company's operating results could vary from period to period as a result of a number of factors, including the purchasing patterns of significant customers, the timing of new product introductions by the Company and its competitors, the amount of slotting fees and new product advertising expenses incurred by the Company, variations in sales by distribution channel, fluctuations in market prices of raw materials and competitive pricing policies. These factors could cause the Company's performance to differ from investor expectations, resulting in volatility in the price of the Common Stock. See "Management's Discussion of Financial Condition and Results of Operations-- Business and Organization." GOVERNMENT REGULATION. The Company is subject to various federal, state and local laws affecting its business. The Company's food processing facility is subject to regulation by various governmental agencies, including state and local licensing, zoning, land use, construction and environmental regulations and various federal, state, and local health, sanitation, immigration, safety and fire codes and standards. In order to offer organic food products, the Company is also subject to inspection and regulation by the United States Department of Agriculture ("USDA"). Suspension of any licenses or approvals, due to failure to comply with applicable regulations, could interrupt the Company's operations, cause a loss of its organic food designation, limit the number of employees working within its facilities or otherwise materially and adversely affect its business. The Company is also subject to federal and state laws establishing minimum wages and regulating overtime and working conditions. Since some of the Company's personnel are paid at rates not far above the federal or California state minimum wage, increases in the federal or California minimum wage will result in increases in the Company's labor costs. See "Business--Government Regulation." GEOGRAPHIC CONCENTRATION. The Company distributes its products in a limited number of markets, which exposes it to fluctuations caused by such factors as adverse economic conditions and changing consumer preferences in these markets. See "Business--Distribution and Marketing." DEPENDENCE UPON EXECUTIVE OFFICERS. The Company's operations depend upon its ability to hire and retain qualified personnel. There is competition for such personnel, and there can be no assurance that the Company will be successful in this regard. The Company's operations are also dependent upon the continued services of its executive officers. The loss of the services of any of these executive officers, whether as a result of death, disability or otherwise, would have a material adverse effect upon the business 7 of the Company. The Company has employment agreements with its Chief Executive Officer and its President, and has agreed to purchase key person life insurance on the life of its Chief Executive Officer in the face amount of $1,000,000. The Company does not carry key person life insurance on the lives of any other executive officers. See "Management--Directors and Executive Officers." OFFERING TO BENEFIT PRINCIPAL STOCKHOLDERS. The Company intends to repay from proceeds of the Offering $700,000 of debt (16.6% of the net proceeds of the Offering) due to two of the Company's principal shareholders. See "Use of Proceeds." LACK OF PUBLIC MARKET; DETERMINATION OF OFFERING PRICE. Prior to the Offering, there has been no public trading market for the Company's Common Stock. The initial public offering price of the Common Stock has been determined by negotiations between the Company and the Representatives and does not necessarily bear any relationship to recognized criteria for the valuation of such securities. There can be no assurance that a regular trading market for the Company's Common Stock will develop or continue after the Offering or, if such a market develops, that the market price of the Common Stock will exceed the Offering price. See "Underwriting." IMMEDIATE SUBSTANTIAL DILUTION. The Offering involves an immediate and substantial dilution of $3.27 per share of Common Stock, an 82% difference between the public offering price of $4.00 per share of Common Stock and the net tangible book value of $.73 per share of Common Stock upon completion of the Offering, assuming no exercise of the Overallotment Option, the Representatives' Warrants or other outstanding stock options or common stock purchase warrants of the Company. See "Dilution." NO DIVIDENDS. The Company has not paid any dividends on its Common Stock and does not intend to pay dividends in the foreseeable future. See "Description of Securities--Dividends." POSSIBLE VOLATILITY OF SECURITIES PRICES. The market price of the Company's Common Stock following the Offering may be highly volatile, as has been the case with the securities of other companies completing initial public offerings. Factors such as the Company's operating results or announcements by the Company or its competitors may have a significant effect on the market price of the Company's securities. In addition, market prices for securities of many emerging and small capitalization companies have experienced wide fluctuations in response to variations in quarterly operating results and general economic indicators and conditions, as well as other factors beyond the control of the Company. SHARES ELIGIBLE FOR FUTURE SALE. Sales of substantial amounts of Common Stock in the open market or the availability of such shares for sale following the Offering could adversely affect the market price for the Common Stock. Following the Offering, the 1,300,000 shares of Common Stock offered by the Company may be sold in the open market. The remaining 5,297,913 shares of the Company's Common Stock are currently eligible for sale under Rule 144 ("Rule 144") promulgated under the 1933 Act. Notwithstanding the above, all of the Company's shareholders have agreed with Sentra Securities Corporation not to sell or otherwise dispose of their shares of Common Stock without the prior written consent of the Representatives for a period of 12 months from the date of this Prospectus. See "Description of Securities--Common Stock Eligible for Future Sale" and "Underwriting." UNDERWRITERS' INFLUENCE ON THE MARKET. A significant amount of the Common Stock offered hereby may be sold to customers of the Representatives and the Underwriters. Such customers subsequently may engage in transactions for the sale or purchase of Common Stock through or with the Underwriters. Although they have no obligation to do so, the Representatives intend to make a market in the Company's Common Stock and may otherwise effect transactions in the Common Stock. This market-making activity may terminate at any time. If they participate in the market, the Representatives may exert a dominating influence on the market, if one develops, for the Common Stock. The price and liquidity of the Common Stock may be significantly affected by the degree, if any, of the Underwriters' participation in such market. CONTROL BY MANAGEMENT; AUTHORIZATION AND ISSUANCE OF PREFERRED STOCK; PREVENTION OF CHANGES IN CONTROL. Upon completion of the Offering, the Company's officers and directors will own approximately 8 41.0% of the then issued and outstanding shares of Common Stock (assuming no exercise of the Overallotment Option, the Representatives' Warrants or other outstanding stock options or common stock purchase warrants not exercisable within 60 days from the date hereof) and will continue to elect a majority of the Company's directors and control the affairs of the Company. The Company's Articles of Incorporation authorize the issuance of up to 5,000,000 shares of Preferred Stock with such rights and preferences as may be determined from time to time by the Board of Directors. Accordingly, under the Articles of Incorporation, the Board of Directors may, without shareholder approval, issue Preferred Stock with dividend, liquidation, conversion, voting, redemption or other rights which could adversely affect the voting power or other rights of the holders of the Common Stock. The issuance of any shares of Preferred Stock having rights superior to those of the Common Stock may result in a decrease of the value or market price of the Common Stock and could further be used by the Board of Directors as a device to prevent a change in control of the Company. The Company has no other anti-takeover provisions in its Articles of Incorporation or Bylaws. Holders of Preferred Stock may also be granted the right to receive dividends, certain preferences in liquidation, and conversion rights. See "Description of Securities." LIMITATIONS ON LIABILITY OF DIRECTORS. The Company's Articles of Incorporation substantially limit the liability of the Company's directors to the Company and its shareholders for breach of fiduciary or other duties to the Company. See "Description of Securities--Limitation on Liabilities." MAINTENANCE CRITERIA FOR THE SMALLCAP MARKET SECURITIES. The National Association of Securities Dealers, Inc. ("the NASD"), which administers the SmallCap Market, sets the criteria for continued eligibility on The NASDAQ SmallCap Market. In order to continue to be included on the SmallCap Market, a company must maintain $2 million in total assets, a $200,000 market value of its public float and $1 million in total capital and surplus. In addition, continued inclusion requires two market-makers, at least 300 holders of the Common Stock and a minimum bid price of $1 per share; provided, however, that if a company falls below such minimum bid price, it will remain eligible for continued inclusion in the SmallCap Market if the market value of the public float is at least $1 million and the company has $2 million in capital and surplus. The Company's failure to meet these maintenance criteria in the future or future maintenance requirements imposed by the SmallCap Market may result in the discontinuance of the inclusion of its securities in the SmallCap Market. In such event, trading, if any, in the securities may then continue to be conducted in the non-NASDAQ over-the-counter market in what are commonly referred to as the electronic bulletin board or the "pink sheets." As a result, an investor may find it more difficult to dispose of or to obtain accurate quotations as to the market value of the securities. In addition, the Company would be subject to Rule 15g (the "Rule") promulgated under the Exchange Act which imposes various sales practice requirements on broker-dealers who sell securities governed by the Rule to persons other than established customers and accredited investors. For these types of transactions, the broker-dealer must make a special suitability determination for the purchaser and have received the purchaser's written consent to the transactions prior to sale. Consequently, the Rule may have an adverse effect on the ability of broker-dealers to sell the securities, which may affect the ability of purchasers in the Offering to sell the securities in the secondary market. The NASD recently proposed significantly more stringent maintenance requirements which require $2 million in net tangible assets, 500,000 shares in the public float and elimination of the exception to the $1 per share bid price requirement. Should these new maintenance requirements be adopted, it will be progressively more difficult for the Company to remain on the SmallCap Market. DISCLOSURE RELATED TO PENNY STOCKS. The Commission has adopted rules that define a "penny stock" as equity securities priced at under $5.00 per share which are not listed for trading on NASDAQ unless (i) the issuer has a net worth of $2,000,000 if in business for more than three years or $5,000,000 if in business for less than three years or (ii) the issuer has had average annual revenues of $6,000,000 for the prior three years. In the event that any of the Company's securities are characterized in the future as penny stock, broker-dealers dealing in the securities will be subject to the disclosure rules for transactions involving penny stocks which require the broker-dealer among other things to (i) determine the suitability of 9 purchasers of the securities and obtain the written consent of purchasers to purchase such securities and (ii) disclose the best (inside) bid and offer prices for such securities and the price at which the broker-dealer last purchased or sold the securities. The additional burdens imposed upon broker-dealers may discourage them from effecting transactions in penny stocks, which could reduce the liquidity of the securities offered hereby. DILUTION At March 31, 1997, the net tangible book value of the Company was $291,734 (unaudited), or $.06 per share of Common Stock. "Net tangible book value" per share represents the total amount of tangible assets of the Company, less the total amount of liabilities of the Company, divided by the number of shares of Common Stock outstanding. Without taking into account any changes in net tangible book value after March 31, 1997, other than to give effect to the sale by the Company of the 1,300,000 shares of Common Stock offered hereby, less underwriting discounts and commissions and estimated costs of the Offering not recorded as deferred costs as of March 31, 1997, the net tangible book value of the Company at March 31, 1997 would have been $4,798,014, or approximately $.73 per share. This represents an immediate increase in net tangible book value of $.67 per share of Common Stock to existing shareholders and an immediate dilution of $3.27 per share to new shareholders. "Dilution" per share represents the difference between the price to be paid by the new shareholders and the net tangible book value per share of Common Stock immediately after this Offering. The foregoing is illustrated in the following table: Public offering price per share................................ $ 4.00 Net tangible book value per share before Offering.............. $ .06 Increase in net tangible book value per share attributable to new investors purchasing in the Offering..................... $ .67 Net tangible book value per share after the Offering........... $ .73 --------- Dilution of net tangible book value per share to new investors.................................................... $ 3.27 --------- Percent reduction of net tangible book value to new investors.................................................... 82%
The following table sets forth the number of shares of Common Stock purchased, the total consideration paid and the average price per share paid by existing shareholders as of March 31, 1997 and new investors purchasing Common Stock in the Offering:
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE ------------------------- ---------------------------- PRICE PER NUMBER PERCENTAGE AMOUNT PERCENTAGE SHARE ---------- ------------- ------------- ------------- ----------- New investors................. 1,300,000 19.7% $ 5,200,000 52.2% $ 4.00 Existing shareholders......... 5,297,913 80.3% $ 4,768,433 47.8% $ .90 ---------- ----- ------------- ----- Totals........................ 6,597,913 100.0% $ 9,968,433 100.0% ---------- ----- ------------- ----- ---------- ----- ------------- -----
The preceding discussion and the accompanying tables assume no exercise of (i) the Overallotment Option, (ii) the Representatives' Warrants, (iii) outstanding stock options to purchase up to 625,000 shares of Common Stock issued under the Company's 1995 Stock Option Plan, or (iv) common stock purchase warrants to purchase up to 550,000 shares of Common Stock. See "Capitalization," "Description of Securities" and "Underwriting." 10 CAPITALIZATION The following table sets forth the capitalization of the Company at March 31, 1997 and as adjusted to give effect to the sale by the Company of 1,300,000 shares of Common Stock offered hereby, without giving effect to the exercise of the Overallotment Option, the Representatives' Warrants or other outstanding stock options or common stock purchase warrants.
ACTUAL AS ADJUSTED(1) ------------- -------------- (UNAUDITED) (UNAUDITED) Current liabilities................................................................ $ 4,647,166 $ 3,947,166 ------------- -------------- Long-term liabilities.............................................................. 409,974 409,974 ------------- -------------- Shareholders' equity Preferred Stock, 5,000,000 no par value shares authorized, none issued........... -0- -0- Common Stock, 20,000,000 no par value shares authorized, 5,297,913 shares outstanding, and 6,597,913 shares outstanding, as adjusted..................... 3,971,721 8,195,721 Accumulated deficit.............................................................. (1,066,988) (1,066,988) ------------- -------------- Total shareholders' equity..................................................... 2,904,733 7,128,733 ------------- -------------- Total capitalization......................................................... $ 7,961,873 $ 11,485,873 ------------- -------------- ------------- --------------
- ------------------------ (1) As adjusted to give effect to the receipt and application of the estimated net proceeds of the Offering. See "Use of Proceeds." 11 USE OF PROCEEDS The net proceeds to be received by the Company from the Offering are estimated to be $4,224,000 ($4,902,600 if the Overallotment Option is exercised). The Company intends to use the net proceeds of the Offering as set forth in the table below:
PERCENT OF NET PURPOSE AMOUNT PROCEEDS - ------------------------------------------------------------------ ------------ -------------- Purchase of raw materials(1)...................................... $ 1,350,000 32.0 Purchase of equipment............................................. 450,000 10.6 Repayment of debt(2).............................................. 1,300,000 30.8 Marketing expenses................................................ 950,000 22.5 Working capital................................................... 174,000 4.1 ------------ ----- Total......................................................... $ 4,224,000 100.0%
- ------------------------ (1) Represents the purchase of organic tomato products ($386,775 of which was previously contracted) and other organic vegetables and fruits to support the Company's plan to expand product offerings and increase manufacturing volumes. See "Business--Strategy" and "Business--Manufacturing Facilities and Suppliers." (2) Represents (i) a $700,000 principal reduction on an unsecured promissory note in the principal amount of $1,560,000 issued to two principal shareholders (and former officers and directors) in connection with the Company's October 1995 purchase of 1,100,000 shares of the Company's Common Stock from these two individuals at $2.00 per share (the balance of $860,000 is payable in installments of $40,000 per month and bears interest at 6% per annum), and (ii) repayment of a bridge loan in the amount of $600,000 used by the Company for working capital, bearing interest at 10% per annum due the earlier of the closing of the Offering or May 1998. See "Certain Transactions." The Company estimates, but cannot assure, that the net proceeds of the Offering, together with existing cash resources and available credit facilities, will be sufficient to fund the Company's estimated cash requirements for at least 12 months following the Offering. Pending application, the net proceeds may be invested in short-term interest bearing obligations. Any funds received by the Company from exercise of the Overallotment Option or the Representatives' Warrants will be added to working capital. 12 SELECTED FINANCIAL DATA The financial information of the Company set forth below for the two years ended June 30, 1995 and 1996 has been derived from the Company's audited financial statements included herein. Interim information for the nine months ended March 31, 1996 and 1997 has been derived from unaudited financial statements which are also included herein. The results of operations for the nine months ended March 31, 1997 are not necessarily indicative of the results to be expected for the year ending June 30, 1997. The financial information should be read in conjunction with the financial statements, related notes and other financial information included elsewhere in this Prospectus. In the opinion of management of the Company, the unaudited financial statements have been prepared on the same basis as the audited financial statements and include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial position and the results of operations for these periods. This data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements and related notes thereto included elsewhere in this Prospectus.
UNAUDITED NINE MONTHS ENDED YEAR ENDED JUNE 30, MARCH 31, --------------------------- ------------------------------ 1996 1995 1997 1996 ------------- ------------ --------------- ------------- INCOME STATEMENT DATA: Net sales........................................... $ 7,641,539 $ 5,027,278 $ 9,067,049 $ 5,651,707 Gross profit........................................ 1,819,202 1,276,968 2,981,910 1,409,201 Operating income (loss)............................. (637,288) 134,515 588,140 100,069 Interest expense.................................... 349,560 121,704 152,340 167,892 Net income (loss)................................... $ (983,462) $ 23,418 $ 343,422 $ (65,391) ------------- ------------ --------------- ------------- ------------- ------------ --------------- ------------- Weighted average shares outstanding................. 5,767,663 5,767,663 5,767,663 5,767,663 Net income (loss) per share......................... $ (.17) $ -- $ .06 $ (.01)
UNAUDITED AT MARCH 31, AS 1997 ADJUSTED(1) --------------- ------------- BALANCE SHEET DATA: Working capital (deficit)......................................................... $ (212,305) $ 3,843,975 Total assets...................................................................... 7,961,873 11,485,873 Long-term debt.................................................................... 409,974 409,974 Total liabilities................................................................. 5,057,140 4,357,140 Shareholders' equity.............................................................. 2,904,733 7,128,733
- ------------------------ (1) As adjusted to give effect to the receipt and application of the estimated net proceeds of the Offering without giving effect to exercise of the Overallotment Option, the Representatives' Warrants or other outstanding stock options or common stock purchase warrants. See "Use of Proceeds" and "Description of Securities." 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS BUSINESS AND ORGANIZATION Since 1987, the Company has manufactured and marketed pesticide-free ("organic") and preservative-free ("all natural") pasta sauces, salsas and condiments under the brand names "Garden Valley Naturals" and "Parrot." The Company began marketing its Parrot line of salsas in 1987, its Garden Valley Naturals line of condiments in 1991 and its Garden Valley Naturals line of pastas and salsas in 1994. In June 1996, the Company merged with OFP, which also marketed (since 1988) a line of organic food products (including pasta sauces and salsas, together with dry cut pastas and organic children's meals) under the "Millina's Finest" brand name. The Company was incorporated in July 1987 as S&D Foods, Inc. In November 1995, the Company changed its name to Garden Valley Naturals, Inc. ("GVN"). Following its June 1996 merger with OFP, the Company's name was changed to Organic Food Products, Inc. The Company sells its products either directly or through distributors or independent commissioned food brokers and specialty food brokers to (i) health food and specialty food stores, (ii) club stores (including Price/Costco and BJ's), and (iii) retail chain and independent grocery stores (including Safeway, A&P, Waldbaum's, Trader Joe's, Stop 'N Shop, Edward's, Lucky's and Big Y). The Company's business strategy is to (i) increase revenues by offering additional organic food products through the Company's existing distribution network, (ii) reduce costs and improve operating efficiencies by using the Company's excess manufacturing capabilities to increase the volume of products it manufactures for itself as well as for others, (iii) expand the Company's current geographic and retail store distribution by offering the Company's products in new markets and increasing distribution in existing markets, and (iv) specialize exclusively in the marketing of organic food products. Proceeds of the Offering will be used for these and other purposes. The Company's operating results could vary from period to period as a result of a number of factors, including the purchasing patterns of significant customers, the timing of new product introductions by the Company and its competitors, the amount of slotting fees and new product advertising expenses incurred by the Company, variations in sales by distribution channel, fluctuations in market prices of raw materials and competitive pricing policies. These factors could cause the Company's performance to differ from investor expectations, resulting in volatility in the price of the Common Stock. Moreover, the amortization of goodwill in connection with the OFP merger is expected to result in a charge against the Company's operations in the approximate amount of $100,000 per year. Prospective purchasers of the Common Stock should carefully consider the following information as well as other information contained in this Prospectus before making an investment in the Common Stock. Information contained in this Prospectus contains "forward-looking statements" which can be identified by the use of forward-looking terminology such as "believes," "expects," "may," "should" or "anticipates" or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy. See, e.g., "Business--Strategy." No assurance can be given that the future results covered by the forward-looking statements will be achieved. The following matters constitute cautionary statements identifying important factors with respect to such forward-looking statements, including certain risks and uncertainties that could cause actual results to vary materially from the future results covered in such forward-looking statements. Other factors, such as the information contained in "Risk Factors," could also cause actual results to vary materially from the future results covered in such forward-looking statements. The following discussion of the results of operations and financial condition of the Company should be read in conjunction with the Company's Financial Statements and Notes thereto included elsewhere in this Prospectus. Historical results and percentage relationships among accounts are not necessarily an indication of trends in operating results for any future period. The following analysis presents the accounts of GVN and OFP on a combined basis for all periods presented, based on the purchase method of 14 accounting. The following analysis also discusses the separate historical results of operations of GVN and OFP. RESULTS OF OPERATIONS--YEAR ENDED JUNE 30, 1996 COMPARED TO YEAR ENDED JUNE 30, 1995 REVENUES Pro forma revenues increased 65.2% from $8,133,000 in 1995 to $13,436,000 in 1996. GVN's sales increased from $3,106,000 to $5,794,000, an 86.5% increase, while OFP's sales increased from $5,027,000 to $7,642,000, a 52.0% increase. GVN's sales increased due to further penetration of its branded products into club stores and chain grocery stores occasioned by expanded marketing efforts which were funded by equity financings. GVN also increased its number of product offerings, which increased its shelf space in retail stores. OFP's sales increased due to further penetration of its branded products into health food stores and the introduction of three new product categories. The new product categories were a canned tomato line introduced in September 1995, a dry boxed cut pasta line introduced in May 1995, and a line of organic canned meals for children introduced in March 1995. OFP also had an approximately $1,000,000 increase in sales of organic fruit raw materials. The Company, in the current fiscal year, has phased out the sale of organic fruit, and in the future will be offering only raw materials that are consistent with food ingredients used in its own products. COST OF GOODS SOLD Pro forma cost of goods sold on a combined basis increased to $10,521,000, or 78.3% of sales in 1996, from $6,079,000, or 74.7% of sales in 1995. OFP's cost of goods sold increased to $5,822,000, 76.2% of sales in 1996, from $3,750,000, 74.6% of sales. This percentage increase was related to sales of a higher proportion of lower gross profit, bulk products sold in 1996 and a co-packer relationship change which resulted in higher co-packer charges. GVN's cost of goods sold increased to $4,699,000, 81.1% of sales in 1996, from $2,329,000, 75.0% of sales in 1995. This percentage increase was related to the reformulating of GVN's pasta sauces to provide a more marketable product, the relocation of GVN's factory and certain retooling of its manufacturing process. SALES AND MARKETING EXPENSES Pro forma combined sales and marketing expenses were $2,186,000, or 16.3% of net sales in 1996, versus $666,000, or 8.2% in 1995. The percentage increase was primarily due to the implementation of a new marketing program by GVN in 1996 which included the payment of slotting fees (payments to retailers to obtain store shelf space for products), totaling approximately $473,000, in-store food demonstration fees of approximately $200,000, and increases of broker commissions and sales and marketing salaries of approximately $330,000. OFP's selling and marketing expenses increased $509,246 in 1996 which related to expenses for advertising, product development, samples and sales materials. In addition, OFP incurred manufacturer's chargebacks of $424,000, which represent reductions in product prices to the Company's customers in order to encourage increased product purchases in new markets. GENERAL AND ADMINISTRATIVE EXPENSES Pro forma general and administrative expenses on a combined basis increased to $1,760,000, or 13.1% of sales in 1996, from $782,000, or 9.6% of sales in, 1995. The increase is primarily attributed to salary increases for existing personnel and additions of personnel for expansion purposes. OFP also incurred significant professional fees as a result of due diligence efforts to analyze other merger and acquisition candidates prior to its June 1996 merger with the Company. 15 RESTRUCTURING CHARGE Pro forma restructuring charges were $451,000 in 1996 and included costs incurred in the elimination of duplicate products, personnel, property and equipment following the June 1996 merger. The principal costs included $183,000 for elimination of redundant inventory, $190,000 in severance pay benefits, and $78,000 for disposal of excess equipment and miscellaneous expenses. INTEREST EXPENSE Pro forma interest expense increased $280,000 to $404,000 in 1996 from $124,000 in 1995. This increase was due to the change in the co-packer relationship by OFP, wherein the co-packer charged a financing fee for carrying product it manufactured on behalf of OFP. This financing fee amounted to approximately $230,000 in 1996. In addition, GVN's interest expense increased by approximately $50,000, due to debt incurred in the repurchase of 1,100,000 shares of Common Stock prior to the June 1996 merger with the Company. See "Certain Transactions." RESULTS OF OPERATIONS--NINE MONTHS ENDED MARCH 31, 1997 COMPARED TO NINE MONTHS ENDED MARCH 31, 1996 REVENUES Revenues for the nine month period ended March 31, 1997 were $9,067,049, a decrease of $773,139, or 8%, from the pro forma revenues for the same period in the prior year. The principal reason for this decline was the decision to phase out the Company's sales of organic raw fruit, due to lower profit margins on bulk sales which represented a substantial portion of the total decrease. The Company placed marketing emphasis on expanding its Millina's Finest brand in health food stores, while reducing expenditures for slotting fees in Garden Valley Naturals' club and grocery store markets. Salsa lines were consolidated under the Parrot brand. Management believes these decisions reduced redundancies and competitiveness in each market and promoted product recognition. The Company plans to reinstitute slotting fees in markets where it believes payment of the fees will be offset by increased sales. COST OF GOODS SOLD Cost of goods sold for the nine month period ended March 31, 1997 was $6,085,139, compared to $7,690,820 (pro forma) for the same period in the prior year, a decrease of $1,605,681, or 21%. This reduction is partly due to the decision to promote sales of products with higher profit margins, but is also due to increased efficiencies at the manufacturing level, and an elimination of the use of co-packer relationships. Costs were also reduced by the June 1996 merger with OFP, which resulted in economies of scale from combined operations and greater leverage in negotiating purchase contracts and pricing. The cost of goods in 1997 was substantially lower than the costs associated with either company's pre-merger costs of production. SALES AND MARKETING EXPENSE Sales and marketing expense for the nine month period ended March 31, 1997 was $1,497,059, compared to $996,131 (pro forma) for the same period in the prior year. While this appears to be an increase of $500,928, representing 16.5% of sales to 10.1% (pro forma) for the prior year, it is important to note that while these expenses were higher in the fourth quarter of last year, for the year ended June 30, 1996, such expense was 16.3%. Accordingly, the current year's expenses are consistent with the prior year's expenses. Efficiencies and reductions of discretionary marketing expenses were partially offset by adding three employees to the marketing staff. 16 GENERAL AND ADMINISTRATIVE EXPENSE General and administrative expenses for the nine month period ended March 31, 1997 were $896,711, or 9.9% of net sales, as compared to $1,198,254 (pro forma), or 12.2%, for the same period in the prior year. Combining the Company and OFP reduced general and administrative overhead through the elimination of redundancies and enhanced operating efficiencies. Duplicated staff was eliminated, and office space, insurance and professional services were revised. Controls have been installed to monitor expenditures. Management anticipates increases in general and administrative expenses to support expansion into new markets and new product lines. INTEREST Interest expense for the nine months ended March 31, 1997 was $152,340, as compared to $204,611 (pro forma), for the same period in the prior year. The interest for the nine month period ended March 31, 1997 includes approximately $60,000 of interest related to $700,000 of promissory notes scheduled to be repaid from the proceeds of the Offering. See "Use of Proceeds." The balance of the interest expense is the result of the Company's revolving line of credit. In 1997, this line of credit was renegotiated, providing the Company with a larger and more diversified facility, at an interest rate of prime plus 1%. A portion of the reduction in interest expense is due to the renegotiated lower interest rate. SEASONALITY Historically, GVN and OFP have experienced little seasonal fluctuation in revenues. In relation to product purchasing, the Company will seasonally contract for certain product for the entire year at harvest time or at planting time to secure raw materials through the year. These purchases take place annually from early spring to mid-summer and are effected to reduce the risk of price swings due to demand fluctuations. These annual purchases can create overages or shortages in inventory. The Company's intention to sell certain bulk raw materials to other manufacturers may assist in reducing any overages and should allow for more effective purchasing of the required raw materials. LIQUIDITY AND CAPITAL RESOURCES The Company will use capital raised from the Offering to purchase raw materials and equipment, to repay debt and to provide marketing funds to introduce new products and introduce existing products into new markets. In addition, capital will be used to reduce existing debt and provide cost savings related thereto. Equipment purchases will be used for retooling and to acquire additional packaging equipment to convert production from boxed cases to shrink wrap cases. During the nine-month period ended March 31, 1997, the Company financed its operations from current sales and the resulting net profit. In February 1997, the Company established a new credit facility of $2,000,000, which included a working capital line of $1,700,000 and a new equipment line of $300,000, at an annual rate of prime plus 1%. Notes payable increased from $1,049,107 at June 30, 1996 to $1,688,923 at March 31, 1997, reflecting this increased credit facility. The Company also generated net proceeds of $1,700,000 from additional equity sold in a private placement in July 1996. These funds were used to purchase inventory, for working capital and to retire Common Stock, as discussed above. During the nine-month period March 31, 1997, capital equipment was purchased increasing property by $280,000 to $1,091,082. Debt to related parties was reduced by $322,000, payables were reduced by $423,000 and $78,000 of Common Stock was retired. See "Certain Transactions". Also, $211,000 was expended in connection with the Offering. Additional capital was used to promote new product lines, and improve markets for existing lines. Receivables increased by $327,000 to $1,145,252, and inventories increased by $1,580,000 to $3,014,630. The Company has entered into fixed price contracts covering approximately 2,000,000 pounds of organic tomatoes, which required payments of approximately $900,000, of which $386,775 remains due and payable on or before July 30, 1997. See "Business--Litigation." 17 The Company believes that the net proceeds of this Offering, together with its existing cash resources and available credit facilities, will be sufficient to meet the Company's anticipated working capital needs for the next 12 months. The Company, however, may raise capital through the issuance of long-term or short-term debt or the issuance of securities in private or public transactions if necessary to fund future expansion of its business. There can be no assurance that acceptable financing for future transactions can be obtained. If such financing is sought and obtained by the Company, it may be necessary to encumber the Company's assets which could be lost in the event of any default by the Company. Moreover, there can be no assurance that the Company would be able to generate sufficient funds to satisfy interest payments due on any such financing. 18 BUSINESS INTRODUCTION Since 1987, the Company has manufactured and marketed pesticide-free ("organic") and preservative-free ("all natural") pasta sauces, salsas and condiments under the brand names "Garden Valley Naturals" and "Parrot." The Company began marketing its Parrot line of salsas in 1987, its Garden Valley Naturals line of condiments in 1991 and its Garden Valley Naturals line of pastas and salsas in 1994. In June 1996, the Company merged with Organic Food Products, Inc. ("OFP"), which also marketed a line of organic food products (including pasta sauces and salsas, together with dry cut pastas and organic children's meals) under the "Millina's Finest" brand name. See "Certain Transactions." In June 1996, the Company restructured its Garden Valley Naturals, Parrot and Millina's Finest product lines by (i) eliminating all nonorganic products, (ii) eliminating salsas and ketchups sold under the Millina's Finest brand name, and (iii) adding pasteurized organic fruit juices and organic frozen entrees to its product offerings. In addition to its current products, the Company will introduce a line of organic grill sauces and organic salad dressings in September 1997. See "Business--Products." All of the Company's products (with the exception of its organic mustards) are manufactured at the Company's 24,000 square foot processing and warehouse facility in Morgan Hill, California. See "Business--Manufacturing Facilities." The Company sells its products either directly or through distributors or independent commissioned food brokers and specialty food brokers to (i) health food and specialty food stores, (ii) club stores (including Price/Costco and BJ's), and (iii) retail chain and independent grocery stores (including Safeway, A&P, Waldbaum's, Trader Joe's, Stop 'N Shop, Edward's, Lucky's and Big Y). See "Business--Distribution and Marketing." STRATEGY The Company's business strategy is to (i) increase revenues by offering additional organic food products through the Company's existing distribution network, (ii) reduce costs and improve operating efficiencies by using the Company's excess manufacturing capabilities to increase the volume of products it manufactures for itself as well as for others, (iii) expand the Company's current geographic and retail store distribution by offering the Company's products in new markets and increasing distribution in existing markets, and (iv) specialize exclusively in the marketing of organic food products. Proceeds of the Offering will be used for these and other purposes. See "Use of Proceeds." (i) OFFER ADDITIONAL ORGANIC FOOD PRODUCTS. Since its merger with OFP, the Company has added organic fruit juices and will add organic grill sauces and organic frozen entrees to its product offerings in September 1997. The Company believes that offering additional products will increase revenues without proportionately increasing costs, due to the economies of scale which result from volume product manufacturing efficiencies as well as the utilization of the Company's existing distribution channels to offer new product lines. (ii) INCREASE MANUFACTURING VOLUMES. The Company believes it can reduce per unit manufacturing costs by using the Company's excess manufacturing capabilities to increase manufacturing volume. The Company seeks to increase the volume of products it manufactures by increasing sales of existing products, increasing its new product offerings and by manufacturing food products for other food marketers on a contract basis. Although it has done so in the past, the Company does not currently manufacture food products for others and has no pending agreements or arrangements to do so. (iii) EXPAND GEOGRAPHIC AND RETAIL STORE DISTRIBUTION. Although the Company has national geographic distribution for its products in health food stores, distribution of products through club stores and grocery stores is primarily limited to northern California and the northeast coast of the United States. Upon completion of the Offering, the Company intends to select additional regional distributors and 19 independent food brokers, offer advertising concessions and pay retail store slotting fees in order to increase its club store and grocery store sales throughout the United States. See "Use of Proceeds." (iv) SPECIALIZE EXCLUSIVELY IN ORGANIC FOOD PRODUCTS. Following its merger with OFP, the Company eliminated all nonorganic food lines from its product offerings. The Company believes it can achieve superior product recognition and customer loyalty by promoting awareness that the Company only markets organic foods. PRODUCTS The Company introduces and discontinues products on a regular basis, consistent with customary practices of other firms in the processed food industry. The Company's current product lines (ranked by percentage of total sales) are as follows: ORGANIC PASTA SAUCES AND PASTAS The Company markets a line of 18 organic pasta sauces under the Garden Valley Naturals and Millina's Finest brand names. The pasta sauces are all natural and most are fat-free. Varieties include garden vegetable, sun-dried tomato, roasted garlic tomato, tomato mushroom, sweet pepper and onions, hot and spicy, smoked garlic and zesty basil. The Company also offers uncooked organic dry cut pastas including spaghetti, linguini, fettucini, angel hair, rotini, penne and bow tie. ORGANIC SALSAS The Company markets a line of 16 organic and all natural salsas under the Garden Valley Naturals brand name including five varieties of fat-free and vinegar-free salsas (sun-dried tomato, roasted garlic tomato, black bean, black bean and corn and chunky organic tomato) in three levels of heat, mild, medium and hot. A medium green tomatillo salsa is also available. The Company also markets a line of ten organic salsas under the Parrot brand name. Varieties include chunky, black bean, tomatillo, spicy gourmet and enchilada sauce. ORGANIC CONDIMENTS The Company offers two varieties of organic catsups and three organic mustards under the Garden Valley Naturals brand name. The tomato catsup and spicy garlic catsup are sweetened with organic fruit juice. All three mustards use organic mustard seed for flavoring and are offered in yellow, stoneground and dijon. All condiments are fat-free and sugar-free. The Company also offers under the Parrot brand name an organic enchilada sauce which is fat free and low in sodium and will introduce grill sauces used for barbecuing hamburgers, hot dogs, chicken and fish in September 1997. CHILDREN'S MEALS The Company offers three canned organic children's meals, composed of pasta O's in tomato sauce and tomato cheese sauce and beans with veggie franks. OTHER NEW PRODUCTS The Company introduced a line of four pasteurized organic fruit juices under the "Cinagro" brand name in apple-carrot, tomato, vegetable and carrot/lemon-lime flavors in May 1997, and introduced an additional four fruit juices in July 1997. The Company will introduce (i) three low fat organic frozen entrees, black bean and corn ravioli, wild mushroom ravioli and roasted vegetable ravioli in August 1997, (ii) three organic salad dressings, sesame seed, sun dried tomato and roasted garlic in September 1997 (iii) two organic fruit based salsas, roasted pineapple and tropical mango in September 1997 and (iv) two organic grill sauces, hot dog and hamburger sauce and roasted pineapple sauce in September 1997. 20 DISTRIBUTION AND MARKETING The Company sells its products either directly or through distributors or independent commissioned food brokers and specialty food brokers to (i) health food and specialty food stores, (ii) club stores (including Price/Costco and BJ's) and (iii) retail chain and independent grocery stores (including Safeway, A&P, Waldbaum's, Trader Joe's, Stop 'N Shop, Edward's and Lucky's). Currently the Company's products are offered in over 6,000 health food stores, 250 club stores and 1,200 grocery stores located in all 50 states and in the Far East, Middle East and Canada. The Company currently uses 12 specialty food brokers and 50 food distributors to sell to health food and other independent retail stores and eight food brokers to sell to club stores and certain grocery store chains. The Company also sells directly to other grocery store chains. In order to increase its distribution and sales, primarily to club stores and grocery store chains, the Company pays "slotting fees", which are payments made by food processors and distributors to retail stores in order to acquire retail shelf space for their food products. The Company's product marketing emphasizes the organic, all natural and generally fat-free content of its products as a healthful and tasty alternative to similar traditional food products. The Company promotes its Millina's Finest product line for sale to natural food and health food stores and the specialty or "gourmet" departments of grocery stores. The Garden Valley Naturals and Parrot brands are targeted primarily for club stores and grocery stores with Garden Valley Naturals representing the higher priced product line. The Company also promotes a pricing strategy in which its organic products are offered at prices only slightly higher than their nonorganic counterparts. One customer (Price/Costco) accounted for more than 10% of the Company's revenues for the year ended June 30, 1996, and two customers (Price/ Costco and Stow Mills) each accounted for more than 10% of the Company's revenues for the nine months ended March 31, 1997. A loss of any of these customers would have a material adverse effect on the Company's operations. MANUFACTURING FACILITIES AND SUPPLIERS The Company manufactures its products in a 24,000 square foot food processing warehouse facility it leases in Morgan Hill, California. Manufacture involves mixing the product's ingredients in 1,000 gallon kettles and then bottling, labeling and casing the product for delivery to the customer. Some products are packaged in shrink-wrapped combination packs consisting of two or more separate products in one tray. The Company manufactures all of its products, except its three mustard condiments, which are processed and packaged for the Company by a co-packer. In addition to the Morgan Hill facility, the Company uses public warehouse facilities on the east coast of the United States for inventory storage and distribution. While many raw materials are available from a number of sources, the Company currently purchases its organic tomato products from only three suppliers and has written agreements covering only a portion of its anticipated tomato product purchases. The Company previously contracted for 2,000,000 pounds of organic tomatoes and is required to pay the remaining $386,775 on the contract by July 30, 1997. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business--Litigation." Two suppliers, Sun Garden Packing Company and Gilroy Canning Company, each accounted for 10% or more of the Company's purchases for the nine months ended March 31, 1997. The Company does not have a written agreement with either supplier but believes that similar products are available from a number of other suppliers for approximately the same prices. COMPETITION The natural food and health food industries in general and the pasta sauce, salsa, condiment and fruit juice businesses in particular are highly competitive, and there are numerous multinational, regional and local firms that currently compete, or are capable of competing, with the Company. Multinational nonorganic (i) pasta sauce competitors include Prego, Ragu, Classico and Newman's Own, (ii) salsa competitors include Pace, El Paso and La Victoria, (iii) condiment competitors include Heinz, French's 21 and Guilden's, and (iv) fruit juice competitors include Minute Maid and Del Monte. The Company also competes with national pasta manufacturers such as RF, Ronzoni and DeBoles, smaller regional or local organic or natural pasta sauce and salsa competitors such as Simply Natural, Muir Glen and Enrico and smaller fruit juice competitors such as Odwalla and Knudsen. Most of the Company's competitors are larger than the Company and have more financial, marketing and management resources, and brand name recognition, than the Company. Competitive factors in the pasta sauce, salsa and related specialty foods industry include price, quality and flavor. The Company positions its product lines to be slightly more expensive than their nonorganic food counterparts but consistent with prices charged by other organic food marketers. The Company believes its products compete favorably against other organic foods with respect to quality and flavor. TRADE NAMES AND TRADEMARKS The Company has registered its "Millina's Finest" and Parrot trademarks in California and has applied for federal trademark registration. The Company has applied for California trademark and trade name protection for its "Garden Valley Naturals" brand. There can be no assurance that any trademark or trade name registrations will be granted to the Company, or, if granted, that the trademarks or trade names will not be copied or challenged by others. GOVERNMENT REGULATION The Company is subject to various federal, state and local regulations relating to cleanliness, maintenance of food production equipment, food storage and food handling, and the Company is subject to unannounced on-site inspections of its manufacturing facilities. As a manufacturer and distributor of foods, the Company is subject to regulation by the U.S. Food and Drug Administration ("FDA"), state food and health boards and local health boards in connection with the manufacturing, handling, storage, transportation, labeling and processing of food products. In order to offer organic food products, the Company is also subject to inspection and regulation by the USDA. Regulations in new markets and future changes in the regulations may adversely impact the Company by raising the cost to manufacture and deliver the Company's products and/or by affecting the perceived healthfulness of the Company's products. A failure to comply with one or more regulatory requirements could interrupt the Company's operations and result in a variety of sanctions, including fines and the withdrawal of the Company's products from store shelves. The Company holds all material licenses and permits required to conduct its operations. The Company is also subject to federal and state laws establishing minimum wages and regulating overtime and working conditions. Since some of the Company's personnel are paid at rates not far above the federal or California state minimum wage, recent and future increases in the federal or California minimum wage have and will result in increases in the Company's labor costs. EMPLOYEES The Company employs 45 individuals including its executive officers, food production, processing and warehousing employees and administrative personnel. The Company's employees are not covered by a collective bargaining agreement, but the Company considers its employee relations to be satisfactory. PROPERTIES The Company leases approximately 24,000 square feet for its corporate office, manufacturing and warehouse facility in Morgan Hill, California from a non-affiliate on a seven-year lease expiring April 30, 2003, at a monthly rental of $6,480. Commencing in March 1997, the rental rate will increase 3% per year. The Company also leases 800 square feet of temporary office space at the same location on a monthly basis for $350 per month. The Company is negotiating with its landlord to lease to the Company an additional 26,000 square feet of space for additional warehousing facilities, although no such lease has been executed. 22 LITIGATION In May 1997 Gilroy Canning Company brought an action against the Company ("Gilroy Canning Company vs. Organic Food Products, Inc. et al" Civil Action No. 97ASO2468 in the Superior Court of California) alleging that the Company failed to make a payment for tomato products in the amount of $398,000 due March 31, 1997 with an additional payment of $386,775 due June 30, 1997. The Company subsequently paid the March 31, 1997 payment and has until July 30, 1997 to satisfy the June 30, 1997 payment. The Company intends to tender the June 30, 1997 payment prior to its July 30, 1997 due date. MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The name, age and term of office of each of the executive officers and directors of the Company are set forth below:
OFFICER OR DIRECTOR NAME POSITION HELD WITH THE COMPANY AGE SINCE - --------------------------------------------------- ----------------------------------------- --- ----------- Floyd R. Hill(1)................................... Chief Executive Officer and Director 53 1995 John Battendieri(1)................................ President and Director 50 1996 Donald L. Ladwig................................... Vice President--Marketing and Sales 49 1995 Perry T. Valassis.................................. Chief Financial Officer 52 1997 Kenneth A. Steel Jr.(1)(2)......................... Director 39 1996 Charles B. Bonner(2)............................... Director 55 1996 Charles R. Dyer(2)................................. Director 53 1996
- ------------------------ (1) Member of the Audit Committee. (2) Member of the Compensation Committee. Directors hold office for a period of one year from their election at the annual meeting of shareholders or until their successors are duly elected and qualified. Officers of the Company are elected by, and serve at the discretion of, the Board of Directors. BACKGROUND The following is a summary of the business experience of each executive officer and director of the Company for at least the last five years: FLOYD R. HILL joined the Company in November 1995 as its Chief Operating Officer and a director, and was appointed Chief Executive Officer in December 1995. In 1989, Mr. Hill co-founded Monterey Pasta, Inc. ("Monterey"), a publicly traded pasta and salsa manufacturer. Mr. Hill served as Monterey's Chief Executive Officer from 1989 to 1993, and its senior vice president from 1993 to November 1995. From 1969 to 1989, Mr. Hill was employed by Eli Lilly & Co. in various marketing and product development positions. JOHN BATTENDIERI founded OFP in 1988 and was its President until it merged with the Company in June 1996. In 1987, he founded Santa Cruz Naturals, an organic fruit juice company, which he sold to Smuckers Corporation in 1992. For more than 25 years, Mr. Battendieri has grown, developed and marketed a wide variety of natural food products. DONALD L. LADWIG joined the Company in June 1995 as its Vice President--Marketing and Sales. From 1992 to May 1995, Mr. Ladwig was employed by Del Monte Foods Corporation as a Vice President of 23 Sales. From 1974 to 1992, he was employed by Proctor and Gamble Corporation in various sales positions, including his last position as Customer Business Development Manager. Mr. Ladwig earned a Masters in Business Administration degree from Pepperdine University. PERRY T. VALASSIS joined the Company in January 1997 as its Chief Financial Officer. From 1990 through 1996, he was employed by Western Microwave, Inc. as its Controller. He has more than 20 years experience in financial reporting for private industry and earned a Masters degree in Business Administration from the University of Southern California. KENNETH A. STEEL, JR. has been employed by K.A. Steel Chemicals, Inc. ("K.A. Steel") since 1978 and has been its Executive Vice President since 1979. K.A. Steel is a privately-held Chicago, Illinois based chemical company in which Mr. Steel holds primary responsibilities for sales, marketing and operations management. Mr. Steel is also the acting Chief Executive Officer and a director of Monterey Pasta, Inc., a publicly traded pasta and salsa manufacturer. CHARLES B. BONNER has been President and majority shareholder since 1990 of Pacific Resources Inc., a Fresno, California merger/acquisition and venture capital firm. From 1975 to 1989, he was President of Bonner Packing Company, a California dried fruit producer and marketer. Mr. Bonner has been a director (since 1993) and an officer (from 1993 to 1994) of Monterey Pasta, Inc., a publicly traded pasta and salsa manufacturer. Mr. Bonner earned a Bachelor of Arts degree from Stanford University. CHARLES R. DYER founded and has been an executive officer and principal of Monterey Bay Food Group, a marketing consultant to the food industry, since 1979. Mr. Dyer earned a Bachelor of Arts degree from the University of California. EXECUTIVE COMPENSATION The following table discloses compensation paid to certain of the Company's executive officers for the years ended June 30, 1995 and 1996. SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION ------------------------------------------- AWARDS ANNUAL COMPENSATION --------------- PAYOUTS ----------------------------------------- ------------- (E) (F) (A) OTHER ANNUAL RESTRICTED (G) (H) NAME AND (B) (C) (D) COMPEN- STOCK OPTIONS/ LTIP PRINCIPAL POSITION YEAR SALARY($) BONUS($) SATION($) AWARD(S)($) SARS(#) PAYOUTS($) - -------------------------- --------- ------------ ------------- ------------ --------------- ----------- ------------- Floyd R. Hill............. 1995 $ 85,000 -0- -0- -0- -0- -0- Chief Executive Officer 1996 $ 110,000 -0- -0- -0- 200,000(1) -0- John Battendieri.......... 1995 $ 220,000(2) -0- -0- -0- -0- -0- President 1996 $ 110,000(2) -0- -0- -0- -0- (I) (A) ALL OTHER NAME AND COMPEN- PRINCIPAL POSITION SATION($) - -------------------------- ----------- Floyd R. Hill............. -0- Chief Executive Officer -0- John Battendieri.......... -0- President 250,000(3)
- -------------------------- (1) See "--1995 Stock Option Plan" and "Principal Shareholders." (2) Represents salary paid Mr. Battendieri by OFP in 1995 and through June 1996, the date of the Company's merger with OFP. From June through December 1996, the Company paid Mr. Battendieri a salary of $55,000. (3) Represents the assumption of a $250,000 obligation due from OFP to Mr. Battendieri, which was assumed and paid by the Company in connection with the OFP merger. The Company has entered into an employment agreement with Mr. Hill expiring July 1999 which provides for an annual salary of $110,000. Mr. Hill was initially granted stock options to purchase 200,000 shares of Common Stock at $2.00 per share in connection with his November 1995 employment with the Company, all of which are fully vested. Subsequently, as a part of his July 1996 employment 24 agreement, Mr. Hill was issued stock options to purchase an additional 200,000 shares of the Company's Common Stock at $2.50 per share exercisable until July 2003. Options to purchase a total of 100,000 of such shares vest in June 1997, 50,000 options vest in June 1998, and the remaining 50,000 options vest in June 1999. Upon completion of the merger with OFP, the Company and Mr. Battendieri (OFP's then President) entered into a three-year employment agreement expiring June 1999, which provides for an annual salary of $110,000 and monthly non-interest bearing loans of $7,500 during the full term of the employment agreement, repayable the earlier of two years from the date of this Prospectus or upon termination of the employment agreement. As of March 31, 1997, an aggregate of $64,900 had been loaned to Mr. Battendieri. The Company agreed to the loan arrangement as a negotiated part of its merger with OFP. The Company's nonsalaried directors do not receive any cash compensation as directors, although they are reimbursed for out-of-pocket expenses in attending Board of Directors' meetings and have been granted an aggregate of 100,000 stock options under the Company's 1995 Stock Option Plan exercisable at prices of $2.00 to $2.50 per share. 1995 STOCK OPTION PLAN In November 1995, the Company adopted a stock option plan (the "Plan") which provides for the grant of stock options intended to qualify as "incentive stock options" or "nonqualified stock options" within the meaning of Section 422 of the United States Internal Revenue Code of 1986 (the "Code"). Incentive stock options are issuable only to eligible officers, directors and key employees of the Company. The Plan is administered by the Board of Directors. The Company had reserved 625,000 shares of Common Stock for issuance under the Plan. Under the Plan, the Board of Directors determines which individuals shall receive stock options, the time period during which the options may be partially or fully exercised, the number of shares of Common Stock that may be purchased under each option and the option price. For incentive stock options (i) the per share exercise price of the Common Stock may not be less than the fair market value of the Common Stock on the date the option is granted and (ii) no person who owns, directly or indirectly, at the time of the granting of an incentive stock option, more than 10% of the total combined voting power of all classes of stock of the Company is eligible to receive stock options unless the option price is at least 110% of the fair market value of the Common Stock subject to the option on the date of grant. No stock options may be transferred by an optionee other than by will or the laws of descent and distribution, and during the lifetime of an optionee, the option may only be exercisable by the optionee. Stock options may be exercised only if the option holder remains continuously associated with the Company from the date of grant to the date of exercise. Stock options under the Plan must be granted within ten years from the effective date of the Plan. The exercise date of a stock option granted under the Plan cannot be later than ten years from the date of grant. Any options that expire unexercised or that terminate upon an optionee's ceasing to be employed by the Company become available once again for issuance. Shares issued upon exercise of an option will rank equally with other shares then outstanding. As of the date of this Prospectus, 625,000 stock options have been granted under the Plan to officers, directors and employees at exercise prices of either $2.00 or $2.50 per share including an aggregate of 555,000 options granted to executive officers and directors. 25 PRINCIPAL SHAREHOLDERS The following table sets forth certain information with respect to the ownership of the Company's Common Stock as of May 31, 1997 by (i) each person who is known by the Company to own of record or beneficially more than 5% of the Company's Common Stock, (ii) each of the Company's directors and (iii) all directors and officers of the Company as a group. The persons listed in the table have sole voting and investment powers with respect to the shares of Common Stock, and the address of each person is in care of the Company at 550 Monterey Road, Morgan Hill, California 95037.
PERCENT PERCENT AMOUNT OF OF CLASS OF CLASS NAME OWNERSHIP PRIOR TO OFFERING AFTER OFFERING - -------------------------------------------------------------------- ---------- ------------------- --------------- Floyd R. Hill(1).................................................... 351,200 6.0 4.9 John Battendieri.................................................... 2,102,499 35.7 29.3 Kenneth A. Steel(2)................................................. 304,163 5.2 4.2 Charles B. Bonner(3)................................................ 5,000 * * Charles R. Dyer(4).................................................. 32,000 * * Dean E. Nicholson................................................... 450,000 7.6 6.3 Steven A. Reedy..................................................... 450,000 7.6 6.3 Spelman & Co., Inc.(5).............................................. 350,000 5.9 4.9 All officers and directors as a group (7 persons)(1)(2)(3)(4)................................... 2,804,862 50.7 41.0
- ------------------------ * Less than 1% (1) Includes stock options to purchase 200,000 shares of Common Stock at $2.00 per share at any time until November 1, 2000. Does not include options issued in connection with Mr. Hill's employment agreement to purchase an additional 200,000 shares of Common Stock at $2.50 per share at various times until July 2003, which options have not yet vested. See "Management--Executive Compensation." (2) Includes options to purchase 30,000 shares of Common Stock at $2.00 per share until March 2001. Does not include stock options to purchase an additional 20,000 shares of Common Stock at $2.50 per share at any time through May 2002, which options have not yet vested. See "Management--Stock Option Plan" and "Certain Transactions." (3) Includes stock options to purchase 5,000 shares of Common Stock at $2.00 per share at any time until March 2001. Does not include options to purchase an additional 20,000 shares of Common Stock at any time through May 2002, which options have not yet vested. See "Management--Stock Option Plan." (4) Does not include stock options to purchase 25,000 shares of Common Stock at $2.50 per share at any time through May 2002, which options have not yet vested. See "Management--Stock Option Plan." (5) Represents common stock purchase warrants to purchase (i) 150,000 shares of Common Stock at $2.00 per share at any time until December 31, 2002 and (ii) 200,000 shares at $2.50 per share at any time until July 31, 2003. See "Underwriting." 26 CERTAIN TRANSACTIONS In October 1995, the Company entered into an agreement with Dean E. Nicholson and Steven A. Reedy, former officers and directors and founding shareholders of the Company, pursuant to which it agreed to repurchase from these individuals an aggregate of 1,100,000 shares of the Company's Common Stock at $2.00 per share for a total purchase price of $2,200,000. The Company paid Messrs. Nicholson and Reedy an aggregate of $640,000 and is required to pay an additional $700,000 of the purchase price the earlier of November 1997 or the closing of the Offering. The balance of $860,000 is payable in installments of $40,000 per month with interest at the rate of 6% per annum. See "Use of Proceeds." In October 1995, the Company entered into an agreement with Kenneth A. Steel, a director of the Company, under which it borrowed $500,000 from Mr. Steel for working capital. The loan bore interest at 10.25% per annum and was due March 31, 1996. In February 1996, Mr. Steel converted the principal amount of the loan into 250,000 shares of the Company's Common Stock at $2.00 per share. The Company previously leased certain machinery and equipment from Messrs. Nicholson and Reedy, paying to them an aggregate of $81,596 and $71,992 for the years ending June 30, 1995 and 1994, respectively. In July 1995, Messrs. Reedy and Nicholson gratuitously contributed the machinery and equipment to the Company's capital. In June 1996, the Company entered into a merger agreement (the "Merger Agreement") with OFP pursuant to which the two companies merged, with the Company becoming the surviving entity. Under the terms of the Merger Agreement, the Company (i) issued 2,250,000 shares of its Common Stock to the shareholders of OFP in exchange for all 606,061 shares of OFP's outstanding Common Stock and (ii) assumed all of the obligations of OFP including a $250,000 obligation due to John Battendieri (OFP's then President and currently the President and a director of the Company), and a revolving line of credit in the approximate aggregate amount of $1,100,000 due to a commercial bank and personally guaranteed by Mr. Battendieri. Under the terms of Mr. Battendieri's June 1996 employment agreement, the Company is required to advance to Mr. Battendieri non-interest bearing loans of $7,500 per month during the full term of his employment agreement, which expires in June 1999. See "Management--Executive Compensation." In June 1996, the Company cancelled its employment agreement with Mr. Nicholson and agreed to pay him a termination fee of $175,000 evidenced by a promissory note in like amount, bearing interest at 8% per annum payable $7,292 per month with the balance of principal and interest due in full in August 1998. At March 31, 1997, the balance due to Mr. Nicholson under the promissory note was $110,851. In May 1997, the Company borrowed $600,000 for working capital from a group of lenders evidenced by promissory notes bearing interest at 10% per annum due the earlier of the closing of the Offering or May 1998. As additional consideration for the loans, the Company issued to the lenders 200,000 common stock purchase warrants, each warrant entitling the holder to purchase one share of Common Stock at $3.00 per share at any time until December 31, 1999. If the loans are not paid by December 1, 1997, each month thereafter 20% of the warrants convert into Common Stock at no cost to the lenders. The lenders have the option to waive interest on the loans in exchange for an additional aggregate of 20,000 warrants carrying the same terms as the initial 200,000 warrants. The loans will be repaid with proceeds of the Offering. See "Use of Proceeds." The Company believes that the terms and conditions of the above transactions were fair, reasonable and consistent with terms the Company could have obtained from unaffiliated third parties. Any future transactions with the Company's executive officers or directors will be entered into on terms that are no less favorable to the Company than those that are available from unaffiliated third parties, and all such transactions will be approved by a majority of the Company's disinterested directors. 27 DESCRIPTION OF SECURITIES COMMON STOCK The Company is authorized to issue 20,000,000 shares of no par value Common Stock. Upon issuance, the shares of Common Stock are not subject to further assessment or call. The holders of Common Stock are entitled to one vote for each share held of record on each matter submitted to a vote of shareholders. Cumulative voting for election of directors is permitted. Subject to the prior rights of any series of Preferred Stock which may be issued by the Company in the future, holders of Common Stock are entitled to receive ratably such dividends as may be declared by the Board of Directors out of funds legally available therefor, and, in the event of the liquidation, dissolution or winding up of the Company, are entitled to share ratably in all assets remaining after payment of liabilities. Holders of Common Stock have no preemptive rights and have no rights to convert their Common Stock into any other securities. The outstanding Common Stock is, and the Common Stock to be outstanding upon completion of the Offering will be, validly issued, fully paid and nonassessable. PREFERRED STOCK The Company is authorized to issue 5,000,000 shares of no par value preferred stock (the "Preferred Stock"). The Preferred Stock may, without action by the shareholders of the Company, be issued by the Board of Directors ("Board") from time to time in one or more series for such consideration and with such relative rights, privileges and preferences as the Board may determine. Accordingly, the Board has the power to fix the dividend rate and to establish the provisions, if any, relating to voting rights, redemption rates, sinking funds, liquidation preferences and conversion rights for any series of Preferred Stock issued in the future. It is not possible to state the actual effect of any other authorization of Preferred Stock upon the rights of holders of Common Stock until the Board determines the specific rights of the holders of any other series of Preferred Stock. The Board's authority to issue Preferred Stock also provides a convenient vehicle in connection with possible acquisitions and other corporate purposes but could have the effect of making it more difficult for a third party to acquire a majority of the outstanding voting stock. Accordingly, the issuance of Preferred Stock may be used as an "anti-takeover" device without further action on the part of the shareholders of the Company and may adversely affect the holders of the Common Stock. See "Risk Factors--Control by Management; Authorization and Issuance of Preferred Stock; Prevention of Changes in Control." COMMON STOCK ELIGIBLE FOR FUTURE SALE Upon completion of the Offering, there will be 6,597,913 shares of Common Stock outstanding, of which 1,300,000 shares have been registered in the Offering, and the remaining 5,297,913 shares have not been registered in the Offering and are "restricted securities" under Rule 144 of the 1933 Act. In general, under Rule 144, a person (or persons whose shares are aggregated) who has satisfied a one-year holding period may, under certain circumstances, sell within any three-month period the number of shares which does not exceed the greater of one percent of the then outstanding shares of Common Stock (approximately 65,979 shares immediately after the Offering assuming no exercise of the Representatives' Warrants, the Overallotment Option, or other outstanding stock options or common stock purchase warrants) or the average weekly trading volume during the four calendar weeks prior to such sale. Rule 144 also permits, under certain circumstances, the sale of shares by a person without any quantity limitation after the securities have been held for two years. All 5,297,913 shares of Common Stock are restricted securities but may be sold under Rule 144, commencing 90 days after the effective date of the Offering. The Company is unable to predict the effect that any sales, under Rule 144 or otherwise, may have on the then prevailing market price of the Common Stock. All of the Company's shareholders have agreed not to sell or otherwise dispose of any of their shares of Common Stock for a period of 12 months from the date of 28 this Prospectus, without the prior written consent of the Representatives. The Company has also granted certain demand and piggy-back registration rights to the Representatives with respect to the Representatives' Warrants as well as the Common Stock issuable upon exercise of the Representatives' Warrants. TRANSFER AGENT The Company has appointed Corporate Stock Transfer, Inc., 370 17th Street, Suite 2350, Denver, Colorado 80202, as the transfer agent for the Common Stock. DIVIDENDS The Company has not paid dividends on its Common Stock since inception and does not plan to pay dividends in the foreseeable future. Earnings, if any, will be retained to finance growth. LIMITATION ON LIABILITIES The Company's Articles of Incorporation provide that liability of directors to the Company for monetary damages is eliminated to the full extent provided by California law. Under California law, a director is not personally liable to the Company or its shareholders for monetary damages for breach of fiduciary duty as a director except for liability (i) for any breach of the director's duty of loyalty to the Company or its shareholders, (ii) for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law, (iii) for authorizing the unlawful payment of a dividend or other distribution on the Company's capital stock or the unlawful purchases of its capital stock, or (iv) for any transaction from which the director derived any improper personal benefit. The effect of this provision in the Articles of Incorporation is to eliminate the rights of the Company and its shareholders (through shareholders' derivative suits on behalf of the Company) to recover monetary damages from a director for breach of the fiduciary duty of care as a director (including breaches resulting from negligent or grossly negligent behavior) except in the situations described in clauses (i) through (iv) above. This provision does not limit or eliminate the rights of the Company or any shareholder to seek non-monetary relief, such as an injunction or rescission, in the event of a breach of a director's duty of care or any liability for violation of the federal securities laws. 29 UNDERWRITING The Underwriters named below have severally agreed, subject to the terms and conditions of the Underwriting Agreement, to purchase from the Company the number of shares set forth opposite their names.
NUMBER OF UNDERWRITER SHARES - --------------------------------------------------------------------------------- ---------- Sentra Securities Corporation.................................................... Spelman & Co., Inc............................................................... Paradise Valley Securities, Inc.................................................. ---------- Total........................................................................ 1,300,000 ---------- ----------
The Company has been advised by the Representatives that the Underwriters propose to offer the Common Stock purchased by them directly to the public at the public offering price set forth on the cover page of this Prospectus and to certain dealers at a price that represents a concession of $ per share. The Underwriters may allow, and such dealers may reallow, a concession within the discretion of the Representatives. The Underwriters are committed to purchase and pay for all of the Common Stock if any Common Stock is taken. After the initial public offering of the Common Stock, the offering price and the selling terms may be changed by the Underwriters. The Company has granted the Representatives an Overallotment Option, exercisable within 30 days from the date of this Prospectus, to purchase up to 195,000 shares of Common Stock solely to cover overallotments. The Underwriters will purchase the Common Stock (including Common Stock subject to the Overallotment Option) from the Company at a price of $3.60 per share. In addition, the Company has agreed to pay to Sentra Securities Corporation and Spelman & Co., Inc. a 3% nonaccountable expense allowance on the aggregate initial public offering price of the shares of Common Stock, including shares subject to the Overallotment Option, none of which has been paid. The Company has agreed to issue the Representatives' Warrants to the Representatives for a consideration of $100. The Representatives' Warrants are exercisable at any time in the four-year period commencing one year from the date of this Prospectus to purchase up to 130,000 shares of Common Stock for $4.80 per share. The Representatives' Warrants are not transferable (nor may they be sold, hypothecated or pledged) for one year from the date of this Prospectus except (i) to an Underwriter or a partner or officer of an Underwriter or (ii) by will or operation of law. During the term of the Representatives' 30 Warrants, the holder thereof is given the opportunity to profit from a rise in the market price of the Company's securities. The Company may find it more difficult to raise additional equity capital while the Representatives' Warrants are outstanding. At any time at which the Representatives' Warrants are likely to be exercised, the Company would probably be able to obtain additional equity capital on more favorable terms. The Company has registered the Common Stock underlying the Representatives' Warrants under the 1933 Act. If the Company files a registration statement relating to an equity offering under the provisions of the 1933 Act at any time during the five-year period following the date of this Prospectus, the holders of the Representatives' Warrants or underlying Common Stock will have the right, subject to certain conditions, to include in such registration statement, at the Company's expense, all or part of the underlying Common Stock at the request of the holders. Additionally, the Company has agreed, for a period of five years commencing on the date of this Prospectus, on demand of the holders of a majority of the Representatives' Warrants or the Common Stock issued or issuable thereunder, to register the Common Stock underlying the Representatives' Warrants one time at the Company's expense. The registration of securities pursuant to the Representatives' Warrants may result in substantial expense to the Company at a time when it may not be able to afford such expense and may impede future financing. The Company may find that the terms on which it could obtain additional capital may be adversely affected while the Representatives' Warrants are outstanding. The number of shares of Common Stock covered by the Representatives' Warrants and the exercise price are subject to adjustment under certain events to prevent dilution. In connection with the Offering, the Underwriters may purchase and sell the Common Stock in the open market. These transactions may include over-allotment and stabilizing transactions and purchases to cover syndicate short positions created in connection with the Offering. Stabilizing transactions consist of certain bids or purchases for the purposes of preventing or retarding a decline in the market price of the Common Stock; and syndicate short positions involve the sale by the Underwriters of a greater number of shares of Common Stock than they are required to purchase from the Company in the Offering. The Underwriters also may impose a penalty bid, whereby selling concessions allowed to syndicate members of other broker-dealers in respect of the Common Stock sold in the Offering for their account may be reclaimed by the syndicate if such securities are repurchased by the syndicate in stabilizing or covering transactions. These activities may stabilize, maintain or otherwise affect the market price of the Common Stock, which may be higher than the price that might otherwise prevail in the open market; and these activities, if commenced, may be discontinued at any time. These transactions may be effected on the SmallCap Market. The initial public offering price of the Common Stock was determined by negotiations between the Company and the Representatives and does not necessarily bear any relationship to recognized criteria for the valuation of such securities. Factors considered in such negotiations included the Company's current level of revenues and earnings, its prospects for future growth based upon proceeds of the Offering, the nature of the Company's products, the organic food products industry in general and the level of competition within the industry. There can be no assurance that a regular trading market for the Common Stock will develop or continue after the Offering or, if such a market develops, that the market price will exceed the offering price. Spelman & Co., Inc. ("Spelman") acted as the Company's Placement Agent in two prior private placements of the Company's securities pursuant to which Spelman sold (i) 1,350,000 shares of the Company's Common Stock at $2.00 per share and (ii) 823,500 shares of the Company's Common Stock at $2.50 per share. In connection with the first private placement completed in November 1995, the Company paid Spelman an aggregate of $351,000 in cash and issued to it common stock purchase warrants to purchase 150,000 shares at $2.00 per share exercisable at any time until December 31, 2002. In connection with the second private placement completed in July 1996, the Company paid Spelman an aggregate of $267,638 in cash and issued to it common stock purchase warrants to purchase an additional 200,000 shares at $2.50 per share exercisable at any time until July 31, 2003. See "Principal Shareholders." 31 The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the 1933 Act, or to contribute to payments that any Underwriter may be required to make in respect thereof. The Representatives do not intend to sell any of the Common Stock to accounts over which they exercise discretionary authority. LEGAL MATTERS The validity of the shares of Common Stock offered hereby will be passed upon for the Company by Gary A. Agron, Englewood, Colorado. Certain legal matters in connection with the Offering will be passed upon for the Representatives by Luce, Forward, Hamilton & Scripps LLP, San Diego, California. EXPERTS The financial statements of the Company for the years ended June 30, 1995 and 1996, appearing in this Prospectus, have been audited by Semple & Cooper LLP, independent certified public accountants, as stated in their report appearing herein, and have been so included herein in reliance upon such report given upon the authority of that firm as experts in accounting and auditing. AVAILABLE INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission") a Registration Statement on Form SB-2 (the "Registration Statement") under the 1933 Act with respect to the securities offered hereby. This Prospectus does not contain all the information set forth in the Registration Statement, certain items of which are omitted in accordance with the rules and regulations of the Commission. For further information with respect to the Company and the securities offered by this Prospectus, reference is made to such Registration Statement and the exhibits thereto which may be inspected without charge at the public reference facilities of the Commission at Judiciary Plaza, 450 Fifth Street N.W., Washington, DC 20549; Northwest Atrium Center, 500 West Madison Street, Suite 1400, Chicago, IL 60661; 7 World Trade Center, New York, NY 10048; and 5670 Wilshire Boulevard, Los Angeles, CA 90036. The Company will be subject to the informational requirements of the Securities Exchange Act of 1934 (the "1934 Act") and, in accordance therewith, will file reports, proxy statements and other information with the Commission. Such reports, proxy statements and other information may be inspected at public reference facilities of the Commission at Judiciary Plaza, 450 Fifth Street N.W., Washington, DC 20549; Northwest Atrium Center, 500 West Madison Street, Suite 1400, Chicago, IL 60661; 7 World Trade Center, New York, NY 10048; and 5670 Wilshire Boulevard, Los Angeles, CA 90036. Copies of such material can be obtained from the Public Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street N.W., Washington, DC 20549 at prescribed rates. The Company will furnish annual reports to its shareholders which will include year end audited financial statements. The Company will also furnish to its shareholders quarterly reports and such other reports as may be authorized by its Board of Directors. 32 To The Shareholders and Board of Directors of Organic Food Products, Inc. We have audited the accompanying balance sheet of Organic Food Products, Inc. as of June 30, 1996, and the related statements of operations, changes in shareholders' equity, and cash flows for the years ended June 30, 1996 and 1995. 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 in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Organic Food Products, Inc. as of June 30, 1996, and the results of its operations, changes in shareholders' equity, and its cash flows for the years ended June 30, 1996 and 1995, in conformity with generally accepted accounting principles. SEMPLE & COOPER, LLP Certified Public Accountants Phoenix, Arizona February 28, 1997 F-1 ORGANIC FOOD PRODUCTS, INC. BALANCE SHEETS ASSETS
JUNE 30, 1996 ------------ MARCH 31, 1997 ------------ (UNAUDITED) Current Assets: Current Assets: Cash................................................................................ $ 191,073 $ 200 Accounts receivable, net (Notes 1 and 4)............................................ 818,342 1,145,252 Inventory (Notes 1, 2, 4 and 6) 1,429,743 3,014,630 Prepaid expenses.................................................................... 25,240 28,010 Advances to shareholder (Note 3).................................................... -- 64,914 Income tax refund receivable........................................................ 259,447 134,355 Deferred tax asset (Note 9) -- 47,500 ------------ ------------ Total Current Assets.............................................................. 2,723,845 4,434,861 ------------ ------------ Property and Equipment: (Notes 1, 4 and 5)............................................ Computer software................................................................... 24,431 57,757 Leasehold improvements.............................................................. 109,182 150,471 Machinery and equipment............................................................. 595,396 795,997 Office equipment.................................................................... 51,781 61,256 Printing plates..................................................................... 12,738 12,997 Vehicles............................................................................ 16,088 12,604 ------------ ------------ 809,616 1,091,082 Less: accumulated depreciation...................................................... (59,030) (138,947) ------------ ------------ 750,586 952,135 ------------ ------------ Other Assets: Deposits and other.................................................................. 24,003 9,378 Deferred offering costs (Notes 1 and 14)............................................ 71,225 282,280 Goodwill, net (Note 1).............................................................. 2,372,175 2,283,219 ------------ ------------ 2,467,403 2,574,877 ------------ ------------ Total Assets...................................................................... $ 5,941,834 $ 7,961,873 ------------ ------------ ------------ ------------
The Accompanying Notes are an Integral Part of the Financial Statements F-2 ORGANIC FOOD PRODUCTS, INC. BALANCE SHEETS (CONTINUED) LIABILITIES AND SHAREHOLDERS' EQUITY
JUNE 30, MARCH 31, 1996 1997 ------------- ------------- (UNAUDITED) Current Liabilities: Notes payable--current portion (Note 4)........................................... $ 1,048,595 $ 1,688,923 Notes payable--related parties--current portion (Note 3).......................... 333,732 1,251,609 Capital lease obligations--current portion (Notes 1 and 5)........................ 5,323 7,752 Accounts payable.................................................................. 2,030,234 1,606,934 Accrued wages and taxes........................................................... 74,499 91,948 ------------- ------------- Total Current Liabilities....................................................... 3,492,383 4,647,166 ------------- ------------- Long-Term Liabilities: Notes payable--long-term portion (Note 4)......................................... 512 -- Notes payable--related parties--long-term portion (Note 3)........................ 1,540,541 361,729 Capital lease obligations--long-term portion (Notes 1 and 5)...................... 1,408 18,745 Deferred income taxes payable (Note 9)............................................ -- 29,500 ------------- ------------- 1,542,461 409,974 ------------- ------------- Commitments (Notes 3 and 6)......................................................... -- -- Shareholders' Equity: (Note 8)...................................................... Common stock...................................................................... 2,317,400 3,971,721 Accumulated deficit from S Corporation............................................ (1,410,410) (1,410,410) Retained earnings................................................................. -- 343,422 ------------- ------------- 906,990 2,904,733 ------------- ------------- Total Liabilities and Shareholders' Equity...................................... $ 5,941,834 $ 7,961,873 ------------- ------------- ------------- -------------
The Accompanying Notes are an Integral Part of the Financial Statements F-3 ORGANIC FOOD PRODUCTS, INC. STATEMENTS OF OPERATIONS
YEARS ENDED NINE MONTH PERIODS ENDED -------------------------- -------------------------- JUNE 30, JUNE 30, MARCH 31, MARCH 31, 1996 1995 1997 1996 ------------ ------------ ------------ ------------ (UNAUDITED) Revenues................................................. $ 7,641,539 $ 5,027,278 $ 9,067,049 $ 5,651,707 Cost of Goods Sold....................................... 5,822,337 3,750,310 6,085,139 4,242,506 ------------ ------------ ------------ ------------ Gross Profit............................................. 1,819,202 1,276,968 2,981,910 1,409,201 ------------ ------------ ------------ ------------ Sales and Marketing Expense.............................. 954,108 444,862 1,497,059 464,083 General and Administrative Expenses...................... 1,244,914 697,591 896,711 845,049 Restructuring charge (Note 13)........................... 257,468 -- -- -- ------------ ------------ ------------ ------------ 2,456,490 1,142,453 2,393,770 1,309,132 ------------ ------------ ------------ ------------ Income (Loss) from Operations............................ (637,288) 134,515 588,140 100,069 Interest Income (Expense), Net........................... (349,122) (121,704) (151,338) (167,454) Other Income (Expense), Net.............................. 2,948 10,607 13,712 1,994 ------------ ------------ ------------ ------------ Income (Loss) before Provision for Income Taxes.......... (983,462) 23,418 450,514 (65,391) ------------ ------------ ------------ ------------ Provision for Income Tax Benefit (Expense): (Note 1) --current............................................ -- -- (125,092) -- --deferred........................................... -- -- 18,000 -- ------------ ------------ ------------ ------------ -- -- (107,092) -- ------------ ------------ ------------ ------------ Net Income (Loss)........................................ (983,462) 23,418 $ 343,422 (65,391) ------------ ------------ Pro forma income tax (expense) benefit (unaudited)............................................. 334,400 (5,600) 15,000 ------------ ------------ ------------ Pro forma Net Income (Loss) after Income Tax Adjustment (unaudited)............................................. $ (649,062) $ 17,818 $ (50,391) ------------ ------------ ------------ ------------ ------------ ------------ Earnings (Loss) per Share (Note 1)....................... $ .06 Pro forma Net Income (Loss) per Share (unaudited)........ $ (.11) $ -- $ (.01) ------------ ------------ ------------ ------------ ------------ ------------ Weighted Average Number of Shares Outstanding............ 5,767,663 5,767,663 5,767,663 5,767,663 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
The Accompanying Notes are an Integral Part of the Financial Statements F-4 ORGANIC FOOD PRODUCTS, INC. STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT) FOR THE YEARS ENDED JUNE 30, 1996 AND 1995 AND FOR THE NINE MONTH PERIOD ENDED MARCH 31, 1997 (UNAUDITED)
ACCUMULATED TOTAL COMMON STOCK ADDITIONAL DEFICIT RETAINED SHAREHOLDERS' ------------------------ PAID-IN FROM S EARNINGS EQUITY SHARES AMOUNT CAPITAL CORPORATION (DEFICIT) (DEFICIT) ---------- ------------ ----------- ------------ ---------- ------------ Balance at June 30, 1994.......... 2,250,000 $ 67,400 $ 8,571 $ (458,937) $ -- $ (382,966) Net income for the year ended June 30, 1995........................ -- -- -- 23,418 -- 23,418 ---------- ------------ ----------- ------------ ---------- ------------ Balance at June 30, 1995.......... 2,250,000 67,400 8,571 (435,519) -- (359,548) Reverse merger and conversion of S Corporation losses.............. 2,250,000 2,250,000 (8,571) 8,571 -- 2,250,000 Net loss for the year ended June 30, 1996........................ -- -- -- (983,462) -- (983,462) ---------- ------------ ----------- ------------ ---------- ------------ Balance at June 30, 1996.......... 4,500,000 2,317,400 -- (1,410,410) -- 906,990 Proceeds from private offering, net of costs of $340,462........ 823,500 1,718,288 -- -- -- 1,718,288 Purchase and retirement of treasury stock.................. (31,250) (78,125) -- -- -- (78,125) Stock issued for director expenses........................ 5,663 14,158 -- -- -- 14,158 Net income for the nine month period ended March 31, 1997 (unaudited)..................... -- -- -- -- 343,422 343,422 ---------- ------------ ----------- ------------ ---------- ------------ Balance at March 31, 1997......... 5,297,913 $ 3,971,721 $ -- $ (1,410,410) $ 343,422 $2,904,733 ---------- ------------ ----------- ------------ ---------- ------------ ---------- ------------ ----------- ------------ ---------- ------------
The Accompanying Notes are an Integral Part of the Financial Statements F-5 ORGANIC FOOD PRODUCTS, INC. STATEMENTS OF CASH FLOWS
YEARS ENDED NINE MONTH PERIODS ENDED ---------------------------- ----------------------------- JUNE 30, JUNE 30, MARCH 31, 1996 1995 MARCH 31, 1997 1996 ------------- ------------- -------------- ------------- (UNAUDITED) Increase (Decrease) in Cash: Cash flows from operating activities: Cash received from customers...................... $ 7,164,566 $ 4,736,771 $ 8,771,812 $ 5,138,654 Cash paid to suppliers and employees.............. (7,834,712) (4,411,400) (10,033,456) (5,343,288) Interest paid..................................... (319,879) (92,023) (91,443) (167,892) Interest received................................. 438 -- 1,002 438 Net liabilities acquired in merger................ 717,591 -- -- -- ------------- ------------- -------------- ------------- Net cash provided (used) by operating activities.................................... (271,996) 233,348 (1,352,085) (372,088) ------------- ------------- -------------- ------------- Cash flows from investing activities: Purchase of fixed assets.......................... (17,135) (9,824) (294,457) (49,011) Advances to shareholder........................... -- -- (64,914) -- ------------- ------------- -------------- ------------- Net cash used by investing activities........... (17,135) (9,824) (359,371) (49,011) ------------- ------------- -------------- ------------- Cash flows from financing activities: Repayment of capital lease........................ (4,532) (2,142) (3,986) (3,103) Repayment of notes payable........................ (11,847) (170,467) (2,290) (196,267) Repayment of notes payable--related parties....... (65,781) (173,875) (321,832) (57,299) Proceeds from notes payable....................... 509,395 9,936 419,583 632,768 Proceeds from notes payable--related party........ 52,169 111,000 -- 44,500 Proceeds from issuance of stock................... -- -- 1,718,288 -- Purchase of treasury stock........................ -- -- (78,125) -- Deferred offering costs........................... -- -- (211,055) -- ------------- ------------- -------------- ------------- Net cash provided (used) by financing activities.................................... 479,404 (225,548) 1,520,583 420,599 ------------- ------------- -------------- ------------- Net increase (decrease) in cash..................... 190,273 (2,024) (190,873) (500) Cash at beginning of period......................... 800 2,824 191,073 800 ------------- ------------- -------------- ------------- Cash at end of period............................... $ 191,073 $ 800 $ 200 $ 300 ------------- ------------- -------------- ------------- ------------- ------------- -------------- -------------
The Accompanying Notes are an Integral Part of the Financial Statements F-6 ORGANIC FOOD PRODUCTS, INC. STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED NINE MONTH PERIODS ENDED -------------------------- -------------------------- JUNE 30, JUNE 30, MARCH 31, MARCH 31, 1996 1995 1997 1996 ------------- ----------- ------------- ----------- (UNAUDITED) Reconciliation of Net Income (Loss) to Net Cash Provided (Used) by Operating Activities: Net Income (Loss)........................................ $ (983,462) $ 23,418 $ 343,422 $ (65,391) ------------- ----------- ------------- ----------- Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: Depreciation and amortization........................ 18,875 13,785 207,655 20,766 Loan discount amortization........................... -- -- 60,897 -- Accrued interest added to note principal............. 29,681 29,681 -- 22,261 (Gain) loss on sale of assets........................ -- -- (2,039) -- Employment contract settlement....................... -- -- -- -- Net liabilities acquired in merger................... 717,591 -- -- -- Inventory financed through notes payable............. -- -- 222,523 -- Stock issued for director's expenses, net............ -- -- 14,158 -- Changes in Assets and Liabilities: Accounts receivable, net............................. (245,424) (264,319) (326,910) (515,047) Inventory............................................ (1,167,388) 340,964 (1,584,887) (600,201) Prepaid expenses..................................... (2,077) (15,593) (2,770) (58,456) Income tax refund receivable......................... (259,447) -- 125,092 -- Deferred tax asset................................... -- -- (47,500) -- Refundable deposits.................................. (24,003) -- 14,625 -- Accounts payable..................................... 1,599,404 75,167 (423,300) 821,113 Accrued wages and taxes.............................. 44,254 30,245 17,449 2,867 Income taxes payable--deferred....................... -- -- 29,500 -- ------------- ----------- ------------- ----------- 711,466 209,930 (1,695,507) (306,697) ------------- ----------- ------------- ----------- Net cash provided (used) by operating activities......... $ (271,996) $ 233,348 $ (1,352,085) $ (372,088) ------------- ----------- ------------- ----------- ------------- ----------- ------------- -----------
The Accompanying Notes are an Integral Part of the Financial Statements F-7 ORGANIC FOOD PRODUCTS, INC. NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, NATURE OF OPERATIONS AND USE OF ESTIMATES: NATURE OF OPERATIONS: Organic Food Products, Inc. (formerly Garden Valley Naturals, Inc.) is a Corporation which was duly formed and organized under the laws of the State of California. The Corporation was incorporated in the State of California on July 7, 1987. The principal business purpose of the Company is the production and distribution of organic food products throughout the United States. ACQUISITION AND MERGER: As of June 28, 1996, Garden Valley Naturals, Inc. (GVN) acquired all of the outstanding common stock of Organic Food Products, Inc. (OFP) for 2,250,000 shares of GVN's common stock. Under the terms of the acquisition, OFP obtained fifty percent (50%) of the voting control of GVN. Although GVN is the parent company of OFP following the transaction, the transaction was accounted for as a recapitalization of OFP and a purchase by OFP of GVN, as the principal shareholder of OFP obtained forty-nine and one-half percent (49.5%) of the voting rights, and, as the single largest shareholder, effectively controls the post-merger company. The accompanying financial statements of OFP include the accounts of OFP for all periods presented, and the accounts of GVN from June 28, 1996, the effective date of the acquisition. PERVASIVENESS OF ESTIMATES: 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 reporting period. Actual results could differ from those estimates. INTERIM FINANCIAL STATEMENTS: The interim financial statements for the nine month periods ended March 31, 1997 and 1996 are unaudited. In the opinion of management, such statements reflect all adjustments (consisting only of normal recurring adjustments) necessary for a fair representation of the results of the interim periods. The results of operations for the nine month period ended March 31, 1997 are not necessarily indicative of the results for the entire year. STOCK-BASED COMPENSATION: In 1996, the Company adopted for footnote disclosure purposes only, SFAS No. 123, "Accounting for Stock-Based Compensation", which requires that companies measure the cost of stock-based employee compensation at the grant date based on the value of the award and recognize this cost over the service period. The value of the stock-based award is determined using the intrinsic value method whereby compensation cost is the excess of the market prices of the stock at grant date or other measurement date over the amount an employee must pay to acquire the stock. ACCOUNTS RECEIVABLE: The Company follows the allowance method of recognizing uncollectible accounts receivable. The allowance method recognizes bad debt expense as a percentage of accounts receivable based on a review of F-8 ORGANIC FOOD PRODUCTS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, NATURE OF OPERATIONS AND USE OF ESTIMATES: (CONTINUED) the individual accounts outstanding, and the Company's prior history of uncollectible accounts receivable. At June 30, 1996 and March 31, 1997, an allowance of $89,983 and $40,000 (unaudited), respectively, has been established for potentially uncollectible accounts receivable. INVENTORY: Inventory quantities and valuations are determined by a physical count and pricing of same. Inventory is stated at the lower of cost, first-in, first-out method, or market. At June 30, 1996 and March 31, 1997, inventory is stated net of an allowance for obsolete inventory, in the amounts of $107,072 and $70,000 (unaudited), respectively. EARNINGS PER SHARE: Earnings per share are based upon the weighted average number of shares outstanding for each of the respective periods, after giving retroactive effect to the 2,250,000 shares issued in the purchase transaction. In addition, for purposes of this computation, the stock split and private offering (as described in Note 8) have been given retroactive effect. The Company has proposed an initial public offering of its common stock. Pursuant to Securities and Exchange Commission rules, shares of common stock issued for consideration below the anticipated offering price per share prior to filing of the registration statement have been included in the calculation of common stock equivalent shares as if they had been outstanding for all periods presented. In addition, shares of common stock that are subject to options and warrants having exercise prices that are below the anticipated offering price per share, whether or not exercisable, have been included in the earnings per share calculation, using the treasury stock method. PROPERTY AND EQUIPMENT: Property and equipment are recorded at cost. Depreciation is provided for using the straight-line method over the estimated useful lives of the assets. Maintenance and repairs that neither materially add to the value of the property nor appreciably prolong its life are charged to expense as incurred. Betterments or renewals are capitalized when incurred. For the years ended June 30, 1996 and 1995, and for the nine month periods ended March 31, 1997 and 1996, depreciation expense was $18,875, $13,785, $118,699 (unaudited) and $20,766 (unaudited), respectively. A summary of the estimated useful lives is as follows: Computer software.............................................. 5 years Leasehold improvements......................................... 7 years 7 - 20 Machinery and equipment........................................ years Office equipment............................................... 5 years Printing plates................................................ 7 years Vehicles....................................................... 5 years
The Company is the lessee of vehicles and equipment under capital lease agreements expiring through October, 1997. The assets and liabilities under the capital leases are recorded at the lower of the present value of the minimum lease payments or the fair market value of the assets. The assets are depreciated over their estimated productive lives. Depreciation of the assets under the capital leases is included in F-9 ORGANIC FOOD PRODUCTS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, NATURE OF OPERATIONS AND USE OF ESTIMATES: (CONTINUED) depreciation expense, as noted above, for the years ended June 30, 1996 and 1995, and for the nine month periods ended March 31, 1997 and 1996. DEFERRED OFFERING COSTS: Deferred offering costs represent costs incurred in connection with the Company's equity offerings subsequent to the respective balance sheet dates. As of June 30, 1996 and March 31, 1997, the Company had incurred $71,225 and $282,280 (unaudited), respectively, in relation to these activities. Deferred offering costs will be charged against the net proceeds from the offerings. INCOME TAXES: Prior to the merger, OFP had elected to be treated as a Subchapter S Corporation for federal and state tax reporting purposes. As such, all taxable income and available tax credits are passed from the corporate entity to the individual shareholder. It is the responsibility of the individual shareholders to report the taxable income and tax credits, and pay the resulting taxes. Effective June 28, 1996, the date of the merger, the Subchapter S election was revoked. Deferred income taxes arise from timing differences resulting from revenues and expenses reported for financial accounting and tax reporting purposes in different periods. Deferred income taxes represent the estimated tax asset or liability from different depreciation methods used for financial accounting and tax reporting purposes and for timing differences in the utilization of net operating loss carryforwards and valuation allowances. GOODWILL: Goodwill represents the excess of the cost of the Company acquired over the fair value of their net assets at the date of acquisition, and is being amortized on the straight-line method over twenty-five (25) years. Amortization expense charged to operations for the nine month period ended March 31, 1997 was $88,956. The Company evaluates the estimated net realizable value of its goodwill at each balance sheet date, and records writedowns if the net book value exceeds net realizable value. FAIR VALUE OF FINANCIAL INSTRUMENTS: The fair value of the Company's notes payable and notes payable-related parties is based on rates currently available from the bank for debt with similar terms and maturities. The fair value of the Company's committments to purchase inventory is based on current market prices available to the Company. F-10 ORGANIC FOOD PRODUCTS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. INVENTORY: As of June 30, 1996 and March 31, 1997, inventory consisted of the following:
JUNE 30, 1996 ------------ MARCH 31, 1997 ------------ (UNAUDITED) Raw materials.................................................... $ 678,034 $1,854,984 Finished goods................................................... 858,781 1,229,646 ------------ ------------ 1,536,815 3,084,630 Less: provision for obsolete inventory........................... (107,072) (70,000) ------------ ------------ $ 1,429,743 $3,014,630 ------------ ------------ ------------ ------------
3. RELATED PARTY TRANSACTIONS: ADVANCES TO SHAREHOLDER: As of March 31, 1997, the Company has advanced $64,914 to a shareholder. The advance is unsecured, non-interest bearing, and considered short-term in nature. NOTES PAYABLE-RELATED PARTIES: At June 30, 1996 and March 31, 1997, notes payable-related parties, consist of the following:
JUNE 30, 1996 ------------ MARCH 31, 1997 ------------- (UNAUDITED) Two (2) 6% interest bearing $780,000 notes payable to two (2) corporate shareholders, $700,000 due on the completion of an initial public offering, in addition to monthly payments of $40,000, including principal and interest until paid in full, net of imputed discount of $118,411 and $57,513, (unaudited), respectively......... $ 1,441,589 $ 1,502,487 8% note payable to a corporate shareholder, with monthly payments of $7,292, including principal and interest, due August, 1998; unsecured...................... 175,000 110,851 Various non-interest bearing notes payable to a corporate shareholder, due January, 1997; unsecured.................................................................... 10,349 -- 12% note payable to a corporate shareholder, due in full January, 1997; unsecured.... 247,335 -- ------------ ------------- 1,874,273 1,613,338 Less: current portion................................................................ (333,732) (1,251,609) ------------ ------------- $ 1,540,541 $ 361,729 ------------ ------------- ------------ -------------
F-11 ORGANIC FOOD PRODUCTS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 3. RELATED PARTY TRANSACTIONS: (CONTINUED) A schedule of future minimum principal payments due on notes payable outstanding at June 30, 1996 and March 31, 1997, is as follows:
YEAR ENDING YEAR JUNE 30, - ----------------------------------------------------------------- ------------ YEAR ENDING MARCH 31, ------------ (UNAUDITED) 1997............................................................. $ 333,732 $ -- 1998............................................................. 1,524,157 1,251,609 1999............................................................. 16,384 361,729 ------------ ------------ $ 1,874,273 $1,613,338 ------------ ------------ ------------ ------------
COMMITMENTS: The Company was leasing facilities from a related party. The lease was cancelled during February, 1996. The terms of the lease agreement required the Company to pay common area maintenance, taxes and other costs, as well as a discretionary base rent of approximately $4,500 per month. Rent expense under the operating lease agreement for the nine month period ended March 31, 1996 was $14,500 (unaudited). 4. NOTES PAYABLE: At June 30, 1996 and March 31, 1997, notes payable consist of the following:
JUNE 30, 1996 ------------- MARCH 31, 1997 ------------- (UNAUDITED) A revolving line of credit with Wells Fargo Bank for $1,700,000, interest at the bank's prime rate plus 1% per annum, interest due monthly, with the outstanding principal balance due in full November 1, 1997; collateralized by various corporate assets.................................................................. $ -- $ 1,466,400 Non-interest bearing note payable to a supplier in five monthly installments of $44,505, commencing June 1, 1997; unsecured....................................... -- 222,523 Three (3) lines of credit with Wells Fargo Bank totalling $1,178,000 ($546,000, $500,000 and $132,000), interest at the bank's prime rate plus .75%, 2%, and 2%, respectively, per annum, interest due monthly, with $1,046,000 expiring October, 1996, and the remaining $132,000 expiring February, 2001; collateralized by various corporate assets and the personal guarantee of the corporate shareholder....................................................................... 1,046,818 -- 9.5% note payable to GMAC in monthly installments of $173, including principal and interest, due in full September, 1997; collateralized by a vehicle................ 2,289 -- ------------- ------------- 1,049,107 1,688,923 Less: current portion of long-term notes payable.................................... (1,048,595) (1,688,923) ------------- ------------- $ 512 $ -- ------------- ------------- ------------- -------------
F-12 ORGANIC FOOD PRODUCTS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 4. NOTES PAYABLE: (CONTINUED) A schedule of future minimum principal payments due on notes payable outstanding at June 30, 1996 and March 31, 1997, is as follows:
YEAR ENDING YEAR JUNE 30, - --------------------------------------------------------------------------- ------------ YEAR ENDING MARCH 31, ------------ (UNAUDITED) 1997....................................................................... $ 1,048,595 $ -- 1998....................................................................... 512 1,688,923 ------------ ------------ $ 1,049,107 $1,688,923 ------------ ------------ ------------ ------------
5. OBLIGATIONS UNDER CAPITAL LEASES: The Company is the lessee of vehicles and equipment, with an aggregate cost of $49,811, under capital lease agreements which expire through September, 1997. As of June 30, 1996 and March 31, 1997, minimum future lease payments due under the capital lease agreements, are as follows:
YEAR ENDING YEAR JUNE 30, - ------------------------------------------------------------------------------- --------- YEAR ENDING MARCH 31, ------------ (UNAUDITED) 1997........................................................................... $ 7,972 $ -- 1998........................................................................... 2,208 10,226 1999........................................................................... -- 5,952 2000........................................................................... -- 5,952 2001........................................................................... -- 5,952 2002........................................................................... -- 4,464 --------- ------------ Total minimum lease payments................................................... 10,180 32,546 Less: amount representing interest............................................. (3,449) (6,049) --------- ------------ Present value of net minimum lease payments.................................... 6,731 26,497 Less: current maturities of capital lease obligations.......................... (5,323) (7,752) --------- ------------ Non-current maturities of capital lease obligations............................ $ 1,408 $ 18,745 --------- ------------ --------- ------------
Interest rates under the capital lease obligations range from ten percent (10%) to twenty-one percent (21%) per annum, and are imputed based on the lessor's implicit rate of return at the inception of the lease. 6. COMMITMENTS: INVENTORY PURCHASES: The Company is committed to purchase tomatoes over the next year at contracted prices. At March 31, 1997, these future committed purchases aggregated approximately $387,000 (unaudited), based on the contracted prices. F-13 ORGANIC FOOD PRODUCTS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 6. COMMITMENTS: (CONTINUED) LEASE OBLIGATIONS: The Company leases office, warehouse and production space in Morgan Hill, California under a non-cancellable operating lease agreement, expiring April, 2003. The Company leased office space in Santa Cruz, California, under a non-cancellable operating lease agreement that expired in June, 1996. In addition, the Company is currently leasing a vehicle under a non-cancellable operating lease agreement, expiring August, 1997. Rent expense under the lease agreements for the years ended June 30, 1996 and 1995, and for the nine month periods ended March 31, 1997 and 1996 was $8,889, $8,889, $6,667 (unaudited), and $6,667 (unaudited), respectively. A schedule of future minimum lease payments due under the non-cancellable operating leases at June 30, 1996 and March 31, 1997, is as follows:
YEAR ENDING YEAR ENDING YEAR JUNE 30, MARCH 31, - ----------------------------------------------------------------------------- ---------- ------------ (UNAUDITED) 1997......................................................................... $ 86,649 $ -- 1998......................................................................... 80,020 84,027 1999......................................................................... 80,896 77,955 2000......................................................................... 83,320.... 80,297 2001......................................................................... 85,820 82,701 2002......................................................................... -- 85,183 Subsequent................................................................... 148,492 170,372 ---------- ------------ $ 565,197 $ 580,535 ---------- ------------ ---------- ------------
EMPLOYMENT CONTRACTS: The Company has entered into employment contracts with two (2) key employees. The contracts expire through July, 1999 and provide for minimum annual salaries, adjusted for cost-of-living changes, and incentives based on the Company's attainment of specified levels of sales and earnings. As of March 31, 1997, the total commitment, excluding incentives, was approximately $467,500 (unaudited). 7. ECONOMIC DEPENDENCY: For the years ended June 30, 1996 and 1995, the Company had one (1) customer which accounted for approximately forty percent (40%) of the total sales volume. For the nine month period ended March 31, 1997, the Company had two (2) customers which accounted for approximately thirty-five percent (35%) (unaudited) of the total sales volume. At June 30, 1996 and March 31, 1997, the amounts due from the customers included in accounts receivable was $60,947 and $367,521 (unaudited), respectively. For the years ended June 30, 1996 and 1995, the Company had one (1) supplier which accounted for approximately sixty-five percent (65%) and forty-seven percent (47%), respectively, of the total purchases. For the nine month period ended March 31, 1997, the Company had two (2) suppliers which accounted for approximately twenty-three percent (23%) of the total purchases. At June 30, 1996 and March 31, 1997, the amounts due to the suppliers included in accounts payable were $357,570 and $540,630 (unaudited), respectively. F-14 ORGANIC FOOD PRODUCTS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 8. STOCKHOLDERS' EQUITY: COMMON STOCK AND STOCK SPLIT: On October 3, 1995, the GVN increased its authorized capital from 1,000 to 20,000,000 shares of no par value common stock, and declared a 2,000 for 1 split of its common stock. At June 30, 1996, the Company had 4,500,000 shares issued and outstanding. At March 31, 1997, the Company had 5,297,913 (unaudited) shares issued and outstanding. PRIVATE OFFERING AND WARRANTS: GVN issued 1,350,000 shares (after 2,000 for 1 split) of common stock for $2,700,000 through a private offering during the year ended June 30, 1996, including the issuance of 250,000 shares for the conversion of a loan from a director. The net proceeds were $2,238,225, of which $640,000 was used as a down payment to purchase 1,100,000 shares of common stock held by the principal shareholders. In connection with this offering, the Company issued warrants to purchase up to 150,000 shares of common stock at $2 per share to an underwriter. These options are exercisable at any time through December 31, 2002. As of March 31, 1997, no warrants have been exercised. In addition, GVN had a second private offering in the nine month period ended March 31, 1997. The proceeds from the offering of 823,500 shares were $1,718,288, net of costs of $340,462 (unaudited). In connection with this offering, the Company issued warrants to purchase up to 200,000 shares of common stock at $2.50 per share to an underwriter. As of March 31, 1997, none of the warrants have been exercised. PREFERRED STOCK: On October 3, 1995, the corporate Articles of Incorporation were amended to authorize the issuance of 5,000,000 shares of preferred stock, no par value. The Board of Directors are authorized to issue preferred stock with such rights, privileges, preferences and restrictions, as they deem appropriate. As of June 30, 1996 and March 31, 1997, no preferred stock has been issued. STOCK OPTIONS AND STOCK OPTION PLAN: Effective November, 1995, the Company's Board of Directors adopted a stock option plan. The Company has 625,000 reserved shares of common stock for issuance under the Plan, pending Board approval. The Board of Directors determines which individuals shall receive options. The time period during which the options may be partially or fully exercised, the number of shares of common stock that may be purchased under each option, and the option price. As of March 31, 1997, 538,000 (unaudited) options were granted under the Plan at exercise prices of $2.00 to $2.50 per share, exercisable until November 1, 2003. As of March 31, 1997, none of the options have been exercised. (See Note 14-- Subsequent Events). F-15 ORGANIC FOOD PRODUCTS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 9. INCOME TAXES AND DEFERRED INCOME TAXES: For the year ended June 30, 1996 and for the nine month period ended March 31, 1997, components of deferred income taxes, are as follows:
JUNE 30, 1996 ---------- MARCH 31, 1997 ----------- (UNAUDITED) Current Assets: Allowances.................................................................. $ 68,298 $ 47,500 Asset valuation allowance................................................... (68,298) -- ---------- ----------- $ -- $ 47,500 ---------- ----------- ---------- ----------- Long-Term Asset (Liability): Depreciation................................................................ $ (16,466) $ (29,500) Net operating loss carryforward............................................. 114,000 --- ---------- ----------- Total net deferred tax asset (liability).................................... 97,534 (29,500) Less: valuation allowance................................................... (97,534) -- ---------- ----------- $ -- $ (29,500) ---------- ----------- ---------- -----------
A reconciliation of the federal statutory rate to the tax provision of the corresponding periods, is as follows:
NINE MONTH PERIODS ENDED YEARS ENDED JUNE 30, MARCH 31, ------------------------ ----------------------- 1996 1995 1997 1996 ----------- ----------- ----------- ---------- (UNAUDITED) Tax benefit (expense) at effective statutory rates............................................. $ 630,000 $ (168,000) $ (183,500) $ 76,000 S-Corporation loss.................................. (340,000) -- -- (71,100) Valuation limitation on net operating loss.......... (114,000) -- -- -- State income taxes.................................. -- (33,000) (14,500) -- Net operating loss carry-forward.................... -- -- 91,000 -- ----------- ----------- ----------- ---------- $ 176,000 $ (201,000) $ (107,000) $ 4,900 ----------- ----------- ----------- ---------- ----------- ----------- ----------- ----------
10. STATEMENTS OF CASH FLOWS: NON-CASH INVESTING AND FINANCING ACTIVITIES: The Company recognized investing, operating and financing activities that affected assets and liabilities, but did not result in cash receipts or payments: For the year ended June 30, 1996, these non-cash activities are as follows: Accrued interest on notes payable was added to the principal portion of the loan, in the amount of $29,681. The Company financed the purchase of two (2) vehicles, with a recorded cost of $7,331, through a capital lease obligation in the same amount. F-16 ORGANIC FOOD PRODUCTS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 10. STATEMENTS OF CASH FLOWS: (CONTINUED) For the year ended June 30, 1995, these non-cash activities are as follows: Accrued interest on notes payable was added to the principal portion of the loan, in the amount of $29,681. For the nine month period ended March 31, 1997, these non-cash activities are as follows: Inventory in the amount of $222,523 was financed through the issuance of a note payable. Interest in the amount of $60,897 was imputed on a discounted note payable. Asset additions in the amount of $23,752 were financed through capital lease obligations. Stock in the amount of $14,158 was issued to a director as reimbursement for expenses. For the nine month period ended March 31, 1996, these non-cash activities are as follows: Accrued interest on a note payable was added to the principal portion of the loan, in the amount of $22,261. Asset additions in the amount of $7,331 were financed through capital lease obligations. 11. CONCENTRATION OF CREDIT RISK: The Company maintains cash balances at Wells Fargo Bank. Deposits not to exceed $100,000 at the institution are insured by the Federal Deposit Insurance Corporation. At March 31, 1997, the Company had uninsured cash in the approximate amount of $20,000 (unaudited). 12. RESTRUCTURING CHARGE: In June, 1996, the Company adopted a restructuring plan to eliminate excess equipment, personnel and inventory, that represented redundancies as a result of the merger. For the year ended June 30, 1996, the Company reported a restructuring charge of $257,468, which was comprised of the following: Redundant inventory....................................................... $ 177,515 Disposal of equipment..................................................... 21,329 Other..................................................................... 58,624 --------- $ 257,468 --------- ---------
13. COMPENSATION FROM OPTIONS AND WARRANTS: The Company has a stock option plan pursuant to which options to purchase shares of the Company's common stock may be granted to employees. The plan provides that the option price shall not be less than the fair market value of the shares on the date of grant, and that the options expire ten years after grant. Options vest ratably over four or five year periods as provided for in each employee's option agreement. At March 31, 1997, there were 625,000 (unaudited) shares reserved for options to be granted under the plan. In addition, the Company has issued warrants to an underwriter in connection with their two private placement offerings. As of March 31, 1997, 350,000 (unaudited) warrants have been issued at exercise F-17 ORGANIC FOOD PRODUCTS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 13. COMPENSATION FROM OPTIONS AND WARRANTS: (CONTINUED) prices of $2.00 to $2.50 per share and expire in approximately five years. The following summarizes stock options and warrant transactions:
STOCK OPTIONS WARRANTS PRICE PER SHARE --------- --------- ---------------- Outstanding at July 1, 1995................. -- -- $ -- Granted................................... 538,000 150,000 $ 2.00 to $2.50 Exercised................................. -- -- $ -- Expired................................... -- -- $ -- --------- --------- ---------------- Outstanding at June 30, 1996................ 538,000 150,000 $ 2.00 to $2.50 Granted................................... -- 200,000 $ 2.50 Exercised................................. -- -- $ -- Expired................................... -- -- $ -- --------- --------- ---------------- Outstanding at March 31, 1997............... 538,000 350,000 $ 2.00 to $2.50 --------- --------- ---------------- --------- --------- ----------------
Information relating to stock options and warrants at March 31, 1997, summarized by exercise price are as follows:
EXERCISE OUTSTANDING EXERCISABLE PRICE ---------------------------- ----------- PER SHARE SHARES LIFE (YEARS) SHARES - --------- --------- ----------------- ----------- $2.00 433,000 5 401,000 2.50 455,000 5 200,000
All stock options issued to employees have an exercise price not less than the fair market value of the Company's common stock on the date of grant, and in accordance with accounting for such options utilizing the intrinsic value method, there is no related compensation expense recorded in the Company's financial statements. Had compensation cost for stock-based compensation been determined based on the fair value of the options on the grant dates consistent with the method of SFAS 123, the Company's net income and earnings per share for the year ended June 30, 1996 and for the nine month period ended March 31, 1997, would have been reduced to the pro forma amounts presented below:
MARCH 31, JUNE 30, 1996 1997 ------------- ----------- (UNAUDITED) Net income (loss) As reported..................................................... $ (649,062) $ 343,422 Pro forma....................................................... (712,385) 277,422 Earnings (loss) per share As reported..................................................... $ (.11) $ .06 Pro forma....................................................... (.12) .05
The fair value of option and warrant grants are estimated on the date of grant utilizing the Black-Scholes option-pricing model, with the following assumptions for grants in the periods ended June 30, 1996 and March 31, 1997, respectively; expected life of options of five years, expected volatility of 14.4% and 19.3%, risk-free interest rates of 8% and a 0% dividend yield. The fair value at date of grant for options and warrants for the aforementioned periods approximated $.23 and $.33 per option. F-18 ORGANIC FOOD PRODUCTS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 14. SUBSEQUENT EVENTS: The Company's Board of Directors has resolved to proceed with a proposed initial public offering of its common stock to the public. The Company is currently in the process of filing a Form SB-2 Registration Statement with the Securities and Exchange Commission to register its common stock for sale to the public. The proposed offering is intended to issue 1,300,000 common shares at four dollars ($4.00) per share. The Company entered into various ten percent (10%) promissory notes payable agreements, in the aggregate amount of $600,000, due the earlier of the completion of an initial public offering or May, 1998, to provide working capital. In relation to the promissory notes 200,000 common stock purchase warrants were issued. The warrants have an exercise price of $3.00 per share exercisable at any time until December 31, 1999. Subsequent to March 31, 1997, the Company entered into an agreement with a supplier to purchase product in the approximate amount of $222,000. The accompanying financial statements reflect this transaction, in addition to an allowance of approximately $30,000 for obsolescence related to the product purchased. Subsequent to March 31, 1997 the Company granted an additional 87,000 options to purchase the Company's stock under their stock option plan. The options are exercisable over various vesting schedules at an exercise price of $2.50 per share. 15. PRO FORMA FINANCIAL INFORMATION: The following unaudited pro forma condensed consolidated statements of operations gives effect to the merger by the Company with GVN, pursuant to the Agreement and Plan of Reorganization between the parties, and is based on estimates and assumptions set forth herein and in the notes to such statements. This pro forma information has been prepared by utilizing the historical financial statements and notes thereto, which are incorporated by reference herein. The pro forma financial data does not purport to be indicative of the results which actually would have been obtained had the purchase been effected on the dates indicated or of the results which may be obtained in the future. The pro forma financial information is based on the purchase method of accounting for the merger with GVN. The pro forma entries are described in the accompanying footnotes to the unaudited pro forma condensed consolidated statements of operations. The unaudited pro forma condensed consolidated statements of operations assumes the acquisition took place on the first day of the period presented. F-19 ORGANIC FOOD PRODUCTS, INC. PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) FOR THE YEAR ENDED JUNE 30, 1996 The following represents an unaudited pro forma condensed consolidated statement of operations for the year ended June 30, 1996, assuming the Company's reverse acquisition of Garden Valley Naturals, Inc. through the issuance of 2,250,000 shares of stock, and is accounted for under the purchase method of accounting.
GARDEN VALLEY ORGANIC FOOD PRO FORMA NATURALS, PRODUCTS, PRO FORMA CONSOLIDATED INC. INC. ADJUSTMENTS AMOUNTS ------------- ------------- ------------- ------------- Revenues............................................. $ 5,794,095 $ 7,641,539 $ 13,435,634 Cost of Revenues..................................... 4,698,579 5,822,337 10,520,916 ------------- ------------- ------------- Gross Profit......................................... 1,095,516 1,819,202 2,914,718 Sales and Marketing Expenses......................... 1,231,904 954,108 2,186,012 General and Administrative Expenses.................. 514,702 1,244,914 $ 118,600(2) 1,878,216 Restructuring Charge................................. 194,032 257,468 451,500 ------------- ------------- ------------- Income (Loss) from Operations...................... (845,122) (637,288) (1,601,010) Other Income (Expense), Net.......................... (7,678) 2,948 (4,730) Interest Income (Expense), Net....................... (44,068) (349,122) (393,190) ------------- ------------- ------------- Net Income (Loss) before Income Taxes.............. (896,868) (983,462) (1,998,930) Income Tax (Expense) Benefits........................ 176,023 -- 334,400(1) 510,423 ------------- ------------- ------------- Net Income (Loss) after Income Tax................. $ (720,845) $ (983,462) $ (1,488,507) ------------- ------------- ------------- ------------- ------------- ------------- Net Loss per Share $ (.12) $ (.21) ------------- ------------- ------------- ------------- Weighted Average Number of Shares Outstanding........ 5,767,663 7,067,663 ------------- ------------- ------------- -------------
- ------------------------ (1) Pro forma income tax adjustment to record the income tax effect of the conversion of Organic Food Products, Inc. to a C Corporation. (2) Amortization of goodwill recorded in the merger. F-20 To The Shareholders and Board of Directors of Garden Valley Naturals, Inc. We have audited the accompanying statements of operations, changes in stockholders' equity, and cash flows of Garden Valley Naturals, Inc. for the years ended June 30, 1996 and 1995. 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 in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the results of operations, changes in stockholders' equity, and cash flows of Garden Valley Naturals, Inc. for the years ended June 30, 1996 and 1995, in conformity with generally accepted accounting principles. SEMPLE & COOPER LLP Certified Public Accountants Phoenix, Arizona February 28, 1997 F-21 GARDEN VALLEY NATURALS, INC. STATEMENTS OF OPERATIONS FOR THE YEARS ENDED JUNE 30, 1996 AND 1995 AND FOR THE NINE MONTH PERIOD ENDED MARCH 31, 1996 (UNAUDITED)
JUNE 30, JUNE 30, 1996 1995* ------------ ------------ MARCH 31, 1996 ------------ (UNAUDITED) Revenues................................................................ $ 5,794,095 $ 3,106,227 $ 4,188,481 Cost of Goods Sold...................................................... 4,698,579 2,328,882 3,448,314 ------------ ------------ ------------ Gross Profit............................................................ 1,095,516 777,345 740,167 ------------ ------------ ------------ Sales and Marketing Expense............................................. 1,231,904 220,788 532,048 General and Administrative Expenses..................................... 514,702 84,326 353,205 Restructuring Charge.................................................... 194,032 -- -- ------------ ------------ ------------ 1,940,638 305,114 885,253 ------------ ------------ ------------ Income (Loss) from Operations........................................... (845,122) 472,231 (145,086) ------------ ------------ ------------ Other Income (Expense): Loss on sale of fixed asset........................................... (7,678) -- 14,791 Interest income....................................................... 9,938 518 9,938 Interest expense...................................................... (54,007) (3,082) (36,719) ------------ ------------ ------------ (51,747) (2,564) (11,990) ------------ ------------ ------------ Income (Loss) before Provision for Income Taxes......................... (896,869) 469,667 (157,076) ------------ ------------ ------------ Provision for Income Tax Benefit (Expense): (Note 1) --current............................................................. 176,023 (200,602) 15,659 --deferred............................................................ -- -- (10,750) ------------ ------------ ------------ 176,023 (200,602) 4,909 ------------ ------------ ------------ Net Income (Loss)....................................................... $ (720,846) $ 269,065 $ (152,167) ------------ ------------ ------------ ------------ ------------ ------------ Earnings (Loss) per Share............................................... $ (.23) $ .07 $ (.04) ------------ ------------ ------------ ------------ ------------ ------------ Weighted Average Number of Shares Outstanding........................... 3,202,140 3,886,250 3,470,360 ------------ ------------ ------------ ------------ ------------ ------------
*As restated, for comparative purposes only. The Accompanying Notes are an Integral Part of the Financial Statements F-22 GARDEN VALLEY NATURALS, INC. STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) FOR THE YEARS ENDED JUNE 30, 1996 AND 1995
COMMON STOCK ADDITIONAL RETAINED STOCKHOLDERS' -------------------------- PAID-IN EARNINGS EQUITY SHARES AMOUNT CAPITAL (DEFICIT) (DEFICIT) ----------- ------------- ----------- ----------- ------------- Balance at June 30, 1994..................... 2,000,000 $ 13,000 $ -- $ 100,990 $ 113,990 Net income for the year ended June 30, 1995....................................... -- -- -- 269,065 269,065 ----------- ------------- ----------- ----------- ------------- Balance at June 30, 1995..................... 2,000,000 13,000 -- 370,055 383,055 Contribution of equipment by stockholders (Notes 2 and 6)............................ -- -- 15,000 -- 15,000 Proceeds from private offering, net of costs of $461,775................................ 1,350,000 2,238,225 -- -- 2,238,225 Execution of stock purchase agreement........ (1,100,000) (2,022,609) (15,000) -- (2,037,609) Net loss for the year ended June 30, 1996.... -- -- -- (720,846) (720,846) ----------- ------------- ----------- ----------- ------------- Balance at June 30, 1996..................... 2,250,000 $ 228,616 $ -- $ (350,791) $ (122,175) ----------- ------------- ----------- ----------- ------------- ----------- ------------- ----------- ----------- -------------
The Accompanying Notes are an Integral Part of the Financial Statements F-23 GARDEN VALLEY NATURALS, INC. STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 1996 AND 1995 AND FOR THE NINE MONTH PERIOD ENDED MARCH 31, 1996 (UNAUDITED)
JUNE 30, JUNE 30, 1996 1995 ------------- ------------- MARCH 31, 1996 ------------- (UNAUDITED) Increase (Decrease) in Cash and Cash Equivalents: Cash flows from operating activities: Cash received from customers...................................... $ 5,918,884 $ 2,683,438 $ 4,254,490 Cash paid to suppliers and employees.............................. (6,384,020) (2,760,808) (4,531,020) Interest paid..................................................... (10,026) (3,082) (36,719) Interest received................................................. 9,938 518 9,938 Income taxes paid................................................. (74,977) (865) (235,341) ------------- ------------- ------------- Net cash used by operating activities........................... (540,201) (80,799) (538,652) ------------- ------------- ------------- Cash flows for investing activities: Purchase of fixed assets.......................................... (690,523) (26,766) (395,364) Advances for notes receivable..................................... (15,484) -- -- Collection of notes receivable.................................... 15,484 -- -- Advances to shareholder........................................... -- -- (15,484) ------------- ------------- ------------- Net cash used by investing activities........................... (690,523) (26,766) (410,848) ------------- ------------- ------------- Cash flows from financing activities: Repayment of debt................................................. (250,512) (32,018) (403,817) Repayment of debt--related parties................................ (649,353) -- (640,000) Proceeds from debt--related parties............................... 1,140,000 -- -- Proceeds from debt financing...................................... 106,406 176,124 250,358 Proceeds from issuance of stock................................... 1,667,000 -- 2,238,225 Repurchase of stock............................................... (640,000) -- -- ------------- ------------- ------------- Net cash provided by financing activities....................... 1,373,541 144,106 1,444,766 ------------- ------------- ------------- Net increase in cash and cash equivalents........................... 142,817 36,541 495,266 Cash and cash equivalents at beginning of year...................... 48,246 11,705 48,246 ------------- ------------- ------------- Cash and cash equivalents at end of year............................ $ 191,063 $ 48,246 $ 543,512 ------------- ------------- ------------- ------------- ------------- -------------
The Accompanying Notes are an Integral Part of the Financial Statements F-24 GARDEN VALLEY NATURALS, INC. STATEMENTS OF CASH FLOWS (CONTINUED) FOR THE YEARS ENDED JUNE 30, 1996 AND 1995 AND FOR THE NINE MONTH PERIOD ENDED MARCH 31, 1996 (UNAUDITED)
JUNE 30, JUNE 30, 1996 1995 ------------ ------------ MARCH 31, 1996 ------------ (UNAUDITED) Reconciliation of Net Income to Net Cash Used by Operating Activities: Net Income (Loss)....................................................... $ (720,846) $ 269,065 $ (152,167) ------------ ------------ ------------ Adjustments to reconcile net income to net cash used by operating activities: Depreciation.......................................................... 23,923 3,728 10,948 Loss on sale of fixed asset........................................... 7,678 -- -- Loan discount amortization............................................ 43,980 -- 23,682 Employment contract settlement........................................ 175,000 -- -- Changes in Assets and Liabilities: Accounts receivable................................................... 178,112 (422,789) 51,218 Inventory............................................................. (232,177) (430,897) (18,682) Prepaid expenses...................................................... (5,366) 2,268 (245,738) Income tax refund receivable.......................................... (259,447) -- (111,024) Refundable deposits................................................... (22,105) (71) (6,480) Accounts payable...................................................... 473,133 295,129 154,495 Accrued expenses...................................................... 48,914 3,031 (4,654) Income taxes payable --current........................................................... (251,000) 199,737 (251,000) --deferred.......................................................... -- -- 10,750 ------------ ------------ ------------ 180,645 (349,864) (386,485) ------------ ------------ ------------ Net cash used by operating activities................................... $ (540,201) $ (80,799) $ (538,652) ------------ ------------ ------------ ------------ ------------ ------------
The Accompanying Notes are an Integral Part of the Financial Statements F-25 GARDEN VALLEY NATURALS, INC. NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, NATURE OF OPERATIONS AND USE OF ESTIMATES: OPERATIONS: Garden Valley Naturals, Inc. is a Corporation which was duly formed and organized under the laws of the State of California. The Corporation was incorporated in the State of California on July 7, 1987. The principal business purpose of the Company is the production and distribution of organic food products throughout the United States. NAME CHANGE: Pursuant to a vote of the Board of Directors, the Company amended the Corporation's Articles of Incorporation to change the Corporation's name to Garden Valley Naturals, Inc. as of November, 1995. The financial statements give retroactive effect to this change. ACQUISITION AND MERGER: As of June 28, 1996, Garden Valley Naturals, Inc. acquired all of the outstanding common stock of Organic Food Products, Inc. for 2,250,000 shares of the Company's common stock, merged the companies into one surviving corporation, and subsequently changed the name from Garden Valley Naturals, Inc. to Organic Food Products, Inc. The financial statements do not give effect to the name change. For financial accounting purposes, the acquisition was accounted for under the purchase method in accordance with Accounting Principles Board Opinion No. 16. The accompanying financial statements for the year ended June 30, 1996 reflect only the activity of Garden Valley Naturals, Inc. through the date of the merger. PERVASIVENESS OF ESTIMATES: 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 reporting period. Actual results could differ from those estimates. INTERIM FINANCIAL STATEMENTS: The interim financial statement for the nine month period ended March 31, 1996 is unaudited. In the opinion of management, such statement reflects all adjustments (consisting only of normal recurring adjustments) necessary for a fair representation of the results of the interim period, and are not necessarily indicative of the results for the entire year. STOCK-BASED COMPENSATION: In 1996, the Company adopted for footnote disclosure purposes only, SFAS No. 123, "Accounting for Stock-Based Compensation," which requires that companies measure the cost of stock-based employee compensation at the grant date based on the value of the award and recognize this cost over the service period. The value of the stock-based award is determined using the intrinsic value method, whereby compensation cost is the excess of the market prices of the stock at grant date or other measurement date over the amount an employee must pay to acquire the stock. F-26 GARDEN VALLEY NATURALS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, NATURE OF OPERATIONS AND USE OF ESTIMATES: (CONTINUED) EARNINGS PER SHARE: Earnings per share are based upon the weighted average number of shares outstanding for each of the respective periods, after giving retroactive effect to the 2,250,000 shares issued in the purchase combination. In addition, for purposes of this computation, the stock split and private offerings (as described in Note 8), have been given retroactive effect. The Company has proposed an initial public offering of its common stock. Pursuant to Securities and Exchange Commission rules, shares of common stock issued for consideration below the anticipated offering price per share prior to filing of the registration statement have been included in the calculation of common stock equivalent shares, as if they had been outstanding for all periods presented. In addition, shares of common stock that are subject to options and warrants having exercise prices that are below the anticipated offering price per share, whether or not exercisable, have been included in the earnings per share calculation, using the treasury stock method. PROPERTY AND EQUIPMENT: Property and equipment are recorded at cost. Depreciation is provided for using the straight-line method over the estimated useful lives of the assets. Maintenance and repairs that neither materially add to the value of the property nor appreciably prolong its life are charged to expense as incurred. Betterments or renewals are capitalized when incurred. For the years ended June 30, 1996 and 1995, and for the nine month period ended March 31, 1996, depreciation expense was $23,923, $3,728, and $10,948 (unaudited), respectively. A summary of the estimated useful lives is as follows: Computer software.............................................. 5 years 7 - 20 Machinery and equipment........................................ years Office equipment............................................... 5 years
INCOME TAXES: For financial accounting and tax reporting purposes, the Company reports revenue and expenses based on the accrual method of accounting. For the years ended June 30, 1996 and 1995, provisions were made for federal and state income tax expense (benefit) in the amounts of $(176,023) and $200,602, respectively. DEFERRED INCOME TAXES: Deferred income taxes arise from timing differences resulting from revenues and expenses reported for financial accounting and tax reporting purposes in different periods. Deferred income taxes represent the estimated tax liability from different depreciation methods used for financial accounting and tax reporting purposes. 2. RELATED PARTY TRANSACTIONS: ADVANCES TO STOCKHOLDER: As of March 31, 1996, advances to shareholder consist of a $15,484 (unaudited) advance to a shareholder. The advance is non-interest bearing and is expected to be collected in the current year. F-27 GARDEN VALLEY NATURALS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. RELATED PARTY TRANSACTIONS: (CONTINUED) COMMITMENTS: The Company was leasing facilities from a related party. The lease was cancelled during February, 1996. The terms of the lease agreement required the Company to pay common area maintenance, taxes and other costs, as well as a discretionary base rent of approximately $4,500 per month. Rent expense under the foregoing operating lease agreement for the years ended June 30, 1996 and 1995, and for the nine month period ended March 31, 1996, was $14,500, $50,217, and $15,091 (unaudited), respectively. The Company was leasing machinery and equipment from a related party. The lease was cancelled as of July 1, 1995. Rent expense under the foregoing lease agreement for the year ended June 30, 1995 was $72,996. PRIVATE OFFERING: The Company issued 1,100,000 shares (after 2 for 1 split) of common stock for $2,200,000 through a private offering in November, 1995. The net proceeds were $1,803,225, of which $640,000 was used to retire 1,100,000 shares of common stock held by the principal shareholders (See Note 8). 3. NOTE PAYABLE: As of June 30, 1996 and 1995, the note payable consists of the following:
JUNE 30, JUNE 30, 1996 1995 ----------- ----------- $200,000 revolving line of credit with Wells Fargo Bank. The line of credit is due and payable on March 10, 1996, with an interest rate of prime plus 1.5%. Borrowings are collateralized by accounts receivable and inventory............................................................................. $ -- $ 144,106 Less: current portion of long-term note payable......................................... -- (144,106) ----------- ----------- $ -- $ -- ----------- ----------- ----------- -----------
As of the effective date of the private offering, November 15, 1995, the revolving line of credit was cancelled. 4. ECONOMIC DEPENDENCY: For the years ended June 30, 1996 and 1995, the Company had one and two customers, respectively, which accounted for approximately 23% and 43%, respectively, of the total sales volume. At June 30, 1996 and 1995, the amounts due from these customers included in accounts receivable were $89,842 and $332,379, respectively. For the nine month period ended March 31, 1996, the Company had one customer which accounted for approximately 23% (unaudited) of the total sales volume. At March 31, 1996, the amount due from this customer included in accounts receivable was $122,529 (unaudited), respectively. For the years ended June 30, 1996 and 1995, the Company had two suppliers which accounted for approximately 43% of the total purchases. At June 30, 1996 and 1995, amounts due these suppliers included in accounts payable were $250,284 and $79,755, respectively. F-28 GARDEN VALLEY NATURALS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 4. ECONOMIC DEPENDENCY: (CONTINUED) For the nine month period ended March 31, 1996, the Company had two suppliers which accounted for approximately 50% (unaudited) of the total purchases. At March 31, 1996, amounts due these suppliers included in accounts payable were $217,792 (unaudited), respectively. 5. COMMITMENTS: INVENTORY PURCHASES: The Company is committed to purchase tomatoes over the next year at contracted prices. At June 30, 1996, these future committed purchases aggregated approximately $1,370,000, based on contracted prices. LEASE OBLIGATIONS: The Company is currently leasing office space in Morgan Hill, California under a non-cancellable operating lease agreement, expiring April, 2003. For the year ended June 30, 1996 and for the nine month period ended March 31, 1996, rent expense under the aforementioned non-cancellable operating lease agreement was $31,766 and $12,326 (unaudited), respectively. A schedule of future minimum lease payments due under the non-cancellable operating lease, is as follows:
YEAR ENDING JUNE 30, AMOUNT - -------------------------------------------------------------- ---------- 1997........................................................ $ 86,649 1998........................................................ 80,020 1999........................................................ 80,896 2000........................................................ 83,320 2001........................................................ 85,820 Subsequent.................................................. 148,492 ---------- $ 565,197 ---------- ----------
6. STATEMENTS OF CASH FLOWS: NON-CASH INVESTING AND FINANCING ACTIVITIES: During the years ended June 30, 1996 and 1995, and for the nine month period ended March 31, 1996, the Company recognized investing and financing activities that affected assets, liabilities and equity, but did not result in cash receipts or payments. For the year ended June 30, 1996, these non-cash activities consisted of the following: The Company financed $1,560,000 of the purchase of treasury stock in the amount of $2,200,000. The note has been recorded net of imputed interest. The Company repaid notes payable to related parties in the amount of $175,000, through the settlement of an employment contract. Accrued interest on notes payable was added to the principal portion of the loan, in the amount of $43,980. F-29 GARDEN VALLEY NATURALS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 6. STATEMENTS OF CASH FLOWS: (CONTINUED) The Company repaid notes payable in the amount of $500,000, with proceeds from a private placement. For the year ended June 30, 1995, these non-cash activities are as follows: Accrued interest on notes payable was added to the principal portion of the loan, in the amount of $29,681. For the nine month period ended March 31, 1996, these non-cash activities are as follows: The Company financed $1,560,000 (unaudited) of the purchase of treasury stock in the amount of $2,200,000. The note has been recorded net of imputed interest. 7. STOCKHOLDERS' EQUITY: COMMON STOCK AND STOCK SPLIT: On October 3, 1995, the Company increased its authorized capital from 1,000 to 20,000,000 shares of no par value common stock, and declared a 2,000 for 1 split of its common stock. PRIVATE OFFERING AND WARRANTS: The Company issued 1,350,000 shares (after 2,000 for 1 split) of common stock for $2,700,000 through a private offering during the year ended June 30, 1996, including the issuance of 250,000 shares for the conversion of a loan from a director. The net proceeds were $2,238,225, of which $640,000 was used as a down payment to purchase 1,100,000 shares of common stock held by the principal shareholders. In connection with this offering, the Company issued warrants to purchase up to 150,000 shares of common stock at $2 per share to an underwriter. These options are exercisable at any time through December 31, 2002. As of June 30, 1996, no warrants have been exercised. In addition, the Company had a second private offering subsequent to June 30, 1996. The proceeds from the offering of 823,500 shares were $1,718,288, net of costs of $340,462 (unaudited). In connection with this offering, the Company issued warrants to purchase up to 200,000 shares of common stock at $2.50 per share to an underwriter. PREFERRED STOCK: On October 3, 1995, the corporate Articles of Incorporation were amended to authorize the issuance of 5,000,000 shares of preferred stock, no par value. The Board of Directors are authorized to issue preferred stock with such rights, privileges, preferences and restrictions, as they deem appropriate. As of June 30, 1996, no preferred stock has been issued. STOCK OPTIONS AND STOCK OPTION PLAN: Effective November, 1995, the Company's Board of Directors adopted a stock option plan. The Company has 625,000 reserved shares of common stock for issuance under the Plan, pending Board approval. The Board of Directors determines which individuals shall receive options. The time period during which the options may be partially or fully exercised, the number of shares of common stock that may be purchased under each option, and the option price. As of June 30, 1996, 483,000 options were granted under the Plan at exercise prices of $2.00 to $2.50 per share, exercisable until November 1, 2003. As of June 30, 1996, none of the options have been exercised. F-30 GARDEN VALLEY NATURALS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 8. INCOME TAXES AND DEFERRED INCOME TAXES: For the year ended June 30, 1996, components of deferred income taxes, are as follows: Current Assets: Allowances..................................................... $ 68,298 Asset valuation allowance...................................... (68,298) --------- $ -- --------- --------- Long-Term Asset (Liability): Depreciation................................................... $ (16,466) Net operating loss carryforward................................ 149,104 --------- Total net deferred tax asset (liability)....................... 132,638 Less: valuation allowance...................................... (132,638) --------- $ -- --------- ---------
A reconciliation of income tax benefit (expense) at the statutory rate to the Company's effective rate, is as follows:
JUNE 30, 1996 JUNE 30, 1995 ------------ ------------- MARCH 31, 1996 --------------- (UNAUDITED) Benefit (Expense) Computed at the Expected Statutory Rate... 34% (34)% 34% State Income Taxes.......................................... 9 (9) 9 Surtax Exemption............................................ -- -- (11) Deferred Tax Asset Valuation Allowance...................... (23) -- (28) -- --- --- 20% (43)% 4% -- -- --- --- --- ---
For the year ended June 30, 1996, the Company has net operating losses available to offset federal and state taxable income in the approximate amounts of $127,000 and $344,000, respectively. 9. COMPENSATION FROM OPTIONS AND WARRANTS: The Company has a stock option plan pursuant to which options to purchase shares of the Company's common stock may be granted to employees. The plan provides that the option price shall not be less than the fair market value of the shares on the date of grant, and that the options expire ten years after grant. Options vest ratably over four or five year periods as provided for in each employee's option agreement. At June 30, 1996, there were 625,000 shares reserved for options to be granted under the plan. In addition, the Company has issued warrants to an underwriter in connection with the private placement offering. As of June 30, 1996, 150,000 warrants have been issued at an exercise price of $2.00 F-31 GARDEN VALLEY NATURALS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 9. COMPENSATION FROM OPTIONS AND WARRANTS: (CONTINUED) per share and expire in approximately five years. The following summarizes stock options and warrant transactions:
STOCK OPTIONS WARRANTS PRICE PER SHARE --------- --------- ---------------- Outstanding at June 30, 1995.......................... -- -- $ -- Granted............................................. 538,000 150,000 $ 2.00 to $2.50 Exercised........................................... -- -- $ -- Expired............................................. -- -- $ -- --------- --------- ---------------- Outstanding at June 30, 1996.......................... 538,000 150,000 $ 2.00 to $2.50 --------- --------- ---------------- --------- --------- ----------------
Information relating to stock options and warrants at June 30, 1996, summarized by exercise price, are as follows:
EXERCISE OUTSTANDING EXERCISABLE PRICE ---------------------------- ----------- PER SHARE SHARES LIFE (YEARS) SHARES - --------- --------- ----------------- ----------- $2.00 433,000 5 401,000 2.50 255,000 5 200,000
All stock options issued to employees have an exercise price not less than the fair market value of the Company's common stock on the date of grant, and in accordance with accounting for such options utilizing the intrinsic value method, there is no related compensation expense recorded in the Company's financial statements. Had compensation cost for stock-based compensation been determined based on the fair value of the grant dates consistent with the method of SFAS 123, the Company's net income and earnings per share for the year ended June 30, 1996 would have been reduced to the pro forma amounts presented below:
NET LOSS LOSS PER SHARE ----------- --------------- As reported...................................................... $ (720,846) $ (.23) Pro forma........................................................ (831,938) $ (.26)
The fair value of option and warrant grants are estimated on the date of grant utilizing the Black-Scholes option-pricing model, with the following assumptions for grants in the year ended June 30, 1996; expected life of options of five years, expected volatility of 14.4% risk-free interest rates of 8% and a 0% dividend yield. The fair value at date of grant for options and warrants for the aforementioned year approximated $.23 per option. In addition, the Company granted 200,000 additional warrants to an underwriter in relation to the second private placement offering. F-32 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING DESCRIBED HEREIN, AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR THE SOLICITATION OF AN OFFER TO BUY, THE SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY STATE OR OTHER JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. ------------------------ TABLE OF CONTENTS
PAGE ----- Prospectus Summary............................. 3 Risk Factors................................... 6 Dilution....................................... 10 Capitalization................................. 11 Use of Proceeds................................ 12 Selected Financial Data........................ 13 Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 14 Business....................................... 19 Management..................................... 23 Principal Shareholders......................... 26 Certain Transactions........................... 27 Description of Securities...................... 28 Underwriting................................... 30 Legal Matters.................................. 32 Experts........................................ 32 Available Information.......................... 32 Financial Statements........................... F-1
------------------------ UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. 1,300,000 SHARES OF COMMON STOCK ORGANIC FOOD PRODUCTS, INC. --------------------- PROSPECTUS --------------------- SENTRA SECURITIES CORPORATION SPELMAN & CO., INC. PARADISE VALLEY SECURITIES, INC. , 1997 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Article IV of the Registrant's Articles of Incorporation provides as follows: "The liabilities of the directors of the corporation for monetary damages shall be eliminated to the fullest extent permissible under California law." Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended (the "1933 Act"), may be permitted to officers, directors or persons controlling the Company, the Company has been advised that, in the opinion of the Securities and Exchange Commission, Washington, D.C. 20549, such indemnification is against public policy as expressed in the 1933 Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the officer, director or controlling person of the Company in the successful defense of any action, suit or proceeding) is asserted by such officer, director or controlling person in connection with the securities being registered, the Company will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the 1933 Act and will be governed by the final adjudication of such issue. ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.(1)(2) SEC Registration Fee........................................... $ 2,309 NASD Filing Fee................................................ 1,262 Blue Sky Filing Fees........................................... 12,000 Blue Sky Legal Fees............................................ 25,000 Printing Expenses.............................................. 60,000 Legal Fees and Expenses........................................ 85,000 Accounting Fees................................................ 80,000 Transfer Agent................................................. 3,000 NASDAQ Application Fee......................................... 25,000 Miscellaneous Expenses......................................... 6,429 ----------- TOTAL...................................................... $ 300,000(1) ----------- -----------
- ------------------------ (1) Does not include the Representatives' commission and expenses of $676,000 ($777,400 if the Overallotment Option is exercised). (2) All expenses, except the SEC registration fee and NASD filing fee, are estimated. ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES During the last three years, the Registrant sold the following shares of its Common Stock which were not registered under the Securities Act of 1933, as amended (the "1933 Act"): (i) In November 1995, the Registrant sold 1,100,000 shares of its Common Stock at $2.00 per share to the following persons:
NUMBER NAME OF SHARES - ----------------------------------------------------------------------------------- ----------- Jack London/Life O Boston Insurance................................................ 250,000 Enrique Feldman.................................................................... 175,000 Floyd Hill......................................................................... 151,200
II-1
NUMBER NAME OF SHARES - ----------------------------------------------------------------------------------- ----------- Paul and Becky Sigfusson........................................................... 77,750 Lyonshare Venture Capital.......................................................... 62,500 Leslie Farkas...................................................................... 50,000 William Maines..................................................................... 50,000 Richard Froehlich MD, IRA.......................................................... 25,000 William Hay........................................................................ 25,000 Jane Zivney Interiors Pension Trust................................................ 25,000 Paul and Anne Janssens Lens........................................................ 25,000 James and Jane Zivney.............................................................. 17,500 Barry Donner....................................................................... 15,800 Alfred Zacher Profit Sharing Plan.................................................. 12,500 Glenn C. Cook and R. Cook.......................................................... 12,500 Delaware Charter G&T FBO........................................................... 12,500 Froelich Family Trust.............................................................. 12,500 Marvin and Pearl Stumpf............................................................ 12,500 Elliot Wagner...................................................................... 12,500 L. Stuart and Naomi Nagasawa....................................................... 12,500 Hirn Doheny Reed & Harper PS Trust................................................. 12,500 William Schlueter.................................................................. 12,500 John and Mary Jane Scott........................................................... 12,500 Kenneth Depersio................................................................... 6,250 Michael and Susan Gernant.......................................................... 6,250 Jerrold and Carolyn Johnson........................................................ 6,250 Kenneth Steel...................................................................... 6,500
(ii) In February 1996, the Registrant sold 250,000 shares of its Common Stock to Kenneth A. Steel, Jr. at $2.00 per share. (iii) In July 1996, the Registrant sold 823,500 shares of its Common Stock at $2.50 per share to the following individuals.
NUMBER NAME OF SHARES - ----------------------------------------------------------------------------------- ----------- Rizzo Trust........................................................................ 20,000 Lori Rizzo......................................................................... 15,000 Steven and Faith Chinskey.......................................................... 5,000 James R. Barge..................................................................... 5,000 Thomas and Susan Lusty............................................................. 10,000 Jerry and Jean Mikus............................................................... 20,000 Michael J. Mehalko................................................................. 5,000 Jane Chu........................................................................... 5,000 Sunbeam Ventures................................................................... 40,000 Glenn C. Cook...................................................................... 20,000 TBP Investments.................................................................... 14,000 Enrique Feldman.................................................................... 140,000 Jeff and Adelynn Barteir........................................................... 10,000 J. Michael Turley.................................................................. 10,000 Monica Koechlin.................................................................... 40,000 Paul and Becky Sigfusson........................................................... 100,000 Vern and Grace Thomsen............................................................. 40,000
II-2
NUMBER NAME OF SHARES - ----------------------------------------------------------------------------------- ----------- Lawrence Cannizzaro................................................................ 20,000 Hooman Nikzad...................................................................... 4,000 Fred Djshandideh................................................................... 4,000 Harvey Belfer...................................................................... 10,000 Satoru Nilmoto..................................................................... 10,000 Lanny and Mariane Lahr............................................................. 10,000 William R. Maines.................................................................. 20,000 Ronald J. Faust.................................................................... 16,000 Lyonshare Venture Capital.......................................................... 25,500 Vestal Venture Capital............................................................. 15,000 Carroll and Joseph Dilustro........................................................ 10,000 Sylvanus V. Tunstall............................................................... 40,000 Donald L. Ladwig................................................................... 20,000 Mateo Lettunich.................................................................... 20,000 Marvin Stumpf...................................................................... 10,000 Donahue Bunch...................................................................... 10,000 Nathaniel and Mildred Orme......................................................... 10,000 Don Zinman......................................................................... 10,000 Kevin and Tracy McGovern........................................................... 5,000 Felicia Choi....................................................................... 10,000 John Jensen........................................................................ 15,000 Herman Kahan, Trustee.............................................................. 10,000 Poseidon Capital................................................................... 10,000 John Nelson........................................................................ 10,000
(iv) In connection with the sales of Common Stock set forth in subparagraph (i), (ii) and (iii) above, the Registrant issued to Spelman & Co., Inc., its placement agent and one of the Representatives of the Offering, 150,000 common stock purchase warrants exercisable at $2.00 per share until December 31, 2002 and 200,000 common stock purchase warrants exercisable at $2.50 per share until July 31, 2003. (v) In July 1996 the Registrant issued 2,227,499 shares of its Common Stock to John Battendieri and 22,501 shares to Casey Adams in connection with the OFP merger. (vi) From time to time, the Registrant has issued stock options (currently aggregating 625,000 such stock options) to employees, officers and directors under its 1995 Stock Option Plan. (vii) In May 1997 the Registrant borrowed an aggregate of $600,000 from the following individuals and issued to them as additional consideration for the loans an aggregate of 200,000 common stock II-3 purchase warrants, each warrant exercisable to purchase one share of the Registrant's Common Stock at any time until December 31, 1999.
NAME NUMBER OF WARRANTS - --------------------------------------------------------------------------------------------- Todd Belfer TPB Inv. Ltd. Partnership........................................................ 20,000 Harvey Belfer................................................................................ 20,000 Lanny Lahr................................................................................... 20,000 Ronald Faust................................................................................. 20,000 Robert Mapes................................................................................. 10,000 Eliot Ellefson............................................................................... 10,000 Bruce Ungerleider............................................................................ 10,000 William Hay.................................................................................. 20,000 William Schlueter............................................................................ 20,000 Kenneth Hersh................................................................................ 16,666 Sherri Rizzo Trust........................................................................... 16,666 Rizzo Trust.................................................................................. 16,667 ------- 200,000
With respect to the sales made, including the private placements set forth in sub-paragraphs (i) and (iii), above, the Registrant relied on Section 4(2) of the 1933 Act, and/or Regulation D, Rule 506. No advertising or general solicitation was employed in offering the securities. The securities were offered to a limited number of individuals all of whom were accredited investors as that term is defined under Regulation D under the 1933 Act and were experienced and sophisticated investors capable of analyzing the merits and risks of their investment. All such investors acknowledged in writing that they were acquiring the securities for investment and not with a view toward distribution or resale and understood the speculative nature of their investment. The transfer of the securities was appropriately restricted from sale by the Registrant. The Registrant complied with all of the requirements of Regulation D, Rule 506 and filed a Form D with the Commission within 15 days from the first sale date in each such private placement. II-4 ITEM 27. EXHIBITS.
EXHIBIT NO. TITLE - ------------- ------------------------------------------------------------------------------------------------ 1.01 Form of Underwriting Agreement (1) 1.02 Form of Selected Dealer Agreement (1) 1.03 Form of Representatives' Warrant (1) 1.04 Form of Amended Underwriting Agreement 1.05 Form of Amended Selected Dealer Agreement 1.06 Form of Amended Representatives' Warrant 1.07 Form of Lock-Up Agreement 3.01 Articles of Incorporation of the Registrant, as amended (1) 3.02 Bylaws of the Registrant (1) 5.01 Opinion of Gary A. Agron, regarding legality of the Common Stock (includes Consent) (1) 10.01 1995 Employee Stock Option Plan (1) 10.02 Office and Warehouse Lease (Morgan Hill, California) (1) 10.03 Employment Agreement with Mr. Hill (1) 10.04 Employment Agreement with Mr. Battendieri (1) 10.05 Merger Agreement between the Registrant (Garden Valley Naturals, Inc.) and Organic Food Products, Inc. (1) 10.06 Loan Agreement with Mr. Steel 10.07 Stock Redemption Agreement with Messrs. Nicholson and Reedy 10.08 Settlement Agreement with Mr. Nicholson 10.09 First Amendment to Stock Redemption Agreement 10.10 Amendment to Promissory Notes issued to Messrs. Nicholson and Reedy 10.11 Form of Subscription Agreement, Promissory Note and Warrant for Bridge Loan 11.01 Computation of Earnings Per Share (1) 11.02 Computation of Earnings Per Share 23.01 Consent of Semple & Cooper LLP (1) 23.02 Consent of Gary A. Agron (See 5.01, above) (1) 23.03 Consent of Semple and Cooper LLP 27.01 Financial Data Schedule (1) 27.02 Financial Data Schedule
- ------------------------ (1) Previously filed ITEM 28. UNDERTAKINGS. The Registrant hereby undertakes: (a) That insofar as indemnification for liabilities arising under the 1933 Act may be permitted to directors, officers and controlling persons of the Registrant, the Registrant has been advised that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer II-5 or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. (b) That subject to the terms and conditions of Section 13(a) of the Securities Exchange Act of 1934, it will file with the Securities and Exchange Commission such supplementary and periodic information, documents and reports as may be prescribed by any rule or regulation of the Commission heretofore or hereafter duly adopted pursuant to authority conferred in that section. (c) That any post-effective amendment filed will comply with the applicable forms, rules and regulations of the Commission in effect at the time such post-effective amendment is filed. (d) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by section 10(a)(3) of the 1933 Act; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement; (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; (e) That, for the purpose of determining any liability under the 1933 Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (f) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the Offering. (g) To provide to the Underwriter at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriter to permit prompt delivery to each purchaser. II-6 SIGNATURES Pursuant to the requirements of the 1933 Act, as amended, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements of filing on Form SB-2 and has caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Morgan Hill, California, on July 8, 1997. ORGANIC FOOD PRODUCTS, INC. BY: /S/ FLOYD R. HILL ----------------------------------------- Floyd R. Hill CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the 1933 Act, as amended, this Registration Statement has been signed below by the following persons on the dates indicated.
SIGNATURE TITLE DATE - ------------------------------------------------------ ---------------------------------------- --------------- /s/ FLOYD R. HILL ------------------------------------------- Chief Executive Officer and Director July 8, 1997 Floyd R. Hill /s/ JOHN BATTENDIERI ------------------------------------------- President and Director July 8, 1997 John Battendieri /s/ DONALD L. LADWIG ------------------------------------------- Vice President--Marketing and Sales July 8, 1997 Donald L. Ladwig /s/ PERRY T. VALASSIS ------------------------------------------- Chief Financial Officer and Principal July 8, 1997 Perry T. Valassis Accounting Officer /s/ KENNETH A. STEEL, JR. ------------------------------------------- Director July 8, 1997 Kenneth A. Steel, Jr. /s/ CHARLES B. BONNER ------------------------------------------- Director July 8, 1997 Charles B. Bonner /s/ CHARLES R. DYER ------------------------------------------- Director July 8, 1997 Charles R. Dyer
II-7 EXHIBIT INDEX
EXHIBIT NO. TITLE - ------------- ----------------------------------------------------------------------------------------------------- 1.04 Form of Amended Underwriting Agreement 1.05 Form of Amended Selected Dealer Agreement 1.06 Form of Amended Representatives' Warrant 1.07 Form of Lock-Up Agreement 10.06 Loan Agreement with Mr. Steel 10.07 Stock Redemption Agreement with Messrs. Nicholson and Reedy 10.08 Settlement Agreement with Mr. Nicholson 10.09 First Amendment to Stock Redemption Agreement 10.10 Amendment to Promissory Notes issued to Messrs. Nicholson and Reedy 10.11 Form of Subscription Agreement, Promissory Note and Warrant for Bridge Loan 11.02 Computation of Earnings Per Share 23.03 Consent of Semple & Cooper LLP 27.02 Financial Schedule
EX-1.04 2 EXHIBIT 1.04 ORGANIC FOOD PRODUCTS 1,300,000 Shares UNDERWRITING AGREEMENT _______________, 1997 Sentra Securities Corporation Spelman & Co., Inc. 2355 Northside Drive, Suite 200 San Diego, CA 92108 (As Representatives of the Several Underwriters Named in Schedule 1 hereto) Dear Sirs: Organic Food Products, a California corporation (the "Company"), hereby confirms its agreement (this "Agreement") with the several underwriters named in Schedule 1 hereto (the "Underwriters"), for whom Sentra Securities Corporation and Spelman & Co., Inc. have been duly authorized to act as representatives (in such capacity, the "Representatives"), as set forth below: SECTION 1. DESCRIPTION OF TRANSACTION The Company proposes to issue and sell to the Underwriters on the Closing Date (as defined below), pursuant to the terms and conditions of this Agreement, an aggregate of 1,300,000 shares ("Firm Shares") of the Company's Common Stock ("Common Stock") at a price of $4.00 per Share on the terms as hereinafter set forth. The Company also proposes to issue and sell to the several Underwriters on or after the Closing Date not more than 195,000 additional Shares if requested by the Representatives as provided in Section 3.02 of this Agreement (the "Option Shares"). The Firm Shares and any Option Shares are collectively referred to herein as the "Shares." SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY In order to induce the Underwriters to enter into this Agreement, the Company hereby represents and warrants to and agrees with the Underwriters that: 2.1 REGISTRATION STATEMENT AND PROSPECTUS. A registration statement on Form SB-2 (File No. 333-22-997) with respect to the Shares, including the related prospectus, copies of which have heretofore been delivered by the Company to the Underwriters, has been filed by the Company in conformity with the requirements of the Securities and Exchange Commission (the "Commission") under the Securities Act of 1933, as amended (the "Act"), and one or more amendments to such registration statement have been so filed. After the execution of this Agreement, the Company will file with the Commission either (a) if such registration statement, as it may have been amended, has been declared by the Commission to be effective under the Act, a prospectus in the form most recently included in an amendment to such registration statement (or, if no such amendment shall have been filed, in such registration statement), with such changes or insertions as are required by Rule 430A under the Act or permitted by Rule 424(b) under the Act and as have been provided to and approved by the Representatives prior to the execution of this Agreement, or (b) if such registration statement, as it may have been amended, has not been declared by the Commission to be effective under the Act, an amendment to such registration statement, including a form of prospectus, a copy of which amendment has been furnished to and approved by the Representatives prior to the execution of this Agreement. As used in this Agreement, the term "Registration Statement" means such registration statement on Form SB-2 and all amendments thereto, including the prospectus, all exhibits and financial statements, as it becomes effective; the term "Preliminary Prospectus" means each prospectus included in said Registration Statement before it becomes effective; and the term "Prospectus" means the prospectus first filed with the Commission pursuant to Rule 424(b) under the Act or, if no prospectus is required to be filed pursuant to said Rule 424(b), such term means the prospectus included in the Registration Statement when it becomes effective. 2.2 ACCURACY OF REGISTRATION STATEMENT AND PROSPECTUS. Neither the Commission nor the "blue sky" or securities authority of any jurisdiction has issued any order preventing or suspending the use of any Preliminary Prospectus. When (a) any Preliminary Prospectus was filed with the Commission, (b) the Registration Statement or any amendment thereto was or is declared effective, and (c) the Prospectus or any amendment or supplement thereto is filed with the Commission pursuant to Rule 424(b) (or, if the Prospectus or such amendment or supplement is not required to be so filed, when the Registration Statement or the amendment thereto containing such amendment or supplement to the Prospectus was or is declared effective) and on the Closing Date the Prospectus, as amended or supplemented at any such time, such filing (i) contained or will contain all statements required to be stated therein in accordance with, and complied or will comply in all material respects with the requirements of, the Act and the rules and regulations of the Commission promulgated thereunder (the "Rules and Regulations") and (ii) did not or will not include any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading in light of the circumstances under which they were made. The foregoing representation does not apply to statements or omissions made in any Preliminary Prospectus, the Registration Statement or any amendment thereto or the Prospectus or any amendment or supplement thereto in reliance upon and in conformity with written information furnished to the Company by any Underwriter through the Representatives specifically for use therein. 2 2.3 INCORPORATION AND STANDING. The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of California and is duly qualified to transact business as a foreign corporation and is in good standing under the laws of all other jurisdictions where the ownership or leasing of its properties or the conduct of its business requires such qualification, except where the failure to be so qualified does not amount to a material liability or disability to the Company. 2.4 DUE POWER AND AUTHORITY. The Company has full corporate power to own or lease its properties and conduct its business as described in the Registration Statement and the Prospectus or, if the Prospectus is not in existence, the most recent Preliminary Prospectus; and the Company has full corporate power to enter into this Agreement and to carry out all the terms and provisions hereof to be carried out by it. The execution and delivery of this Agreement and consummation of the transactions contemplated herein have been duly authorized by the Company and this Agreement has been duly executed and delivered by the Company and constitutes the legal, valid and binding obligation of the Company, enforceable against the Company in accordance with the terms thereof, except as may be limited by applicable bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally and by general equitable principles, and as rights to indemnity and contribution hereunder may be limited by applicable law. 2.5 CONSENTS; NO DEFAULTS. The issuance, offering and sale of the Shares to the Underwriters by the Company pursuant to this Agreement, the compliance by the Company with the other provisions of this Agreement and the consummation of the other transactions herein contemplated do not (a) require the consent, approval, authorization, registration or qualification of or with any governmental authority, except such as have been obtained, or as may be required under the Act or under the securities or blue sky laws of any jurisdiction, or (b) conflict with or result in a breach or violation of any of the terms and provisions of, or constitute a default under, any indenture, mortgage, deed of trust, lease or other material agreement or instrument to which the Company is a party or by which the Company or any of its properties is bound, or the charter documents or bylaws of the Company, or any statute or any judgment, decree, order, rule or regulation of any court or other governmental authority or any arbitrator applicable to the Company. 2.6 NO BREACH OR DEFAULT. The Company is not in breach of any term or provision of its Articles of Incorporation or Bylaws; no default exists, and no event has occurred which with notice or lapse of time or both, would constitute a default, in the Company's due performance and observance of any term, covenant or condition of any indenture, mortgage, deed of trust, lease, note, bank loan or credit agreement or any other material agreement or instrument to which the Company or its properties may be bound or affected in any respect which would have a material adverse effect on the condition (financial or otherwise), business, properties, prospects, net worth or results of operations of the Company. 2.7 LICENSES. Except as described in the Prospectus, the Company possesses all certificates, authorizations and permits issued by the appropriate federal, state or foreign regulatory authorities necessary for the conduct of its business, including without limitation the Food and Drug 3 Administration, the United States Department of Agriculture and the Environmental Protection Agency, and the Company has not received any notice of proceedings relating to the revocation or modification of any such certificate, authorization or permit which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would result in a material adverse change in the condition (financial or otherwise), business prospects, net worth or results of operations of the Company, except as described in or contemplated by the Registration Statement. Each approval, registration, qualification, license, permit, consent, order, authorization, designation, declaration or filing by or with any regulatory, administrative or other governmental body or agency necessary in connection with the execution and delivery by the Company of this Agreement and the consummation of the transactions contemplated (except such additional actions as may be required by the National Association of Securities Dealers, Inc. or may be necessary to qualify the Common Stock for public offering under state securities or blue sky laws) has been obtained or made and each is in full force and effect. 2.8 COMPLIANCE WITH LAWS. Except as disclosed in the Registration Statement and in the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), the Company is not in violation of any laws, ordinances, governmental rules or regulations to which it is subject, which would have a material adverse effect on the condition (financial or otherwise), business, properties, prospects, net worth or results of operations of the Company. 2.9 EXISTING CAPITAL STRUCTURE AND SHAREHOLDER RIGHTS. The Company has an authorized, issued and outstanding capitalization as set forth in, and capital stock conforms in all material respects to the description contained in, the Prospectus or, if the Prospectus is not in existence, the most recent Preliminary Prospectus. Except as described in the Registration Statement and in the Prospectus there are no outstanding (a) securities or obligations of the Company convertible into or exchangeable for any capital stock of the Company, (b) warrants, rights or options to subscribe for or purchase from the Company any such capital stock or any such convertible or exchangeable securities or obligations, or (c) obligations of the Company to issue such shares, any such convertible or exchangeable securities or obligations, or any such warrants, rights or obligations. All of the issued shares of capital stock of the Company have been duly authorized and validly issued and are fully paid and nonassessable, and have been issued in compliance with all federal and state securities laws. No preemptive rights of shareholders exist with respect to any capital stock of the Company. No shareholder of the Company has any right pursuant to any agreement which has not been waived or honored to require the Company to register the sale of any securities owned by such shareholder under the Act in the public offering contemplated herein except as disclosed in the Registration Statement. The Company has no subsidiaries, and does not own any shares of stock or any other equity interest in any firm, partnership, association or other entity. 2.10 AUTHORITY FOR ISSUANCE OF SHARES. The issuance of the Common Stock issuable in connection with the Shares has been duly authorized and at any Firm or Option Closing Date as defined herein after payment therefor in accordance herewith, such Common Stock will be validly issued, fully paid and nonassessable. The Shares will conform in all material respects with all statements with regard thereto in the Registration Statement and the Prospectus. 4 2.11 TITLE TO TANGIBLE PROPERTY. Except as otherwise set forth in or contemplated by the Registration Statement and Prospectus, the Company has good and marketable title to all items of personal property owned by the Company, free and clear of any security interest, liens, encumbrances, equities, claims and other defects, except such as do not materially and adversely affect the value of such property and do not materially interfere with the use made or proposed to be made of such property by the Company, and any real property and buildings held under lease by the Company are held under valid, subsisting and enforceable leases, with such exceptions as are not material and do not materially interfere with the use made or proposed to be made of such property and buildings by the Company. 2.12 TITLE TO INTELLECTUAL PROPERTY. The Company owns the trademarks and intellectual property described in the Registration Statement. The Company does not own any patents. The Company owns or possesses, or can acquire on reasonable terms, all material, trademarks, service marks, trade names, licenses, copyrights and proprietary or other confidential information currently employed by it in connection with its business, and the Company has not received any notice of infringement of or conflict with asserted rights of any third party with respect to any of the foregoing intellectual property rights which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding would result in a material adverse change in the condition (financial or otherwise), business prospects, net worth or results of operations of the Company, except as described in or contemplated by the Prospectus. 2.13 CONTRACT RIGHTS. The agreements to which the Company is a party described in the Registration Statement and Prospectus are valid agreements, enforceable by the Company in accordance with their terms, except as the enforcement thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditor's rights generally or by equitable principles, and, to the Company's knowledge, the other contracting party or parties thereto are not in material breach or material default under any of such agreements. 2.14 NO MARKET MANIPULATION. The Company has not taken nor will it take, directly or indirectly, any action designed to cause or result, or which might reasonably be expected to cause or result, in the stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Common Stock. 2.15 NO OTHER SALES OR COMMISSIONS. The Company has not since the filing of the Registration Statement (i) sold, bid for, purchased, attempted to induce any person to purchase, or paid anyone any compensation for soliciting purchases of, its capital stock or (ii) paid or agreed to pay to any person any compensation for soliciting another to purchase any securities of the Company except for the sale of Shares by the Company under this Agreement. 5 2.16 ACCURACY OF FINANCIAL STATEMENTS. The financial statements and schedules of the Company included in the Registration Statement and the Prospectus, or, if the Prospectus is not in existence, the most recent Preliminary Prospectus, fairly present in all material respects the financial position of the Company and the results of operations and changes in financial condition as of the dates and periods therein specified. Such financial statements and schedules have been prepared in accordance with generally accepted accounting principles consistently applied throughout the periods involved except as otherwise noted therein and include all financial information required to be included by the Act. The selected financial data set forth under the captions "PROSPECTUS SUMMARY--Summary Financial Information," "SELECTED FINANCIAL DATA" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" in the Prospectus, or, if the Prospectus is not in existence the most recent Preliminary Prospectus, fairly present in all material respects, on the basis stated in the Prospectus or such Preliminary Prospectus, the information included therein. 2.17 INDEPENDENT PUBLIC ACCOUNTANT. Semple & Cooper, which have certified or shall certify certain of the financial statements of the Company filed or to be filed as part of the Registration Statement and the Prospectus, are independent certified public accountants within the meaning of the Act and the Rules and Regulations. 2.18 INTERNAL ACCOUNTING. The Company maintains a system of internal accounting controls sufficient to provide reasonable assurance that (a) transactions are executed in accordance with management's general or specific authorization; (b) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability; (c) access to assets is permitted only in accordance with management's general or specific authorization; and (d) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. 2.19 LITIGATION. Except as set forth in the Registration Statement and Prospectus, there is and at the Closing Date there will be no action, suit or proceeding before any court or governmental agency, authority or body pending or to the knowledge of the Company threatened which might result in judgments against the Company not adequately covered by insurance or which collectively might result in any material adverse change in the condition (financial or otherwise), the business or the prospects of the Company, or would have a material adverse effect on the properties or assets of the Company. The Company is not subject to the provisions of any injunction, judgement, decree or order of any court, regulatory body, administrative agency or other governmental body or arbitral forum, which might result in a material adverse change in the business, assets or condition of the Company. 2.20 NO MATERIAL ADVERSE CHANGE. Subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), (a) the Company has not incurred any material adverse change in or affecting the condition, financial or otherwise, of the Company or the earnings, 6 business affairs, management, or business prospects of the Company, whether or not occurring in the ordinary course of business, (b) there has not been any material transaction entered into by the Company, other than transactions in the ordinary course of business or transactions specifically described in the Registration Statement as it may be amended or supplemented, (c) the Company has not sustained any material loss or interference with its business or properties from fire, flood, windstorm, accident or other calamity, (d) the Company has not paid or declared any dividends or other distribution with respect to its capital stock and the Company is not in default in the payment of principal or interest on any outstanding debt obligations, and (e) there has not been any change in the capital stock (other than the sale of the Common Stock hereunder or the exercise of outstanding stock options or warrants as described in the Registration Statement) or material increase in indebtedness of the Company. The Company does not have any known material contingent obligation which is not disclosed in the Registration Statement (or contained in the financial statements or related notes thereto), as such may be amended or supplemented. 2.21 TRANSACTIONS WITH AFFILIATES. Subsequent to the respective dates as of which information is given in the Registration Statement and Prospectus or if the Prospectus is not in existence the most recent Preliminary Prospectus, and except as may otherwise be indicated or contemplated herein or therein, (a) the Company has not entered into any transaction with an "affiliate" of the Company, as defined in the Act and the Rules and Regulations, or (b) declared, paid or made any dividend or distribution of any kind on or in connection with any class of its capital stock, and (c) the Company has no knowledge of any transaction between any affiliate of the Company and any significant customer or supplier of the Company, except in its ordinary course of business. 2.22 INSURANCE. Except as otherwise set forth in or contemplated by the Registration Statement and Prospectus, the Company is insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as are prudent and customary in the business in which it is engaged, including without limitation products liability insurance; the Company has not been refused any insurance coverage sought or applied for; and the Company has no reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not materially and adversely affect the condition (financial or otherwise), business prospects, net worth or results of operations of the Company. 2.23 TAX RETURNS. The Company has filed all foreign, federal, state and local tax returns that are required to be filed or has requested extensions thereof and has paid all taxes required to be paid by it and any other assessment, fine or penalty levied against it, to the extent that any of the foregoing is due and payable or adequate accruals have been set up to cover any such unpaid taxes, except for any such assessment, fine or penalty that is currently being contested in good faith. 7 2.24 POLITICAL CONTRIBUTIONS. The Company has not directly or indirectly, (a) made any unlawful contribution to any candidate for public office, or failed to disclose fully any contribution in violation of law, or (b) made any payment to any federal, state, local, or foreign governmental officer or official, or other person charged with similar public or quasi-public duties, other than payments required or permitted by the laws of the United States or any other such jurisdiction. 2.25 RELATIONSHIPS WITH CUSTOMERS, SUPPLIERS AND MANUFACTURERS. The Company does not currently have any written contracts with any of its customers, suppliers and manufacturers. The Company is in compliance with all oral agreements with its customers, suppliers and manufacturers. The Company has not received notice from any of its customers, suppliers and manufacturers alleging any breach of contract, representation or warranty which, in the aggregate, would have a material adverse effect on the financial condition or operations results of the Company. 2.26 INVESTMENT COMPANY ACT. The Company conducts its operations in a manner that does not subject it to registration as an investment company under the Investment Company Act of 1940, as amended, and the transactions contemplated by this Agreement will not cause the Company to become an investment company subject to registration under the Investment Company Act of 1940, as amended. SECTION 3. PURCHASE, SALE AND DELIVERY OF THE SHARES 3.1 PURCHASE OF FIRM SHARES. On the basis of the representations, warranties, agreements and covenants herein contained and subject to the terms and conditions herein set forth, the Company agrees to issue and sell to each of the Underwriters named in Schedule I hereto, and each of the Underwriters, severally and not jointly, agrees to purchase from the Company, at a purchase price of $4.50 per Share, the number of Firm Shares set forth opposite the name of such Underwriter in Schedule 1 hereto. The Company will make one or more certificates for Common Stock constituting the Firm Shares, in definitive form and in such denomination or denominations and registered in such name or names as the Representatives shall request upon notice to the Company at least 48 hours prior to the Firm Closing Date, available for checking and packaging by the Representatives at the offices of the Company's transfer agent or registrar (or the correspondent or the agent of the Company's transfer agent or registrar) at least 24 hours prior to the Firm Closing Date. Payment for the Firm Shares shall be made by bank wire payable in same day funds to the order of the Company drawn to the order of the Company for the Firm Shares, against delivery of certificates therefor to the Representatives. Delivery of the documents, certificates and opinions described in Section 6 of this Agreement, the Firm Shares and payment for the Firm Shares and the Option Shares shall be made at the offices of Sentra Securities Corporation, 2355 Northside Drive, Suite 200, San Diego, California 92108, at 9:00 a.m., San Diego time, on the third full business day following the date hereof (on the fourth full business day if this Agreement is executed after 1:30 p.m., San Diego time), or at such other places, time or date as the Representatives and the Company 8 may agree upon or as the Representatives may determine pursuant to Section 9 hereof, such time and date of delivery against payment being herein referred to as the "Firm Closing Date" or "Closing Date" as applicable. 3.2 OVER-ALLOTMENTS; OPTION SHARES. For the purpose of covering any over-allotments in connection with the distribution and sale of the Firm Shares as contemplated by the Prospectus, the Company hereby grants to you on behalf of the several Underwriters an option to purchase, severally and not jointly, the Option Shares. The purchase price to be paid for any Option Shares shall be the same price per share as the price per Share for the Firm Shares set forth above in Section 3.1, plus, if the purchase and sale of any Option Share takes place after the Firm Closing Date and after the Common Stock is trading "ex-dividend," an amount equal to the dividends payable on the Common Stock contained in such Option Shares. The option granted hereby may be exercised in the manner described below as to all or any part of the Option Shares from time to time within forty-five days after the date of the Prospectus. The Underwriters shall not be under any obligation to purchase any of the Option Shares prior to the exercise of such option. The Representatives may from time to time exercise the option granted hereby by giving notice in writing or by telephone (confirmed in writing) to the Company setting forth the aggregate number of Option Shares as to which the several Underwriters are then exercising the option and the date and time for delivery of and payment for such Option Shares. Any such date of delivery shall be determined by the Representatives but shall not be earlier than two business days or later than seven business days after such exercise of the option and, in any event, shall not be earlier than the Firm Closing Date. The time and date set forth in such notice, or such other time on such other date as the Representatives and the Company may agree upon or as the Representatives may determine pursuant to Section 9 hereof, is herein called the "Option Closing Date" with respect to such Option Shares. Upon each exercise of the option as provided herein, subject to the terms and conditions herein set forth, the Company shall become obligated to sell to each of the several Underwriters, and each of the Underwriters (severally and not jointly) shall become obligated to purchase from the Company, the same percentage of the total number of the Option Shares as to which the several Underwriters are then exercising the option as such Underwriter is obligated to purchase of the aggregate number of Firm Shares, as adjusted by the Representatives in such manner as it deems advisable to avoid fractional shares. If the option is exercised as to all or any portion of the Option Shares, one or more certificates for the Common Stock contained in such Option Shares, in definitive form, and payment therefore, shall be delivered on the related Option Closing Date in the manner, and upon the terms and conditions, set forth in Section 3.1, except that reference therein to the Firm Shares and the Firm Closing Date shall be deemed, for purposes of this Section 3.2, to refer to such Option Shares and Option Closing Date, respectively. No Option Shares shall be required to be, or be, sold and delivered unless the Firm Shares have been, or simultaneously are, sold and delivered as provided in this Agreement. 3.3 DEFAULT BY AN UNDERWRITER. It is understood that you, individually and not as the Representatives, may (but shall not be obligated to) make payment on behalf of any Underwriter or Underwriters for any of the Shares to be purchased by such Underwriter or Underwriters. No such 9 payment shall relieve such Underwriter or Underwriters from any of its or their obligations hereunder. SECTION 4. OFFERING BY THE UNDERWRITERS Upon payment by the Underwriters of the purchase price of $3.60 per Share and the Company's authorization of the release of the Firm Shares, the several Underwriters shall offer the Firm Shares for sale to the public upon the terms set forth in the Prospectus. The Representatives may from time to time thereafter change the public offering prices and other selling terms. If the option set forth in Section 3.2 of this Agreement is exercised, then upon the Company's authorization of the release of the Option Shares the several Underwriters shall offer such Shares for sale to the public upon the foregoing terms. SECTION 5. COVENANTS OF THE COMPANY Except as otherwise stated below, the Company covenants and agrees with each of the Underwriters that: 5.1 COMPANY'S BEST EFFORTS TO CAUSE REGISTRATION STATEMENT TO BECOME EFFECTIVE. The Company will use its best efforts to cause the Registration Statement, if not effective at the time of execution of this Agreement, and any amendments thereto, to become effective as promptly as possible. If required, the Company will file the Prospectus and any amendment or supplement thereto with the Commission in the manner and within the time period required by Rule 424(b) under the Act. During any time when a prospectus relating to the Common Stock is required to be delivered under the Act, the Company (a) will comply with all requirements imposed upon it by the Act and the Rules and Regulations to the extent necessary to permit the continuance of sales of or dealings in the Common Stock in accordance with the provisions hereof and of the Prospectus, as then amended or supplemented, and (b) will not file with the Commission the prospectus or the amendment referred to in the second sentence of Section 2.1 hereof, any amendment or supplement to such prospectus or any amendment to the Registration Statement unless and until the Representatives have been advised of such proposed filing, has been furnished with a copy for a reasonable period of time prior to the proposed filing, and has given its consent to such filing, which shall not be unreasonably withheld or delayed. 5.2 PREPARATION AND FILING OF AMENDMENTS AND SUPPLEMENTS. The Company will prepare and file with the Commission, in accordance with the Rules and Regulations of the Commission, promptly upon written request by the Representatives or counsel for the Representatives, any amendments to the Registration Statement or amendments or supplements to the Prospectus that may be reasonably necessary or advisable in connection with the distribution of the Shares by the several Underwriters, and the Company will use its best efforts to cause any such 10 amendment to the Registration Statement to be declared effective by the Commission as promptly as possible. The Company will advise the Representatives, promptly after receiving notice thereof, of the time when the Registration Statement or any amendment thereto has been filed or declared effective or the Prospectus or any amendment or supplement thereto has been filed and will provide evidence satisfactory to the Representatives of each such filing or effectiveness. 5.3 NOTICE OF STOP ORDERS. The Company will advise the Representatives promptly after receiving notice or obtaining knowledge of: (a) the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or any amendment thereto, or any order preventing or suspending the use of any Preliminary Prospectus of the Prospectus or any amendment or supplement thereto; (b) the suspension of the qualification of the Shares for offering or sale in any jurisdiction; (c) the institution, threatening or contemplation of any proceeding for any such purpose; or (d) any request made by the Commission for amending the Registration Statement, for amending or supplementing the Prospectus or for additional information. The Company will use its best efforts to prevent the issuance of any such stop order and, if any such stop order is issued to obtain the withdrawal thereof as promptly as possible. 5.4 BLUE SKY QUALIFICATION. The Company will arrange and cooperate with counsel to the Representatives for the qualification of the Shares for offering and sale under the securities or blue sky laws of such jurisdictions as the Representatives may designate and will continue such qualifications in effect for as long as may be necessary to complete the distribution of the Shares; provided, however, that in connection therewith the Company shall not be required to qualify as a foreign corporation or to execute a general consent to service of process in any jurisdiction. 5.5 POST-EFFECTIVE AMENDMENTS. If, at any time when a prospectus relating to the Shares is required to be delivered under the Act, any event occurs as a result of which the Prospectus, as then amended or supplemented, would include any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein not misleading, in the light of the circumstances under which they were made, or if for any other reason it is necessary at any time to amend or supplement the Prospectus to comply with the Act or the Rules or Regulations, the Company will promptly notify the Representatives thereof and, subject to Section 3 hereof, will prepare and file with the Commission, at the Company's expense, an amendment to the Registration Statement or an amendment or supplement to the Prospectus that corrects such statement or omission or effects such compliance. 5.6 DELIVERY OF PROSPECTUSES. The Company will, without charge, provide (a) to the Representatives and to counsel for the Representatives a signed copy of the Registration Statement originally filed with respect to the Shares and each amendment thereto (in each case including exhibits thereto), (b) to each other Underwriter so requesting in writing, a conformed copy of such Registration Statement and each amendment thereto (in each case without exhibits thereto) and (c) so long as a prospectus relating to the Shares is required to be delivered under the Act, as 11 many copies of each Preliminary Prospectus or the Prospectus or any amendment or supplement thereto as the Representatives may reasonably request. 5.7 SECTION 11(a) FINANCIALS. The Company will, as soon as practicable but in any event not later than 90 days after the period covered thereby, make generally available to its security holders and to the Representatives a consolidated earnings statement of the Company and its subsidiaries that satisfies the provisions of Section 11(a) of the Act and Rule 158 thereunder covering a twelve-month period beginning not later than the first day of the Company's fiscal quarter next following the effective date of the Registration Statement. 5.8 APPLICATION OF PROCEEDS. The Company will apply the net proceeds from the sale of the Shares as set forth in the Prospectus and Registration Statement and will not take any action that would cause it to become an investment company under the Investment Company Act of 1940, as amended. 5.9 SALES OR PURCHASES OF SECURITIES. The Company will not, directly or indirectly, without the prior written consent of the Representatives, offer, sell, grant any option or warrant to purchase or otherwise dispose (or announce any offer, sale, grant of any option to purchase or other disposition) of any shares of Common Stock or any securities convertible into, or exchangeable or exercisable for, shares of Common Stock for a period of one year after the date hereof, except (a) to the Underwriters pursuant to this Agreement and (b) options to any person pursuant to and in accordance with the Company's 1995 Incentive Stock Option Plan, as such plan is in effect on the date hereof, and provided that (i) such options have an exercise price equal to the fair market value of the Common Stock, and (ii) such person has delivered to the Representatives the agreement described in Section 7.8 of this Agreement. The Company will not, directly or indirectly, without the prior written consent of the Representatives purchase any Common Stock or any securities convertible into, or exercisable for, shares of Common Stock for a period of one year after the date hereof. 5.10 APPLICATION TO NASDAQ SMALLCAP MARKET. The Company will cause the Common Stock and Warrants to be duly included for quotation on the Nasdaq SmallCap Market prior to the Closing Date. If requested by the Representatives, the Company will also cause the Common Stock to be duly included for listing on the Pacific Stock Exchange. The Company will use its best efforts to ensure that the Common Stock remains included for quotation on the Nasdaq SmallCap Market and the Pacific Stock Exchange (if applicable) following the Closing Date for a period of not less than three years. 5.11 REPORTS TO SHAREHOLDERS. So long as any Common Stock is outstanding until five years after the Closing Date, the Company will furnish to the Representatives (a) as soon as available a copy of each report of the Company mailed to shareholders and filed with the Commission and (b) from time to time such other information concerning the Company as the Representatives may reasonably request. 12 5.12 DELIVERY OF DOCUMENTS. At or prior to the Closing, the Company will deliver to the Representatives true and correct copies of the articles of incorporation of the Company and all amendments thereto, all such copies to be certified by the Secretary of State of the State of California, a good standing certificate from the Secretary of State of California, dated no more than five business days prior to the Closing Date; true and correct copies of the bylaws of the Company, as amended, certified by the Secretary of the Company and true and correct copies of the minutes of all meetings of the directors and shareholders of the Company held prior to the Closing Date which in any way relate to the subject matter of this Agreement. 5.13 UNDERWRITERS' WARRANT. On or prior to the Closing Date, the Company shall deliver to the Representatives warrants (the "Underwriter's Warrants"), at an aggregate purchase price of $100, to purchase Shares equal to 10% of the Firm Shares sold in the Offering, which Underwriter's Warrants shall be exercisable for a per Share exercise price equal to 120% of the per Share public offering price of the Firm Shares. 5.14 COOPERATION WITH REPRESENTATIVES' DUE DILIGENCE. At all times prior to the Closing Date, the Company will cooperate with the Representatives in such investigation as the Representatives may make or cause to be made of all the properties, business and operations of the Company in connection with the purchase and public offering of the Shares and the Company will make available to the Representatives in connection therewith such information in its possession as the Representatives may reasonably request. 5.15 STOCK TRANSFER AGENT. The Company has appointed Corporate Stock Transfer, Inc., Denver, Colorado, as Transfer Agent for the Common Stock. The Company will not change or terminate such appointment for a period of two years from the effective date without first obtaining the written consent of the Representatives, which consent shall not be unreasonably withheld. 5.16 PUBLICITY. Prior to the Firm Closing Date, or the Option Closing Date, as the case may be, the Company shall not issue any press release or other communication directly or indirectly and shall hold no press conference with respect to the Company, its financial condition, results of operations, business, properties, assets, liabilities and any of them, or this offering, without the prior written consent of the Representatives. If at any time during the 90 day period after the Registration Statement becomes effective, any rumor, publication or event relating to or affecting the Company shall occur as a result of which in the opinion of the Representatives the market price of the Common Stock has been or is likely to be materially affected, regardless of whether such rumor, publication or event necessitates a supplement to or amendment of the Prospectus, the Company will, after written notice from the Representatives, evaluate the propriety of disseminating a press release or other public statement reasonably acceptable to the Representatives and their counsel, commenting on such rumor, publication or event. 13 5.17 FORECASTS AND PROJECTIONS. For a period of two years from the effective date of the Registration Statement, the Company shall provide the Representatives with routine internal forecasts if any such reports are prepared by the Company for dissemination to the public. 5.18 KEY MAN INSURANCE; DIRECTOR AND OFFICER LIABILITY INSURANCE. The Company will maintain for a period of at least five (5) years, Key Man Insurance on Floyd Hill in the amount of $1,000,000. The Company will also maintain for a period of at least five (5) years, Director and Officer Liability insurance in the amount of at least $5,000,000. The Representatives reserve the right to write the above policies at the next renewal date thereof providing it can do so on terms no less favorable to the Company. 5.19 COMPANY'S BOARD OF DIRECTORS. The Company will maintain a professional board of directors that will at all times include at least two outside directors. The Company shall appoint two individuals recommended by Representatives to the Company's Board of Directors which recommendation shall be made by Representatives after the Closing Date. SECTION 6. EXPENSES 6.1 OFFERING EXPENSES. The Company will pay upon demand all costs and expenses incident to the performance of the Company's obligations under this Agreement, whether or not the transactions contemplated herein are consummated or this Agreement is terminated pursuant to Section 11 hereof, including all costs and expenses incident to (a) the printing or other production of documents with respect to the transactions, including any costs of printing the Registration Statement originally filed with respect to the Shares and any amendment thereto, any Preliminary Prospectus and the Prospectus and any amendment or supplement thereto, this Agreement, the Agreement Among Underwriters, the Selected Dealer Agreement, and any blue sky memoranda, (b) all arrangements relating to the delivery to the Underwriters of copies of the foregoing documents, (c) the fees and disbursements of counsel, accountants and any other experts or advisors retained by the Company, (d) preparation, issuance and delivery to the Underwriters of any certificates evidencing the Common Stock, including transfer agent's and registrar's fees, (e) the qualification of the Shares under state securities and blue sky laws, including filing fees and fees and disbursements of counsel for the Representatives relating thereto, (f) the filing fees of the Commission and the National Association of Securities Dealers, Inc. relating to the Shares, (g) any listing fees for the quotation of the Common Stock on the Nasdaq SmallCap Market, (h) the entire cost of one "tombstone advertisement" in a national business newspaper and one-half the cost of placing any additional "tombstone advertisements" in any publications which may be selected by the Representatives (provided that any such cost in excess of $5,000 shall require the consent of both the Company and the Representatives), (i) all other advertising that has been approved in advance by the Company relating to the offering of the Shares (other than as shall have been specifically approved in writing by the Representatives to be paid for by the Underwriters), and (j) road shows conducted by the Company. In addition to the foregoing, the Company agrees to pay to the Representatives a non-accountable expense allowance of 3% of the gross amount to be raised from 14 the sale of the Shares hereunder, payable at the Closing(s), of which $50,000 has already been paid by the Company in connection with this offering. If the sale of the Shares provided for herein is not consummated because any condition to the obligations of the Underwriters set forth in Section 7 (other than Section 7.6) hereof is not satisfied, because this Agreement is terminated pursuant to Section 11 hereof or because of any failure, refusal or inability on the part of the Company to perform all obligations and satisfy all conditions on its part to be performed or satisfied hereunder other than by reason of a default by any of the Underwriters, the Company will reimburse the Underwriters severally upon demand for all out-of-pocket expenses (including counsel fees and disbursements) that shall have been reasonably incurred by them in connection with the proposed purchase and sale of the Shares. The Company shall in no event be liable to any of the Underwriters for the loss of anticipated profits from the transactions covered by this Agreement. 6.2 INTERIM INDEMNIFICATION. The Company agrees that as an interim measure during the pendency of any claim, action, investigation, inquiry or other proceeding described in Section 8.1 hereof, it will reimburse the Underwriters on a monthly basis for all reasonable legal or other expenses incurred in connection with investigating or defending any such claim, action, investigation, inquiry or other proceeding, notwithstanding the absence of a judicial determination as to the propriety and enforceability of the Company's obligation to reimburse the Underwriters for such expenses and the possibility that such payments might later be held to have been improper by a court of competent jurisdiction. To the extent that any such interim reimbursement payment is so held to have been improper, the Underwriters shall promptly return such payment to the Company together with interest, compounded daily, determined on the basis of the prime rate (or other commercial lending rate for borrowers of the highest credit standing) listed from time to time in THE WALL STREET JOURNAL which represents the base rate on corporate loans posted by a substantial majority of the nation's thirty (30) largest banks (the "Prime Rate"). Any such interim reimbursement payments which are not made to the Underwriters within thirty (30) days of a request for reimbursement shall bear interest at the Prime Rate from the date of such request. The Underwriters severally and not jointly agree that, as an interim measure during the pendency of any claim, action, investigation, inquiry or other proceeding described in Section 8.2 hereof, they will reimburse the Company on a monthly basis for all reasonable legal or other expenses incurred in connection with investigating or defending any such claim, action, investigation, inquiry or other proceeding, notwithstanding the absence of a judicial determination as to the propriety and enforceability of the Underwriters' obligation to reimburse the Company for such expenses and the possibility that such payments might later be held to have been improper by a court of competent jurisdiction. To the extent that any such interim reimbursement payment is so held to have been improper, the Company shall promptly return such payment to the Underwriters together with interest, compounded daily, determined on the basis of the Prime Rate. Any such interim reimbursement payments which are not made to the Company within thirty (30) days of a request for reimbursement shall bear interest at the Prime Rate from the date of such request. 15 SECTION 7. CONDITIONS OF THE UNDERWRITERS' OBLIGATIONS The obligations of the several Underwriters to purchase and pay for the Firm Shares shall be subject, unless waived by the Representatives in its sole discretion, to the accuracy of the representations and warranties of the Company contained herein as of the date hereof and as of the Firm Closing Date as if made on and as of the Firm Closing Date, to the accuracy of the statements of the Company's officers made pursuant to the provisions hereof, to the performance by the Company of its covenants and agreements hereunder and to the following additional conditions: 7.1 EFFECTIVENESS OF REGISTRATION STATEMENT. If the Registration Statement or any amendment thereto filed prior to the Firm Closing Date has not been declared effective as of the time of execution hereof, the Registration Statement or such amendment shall have been declared effective not later than 11 a.m., California time, on the date on which the amendment to the Registration Statement originally filed with respect to the Shares or to the Registration Statement, as the case may be, containing information regarding the initial public offering price of the Shares has been filed with the Commission, or such later time and date as shall have been consented to by the Representatives; if required, the Prospectus and any amendment or supplement thereto shall have been filed with the Commission in the manner and within the time period required by Rule 424(b) under the Act; no stop order suspending the effectiveness of the Registration Statement or any amendment thereto shall have been issued, and no proceedings for that purpose shall have been instituted or threatened or, to the knowledge of the Company or the Representatives, shall be contemplated by the Commission; and the Company shall have complied with any request of the Commission for additional information (to be included in the Registration Statement or the Prospectus or otherwise) to the reasonable satisfaction of counsel for the underwriters. 7.2 OPINION OF COUNSEL. The Representatives shall have received an opinion, dated the Firm Closing Date, of Carr, McClellan, Ingersoll, Thompson & Horn, counsel for the Company, to the effect that: (a) the Company has been duly organized and is validly existing as a corporation in good standing under the laws of the State of California, and duly qualified to transact business as a foreign corporation and is in good standing under the laws of all other jurisdictions where the ownership or leasing of its properties or the conduct of its business requires such qualification, except where the failure to be so qualified would not have a material adverse effect on the Company; (b) the Company has the corporate power to own or lease its properties; to conduct its business as described in the Registration Statement and the Prospectus; to enter into this Agreement and to carry out all of the terms and provisions hereof to be carried out by it; (c) the Company has an authorized capital stock as set forth under the heading "CAPITALIZATION" in the Prospectus; effective upon the Closing Date all of the 16 Company's shares have been duly authorized and validly issued and are fully paid and nonassessable; the shares have been duly authorized by all necessary corporate action of the Company, and, when issued and delivered to and paid for pursuant to this Agreement, will be validly issued, fully paid and nonassessable; the shares have been duly authorized for quotation on the Nasdaq SmallCap Market; no holders of outstanding shares of capital stock of the Company are entitled as such to any preemptive or other rights to subscribe for any of the Shares; and no holders of securities of the Company are entitled to have such securities registered under the Registration Statement; (d) the execution and delivery of this Agreement have been duly authorized by all necessary corporate action of the Company and this Agreement is a valid and binding obligation of the Company except as rights to indemnity and contribution thereunder may be limited by applicable federal or state securities laws and except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforceability of creditors' rights generally and subject to general principles of equity; (e) no legal or governmental proceedings are pending to which the Company is a party or to which the property of the Company is subject that are required to be described in the Registration Statement or the Prospectus and are not described therein, and, to the best knowledge of such counsel, no such proceedings have been threatened against the Company or with respect to any of its properties that can reasonably be expected to, or, if determined adversely to the Company, would, in any individual case or in the aggregate, result in any material adverse change in the business, financial condition or results of operations of the Company; (f) no contract or other document is required to be described in the Registration Statement or the Prospectus or to be filed as an exhibit to the Registration Statement that is not described therein or filed as required; (g) the issuance, offering and sale of the Shares by the Company pursuant to this Agreement, the compliance by the Company with the other provisions of this Agreement and the consummation of the other transactions herein contemplated do not require the consent, approval, authorization, registration or qualification of or with any governmental authority, except such as have been obtained and such as may be required under state securities or blue sky laws, or conflict with or result in a breach or violation of any of the terms and provisions of, or constitute a default under, any indenture, mortgage, deed of trust, lease or other agreement or instrument, known to such counsel, to which the Company is a party or by which the Company or any of its properties are bound, or the Articles of Incorporation or Bylaws of the Company, or any statute or any judgment, decree, order, rule or regulation of any court or other governmental authority or any arbitrator known to such counsel and applicable to the Company; 17 The Representatives shall have received an opinion, dated the Firm Closing Date, of Gary A. Agron, Esq., counsel for the Company, to the effect that: (a) the Company has an authorized capital stock as set forth under the heading "CAPITALIZATION" in the Prospectus; effective upon the Closing Date all of the Company's shares have been duly authorized and validly issued and are fully paid and nonassessable; the shares have been duly authorized by all necessary corporate action of the Company, and, when issued and delivered to and paid for pursuant to this Agreement, will be validly issued, fully paid and nonassessable; the shares have been duly authorized for quotation on the Nasdaq SmallCap Market; no holders of outstanding shares of capital stock of the Company are entitled as such to any preemptive or other rights to subscribe for any of the Shares; and no holders of securities of the Company are entitled to have such securities registered under the Registration Statement; (b) the capital stock of the Company conforms, as to legal matters, to the statements set forth under the heading "DESCRIPTION OF SECURITIES" in the Prospectus in all material respects; (c) no legal or governmental proceedings are pending to which the Company is a party or to which the property of the Company is subject that are required to be described in the Registration Statement or the Prospectus and are not described therein, and, to the best knowledge of such counsel, no such proceedings have been threatened against the Company or with respect to any of its properties that can reasonably be expected to, or, if determined adversely to the Company, would, in any individual case or in the aggregate, result in any material adverse change in the business, financial condition or results of operations of the Company; (d) no contract or other document is required to be described in the Registration Statement or the Prospectus or to be filed as an exhibit to the Registration Statement that is not described therein or filed as required; (e) the issuance, offering and sale of the Shares by the Company pursuant to this Agreement, the compliance by the Company with the other provisions of this Agreement and the consummation of the other transactions herein contemplated do not require the consent, approval, authorization, registration or qualification of or with any governmental authority, except such as have been obtained and such as may be required under state securities or blue sky laws, or conflict with or result in a breach or violation of any of the terms and provisions of, or constitute a default under, any indenture, mortgage, deed of trust, lease or other agreement or instrument, known to such counsel, to which the Company is a party or by which the Company or any of its properties are bound, or the Articles of Incorporation or Bylaws of the Company, or any statute or any judgment, decree, order, rule or regulation of any court or other governmental authority or any arbitrator known to such counsel and applicable to the Company; (f) the Registration Statement is effective under the Act; any required filing of the Prospectus pursuant to Rule 424(b) has been made in the manner and within the time 18 period required by Rule 424(b); and no stop order suspending the effectiveness of the Registration Statement or any amendment thereto has been issued by the Commission, and no proceedings for that purpose have been instituted or, to the knowledge of such counsel, are threatened or contemplated by the Commission; (g) the Registration Statement and the Prospectus and each amendment or supplement thereto (in each case, other than the financial statements and other financial and statistical information contained therein, as to which such counsel need express no opinion) comply as to form in all material respects with the applicable requirements of the Act and the Rules and Regulations; (h) the Company is not required, and, if the Company uses the proceeds of the sale of the Firm Shares and the Option Shares solely as described in the Prospectus, will not be required as a result of the sale of such Shares to be registered as an investment company within the meaning of the Investment Company Act of 1940, as amended; and (i) such counsel shall also state that they have no reason to believe that the Registration Statement, as of its effective date, contained any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements therein not misleading or that the Prospectus, as of its date or the date of such opinion, included or includes any untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading; provided that in each case such counsel need not express any opinion as to the financial statements and other financial and statistical information contained therein. In rendering any such opinion, such counsel may rely as to matters of fact, to the extent such counsel deems proper, on certificates of responsible officers of the Company and public officials. The foregoing opinion may be limited to the laws of the United States and the General Corporation Law of the State of California. References to the Registration Statement and the Prospectus in this Section 7.2 shall include any amendment or supplement thereto at the date of such opinion. Such counsel shall permit Luce, Forward, Hamilton & Scripps LLP to rely upon such opinion in rendering its opinion in Section 7.3. 7.3 REVIEW BY AND OPINION OF REPRESENTATIVES' COUNSEL. The Representatives shall have received an opinion, dated as of the Firm Closing Date, of Luce, Forward, Hamilton & Scripps LLP, counsel for the Representatives, with respect to certain matters as the Representatives may reasonably require, and the Company shall have furnished to such counsel such documents and certificates as they may reasonably request for the purpose of enabling them to opine upon such matters. 7.4 ACCOUNTANT'S LETTER. The Representatives shall have received from Semple & Cooper a letter or letters dated, respectively, the date hereof and the Closing Date, in form and substance satisfactory to the Representatives, to the effect that: 19 (a) they are independent accountants with respect to the Company within the meaning of the Act and the Rules and Regulations; (b) in their opinion, the financial statements audited by them and included in the Registration Statement and the Prospectus comply in form in all material respects with the applicable accounting requirements of the Act and the related published rules and regulations; (c) on the basis of a reading of the audited financial statements of the Company, for the years ended June 30, 1995 and June 30, 1996, and the unaudited financial statements of the Company for the period ended March 31, 1997, and the notes thereto, carrying out certain specified procedures (which do not constitute an audit made in accordance with generally accepted auditing standards) that would not necessarily reveal matters of significance with respect to the comments set forth in this paragraph, a reading of the minute books of the shareholders, the board of directors and any committees thereof of the Company, and inquiries of certain officials of the Company who have responsibility for financial and accounting matters, nothing came to their attention that caused them to believe that: (i) the unaudited condensed financial statements of the Company included in the Registration Statement and the Prospectus do not comply in form in all material respects with the applicable accounting requirements of the Act and the related published rules and regulations thereunder or are not in conformity with generally accepted accounting principles applied on a basis substantially consistent with that of the audited financial statements included in the Registration Statement and the Prospectus; and (ii) at a specific date not more than five business days prior to the date of such letter, there were any changes in the capital stock or long-term debt of the Company or any decreases in net current assets or stockholders' equity of the Company, in each case compared with amounts shown on the March 31, 1997 balance sheet included in the Registration Statement and the Prospectus, or for the period from March 31, 1997 to such specified date there were any decreases, as compared with the corresponding period in the preceding year, in net sales, gross profit, selling, general and administrative expenses, employee plans and bonuses, income (loss) from operations, interest expenses, income (loss) before income taxes, provision (benefit) for income taxes, net income (loss) or net income (loss) per share of the Company, except in all instances for changes, decreases or increases set forth in such letter; and (d) they have carried out certain specified procedures, not constituting an audit, with respect to certain amounts, percentages and financial information that are derived from the general accounting records of the Company and are included in the Registration Statement and the Prospectus, and have compared such amounts, percentages and financial information with such records of the Company and with information derived from such records and have found them to be in agreement, excluding any questions of legal interpretation. 20 In the event that the letters referred to above set forth any such changes, decreases or increases, it shall be a further condition to the obligations of the Underwriters that such letters shall be accompanied by a written explanation of the Company as to the significance thereof, unless the Representatives deems such explanation unnecessary, and such changes, decreases or increases do not, in the sole judgment of the Representatives, make it impractical or inadvisable to proceed with the purchase and delivery of the Shares as contemplated by the Registration Statement, as amended as of the date hereof. References to the Registration Statement and the Prospectus in this Section 7.4 with respect to either letter referred to above shall include any amendment or supplement thereto at the date of such letter. 7.5 OFFICER'S CERTIFICATE. The Representatives shall have received a certificate, dated the Firm Closing Date, of the president and the principal financial or accounting officer of the Company to the effect that: (a) the representations and warranties of the Company in this Agreement are true and correct as if made on and as of the Firm Closing Date; the Registration Statement, as amended as of the Firm Closing Date, does not include any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading, in light of the circumstances in which they were made and the Prospectus, as amended or supplemented as of the Firm Closing Date, does not include any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein not misleading, in the light of the circumstances under which they were made; and the Company has in all material respects performed all covenants and agreements and satisfied all conditions on its part to be performed or satisfied at or prior to the Firm Closing Date; (b) no stop order suspending the effectiveness of the Registration Statement or any amendment thereto has been issued, and no proceedings for that purpose have been instituted or threatened or, to the best of their knowledge, are contemplated by the Commission; and (c) subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus, the Company has not sustained any material loss or interference with its business or properties from fire, flood, hurricane, accident or other calamity, whether or not covered by insurance, or from any labor dispute or any legal or governmental proceeding, and there has not been any material adverse change, or any development involving a prospective material adverse change, in the condition (financial or otherwise), business prospects, net worth or results of operations of the Company, except in each case as described in or contemplated by the Prospectus (exclusive of any amendment or supplement thereto). 7.6 NASD REVIEW. The NASD, upon review of the terms of the public offering of the Firm Shares and Option Shares, shall not have objected to the Underwriters' participation in such offering. 21 7.7 LOCKUPS. The Representatives shall have received from each officer, director and person who owns more than five percent (5%) of the Company's Common Stock, or securities convertible into Common Stock, an agreement to the effect that such person will not, directly or indirectly, without the prior written consent of the Representatives, offer, sell or grant any option to purchase or otherwise dispose (or announce any offer, sale, grant of an option to purchase or other disposition) of any shares of Common Stock or any securities convertible into, or exchangeable for, shares of Common Stock for a period of twelve months. 7.8 DUE DILIGENCE EXAMINATION. The counsel to the Representatives and other persons retained by the Representatives to conduct a due diligence investigation with respect to the offering, shall be reasonably satisfied with the results of their respective due diligence investigations. 7.9 BLUE SKY QUALIFICATION. The Shares shall be qualified in such states as the Representatives may reasonably request pursuant to Section 5.4, and each such qualification shall be in effect and not subject to any stop order or other proceeding on the Closing Date or Option Closing Date, as the case may be. 7.10 OTHER DOCUMENTS. On or before the Firm Closing Date, the Representatives and counsel for the Representatives shall have received such further certificates, documents or other information as they may have reasonably requested from the Company. All opinions, certificates, letters and documents delivered pursuant to this Agreement will comply with the provisions hereof only if they are reasonably satisfactory in all material respects to the Representatives. The Company shall furnish to the Representatives such conformed copies of such opinions, certificates, letters and documents in such quantities as the Representatives and the counsel to the Representatives shall reasonably request. The respective obligations of the several Underwriters to purchase and pay for any Option Shares shall be subject, in the Representatives' discretion, to each of the foregoing conditions to purchase the Firm Shares, except that all references to the Firm Shares and the Firm Closing Date shall be deemed to refer to such Option Shares and the related Option Closing Date, respectively. SECTION 8. INDEMNIFICATION AND CONTRIBUTION 8.1 INDEMNIFICATION BY COMPANY. The Company agrees to indemnify and hold harmless each Underwriter and each person, if any, who controls any Underwriter within the meaning of Section 15 of the Act or Section 20 of the Securities Exchange Act of 1934 (the "Exchange Act") against any losses, claims, damages or liabilities, joint or several, to which such Underwriter or such controlling person may become subject under the Act, the Exchange Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon: 22 (a) any untrue statement or alleged untrue statement made by the Company in Section 2 of this Agreement; (b) any untrue statement or alleged untrue statement of any material fact contained in (i) the Registration Statement or any amendment thereto or any Preliminary Prospectus or the Prospectus or any amendment or supplement thereto, or (ii) any application or other document, or any amendment or supplement thereto, executed by the Company and based upon written information furnished by or on behalf of the Company filed in any jurisdiction in order to qualify the Shares under the securities or blue sky laws thereof or filed with the Commission or any securities association or securities exchange (each an "Application"); or (c) the omission or alleged omission to state in the Registration Statement or any amendment thereto, any Preliminary Prospectus or the Prospectus or any amendment or supplement thereto, or any Application a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances in which they are made, and will reimburse, as incurred, each Underwriter and each such controlling person for any legal or other expenses reasonably incurred by such Underwriter or such controlling person in connection with investigating, defending against or appearing as a third-party witness in connection with any such loss, claim, damage, liability or action; provided, however, that the Company will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon any untrue statement or alleged untrue statement or omission or alleged omission made in such registration statement or any amendment thereto, any Preliminary Prospectus or the Prospectus or any amendment or supplement thereto, or any Application in reliance upon and in conformity with written information furnished to the Company by any Underwriter through the Representatives specifically for use therein; and provided further, that the Company will not be liable to any Underwriter or any person controlling such Underwriter with respect to any such untrue statement or omission made in any Preliminary Prospectus that is corrected in the Prospectus (or any amendment or supplement thereto) if the person asserting any such loss, claim, damage or liability purchased Shares from such Underwriter but was not sent or given a copy of the Prospectus (as amended or supplemented), other than the documents incorporated by reference therein at or prior to the written confirmation of the sale of such Shares to such person in any case where such delivery of the Prospectus (as amended or supplemented) is required by the Act, unless such failure to deliver the Prospectus (as amended or supplemented) was a result of noncompliance by the Company with Section 5.5 of this Agreement. This indemnity agreement will be in addition to any liability which the Company may otherwise have. The Company will not, without the prior written consent of each Underwriter, settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action, suit or proceeding in respect of which indemnification may be sought hereunder (whether or not such Underwriter or any person who controls such Underwriter within the meaning of Section 15 of the Act or Section 20 of the Exchange Act is a party to such claim, action, suit or proceeding), unless such settlement, compromise or consent includes an unconditional release of such Underwriter and each such controlling person from all liability arising out of such claim, action, suit or proceeding. 23 8.2 INDEMNIFICATION BY UNDERWRITERS. Each Underwriter will indemnify and hold harmless the Company, each of its directors, each of its officers who signed the Registration Statement and each person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20 of the Exchange Act against any losses, claims, damages or liabilities to which the Company, any such director or officer of the Company or any such controlling person of the Company may become subject under the Act, the Exchange Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon (a) any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement or any amendment thereto, any Preliminary Prospectus or the Prospectus or any amendment or supplement thereto, or any Application or (b) the omission or the alleged omission to state therein a material fact required to be stated in the Registration Statement or any amendment thereto, any Preliminary Prospectus or the Prospectus or any amendment or supplement thereto, or any Application or necessary to make the statements therein not misleading in light of the circumstances in which they are made, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company by any Underwriter through the Representatives specifically for use therein; and, subject to the limitation set forth immediately preceding this clause, will reimburse, as incurred, any legal or other expenses reasonably incurred by the Company or any director, officer or controlling person of the Company in connection with investigation or defending against or appearing as a third-party witness in connection with any such loss, claim, damage, liability or any action in respect thereof. This indemnity agreement will be in addition to any liability which such Underwriter may otherwise have. No Underwriter will, without the prior written consent of the Company, settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action, suit or proceeding in respect of which indemnification may be sought hereunder (whether or not the Company, any of its directors, any of its officers who signed the Registration Statement or any person who controls the Company within the meaning of Section 15 of the Act or Section 20 of the Exchange Act is a party to such claim, action, suit or proceeding), unless such settlement, compromise or consent includes an unconditional release of the Company and each such director, officer and controlling person from all liability arising out of such claim, action, suit or proceeding. 8.3 NOTICE OF DEFENSE. Promptly after receipt by an indemnified party under this Section 8 of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party under this Section 8, notify the indemnifying party of the commencement thereof; but the omission so to notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party otherwise than under this Section 8. In case any such action is brought against any indemnified party, and it notifies the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate therein and, to the extent that it may wish, jointly with any other indemnifying party and the indemnified party shall have reasonably concluded that there may be one or more legal defenses available to it and/or other indemnified parties which are different from or additional to those available to the indemnifying party, the indemnifying party shall not have the right to direct the defense of such action on behalf of such indemnified party or parties and such indemnified party or 24 parties shall have the right to select separate counsel to defend such action on behalf of such indemnified party or parties. After notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof and approval by such indemnified party of counsel appointed to defend such action, the indemnifying party will not be liable to such indemnified party (which may not be unreasonably withheld or delayed) under this Section 8 for any legal or other expenses, other than reasonable costs of investigation, subsequently incurred by such indemnified party in connection with the defense thereof, unless (a) the indemnified party shall have employed separate counsel in accordance with the proviso to the next preceding sentence (it being understood, however, that in connection with such action the indemnifying party shall not be liable for the expenses of more than one separate counsel at any one time in any one action or separate but substantially similar actions in the same jurisdiction arising out of the same general allegations or circumstances, designated by the Representatives in the case of Section 8.1, representing the indemnified parties under such Section 8.1 who are parties to such action or actions) or (b) the indemnifying party has authorized the employment of counsel for the indemnified party at the expense of the indemnifying party. After such notice from the indemnifying party to such indemnified party, the indemnifying party will not be liable for the costs and expenses of any settlement of such action effected by such indemnified party without the consent of the indemnifying party, unless such indemnified party waived its rights under this Section 8 in which case the indemnified party may effect such a settlement without such consent. 8.4 CONTRIBUTION. In circumstances in which the indemnity agreement provided for in the preceding paragraphs of this Section 8 is unavailable or insufficient to hold harmless an indemnified party in respect of any losses, claims, damages or liability (or actions in respect thereof), each indemnifying party, in order to provide for just and equitable contribution, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (or actions in respect thereof) in such proportion as is appropriate to reflect (a) the relative benefits received by the indemnifying party or parties on the one hand and the indemnified party on the other from the offering of the Shares or (b) if the allocation provided by the foregoing clause (a) is not permitted by applicable law, not only such relative benefits but also the relative fault of the indemnifying party or parties on the one hand and the indemnified party on the other in connection with the statements or omissions or alleged statements or omissions that resulted in such losses, claims, damages or liability (or action in respect thereof). The relative benefits received by the Company on the one hand and the Underwriters on the other shall be deemed to be in the same proportion as the total proceeds from the offering (after deducting expenses) received by the Company bear to the total underwriting discounts and commissions received by the Underwriters. The relative fault of the parties shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or the Underwriters, the parties' relative intents, knowledge, access to information and opportunity to correct or prevent such statement or omission, and any other equitable considerations appropriate in the circumstances. The Company and the Underwriters agree that it would not be equitable if the amount of such contribution were determined by pro rata or per capita allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation that does not take into account the equitable 25 consideration referred to in the first sentence of this Section 8.4. Notwithstanding any other provision of this Section 8.4, no Underwriter shall be obligated to make contributions hereunder that in the aggregate exceed the underwriter discount on the Shares purchased by such Underwriter under this Agreement, less the aggregate amount of any damages that such Underwriter has otherwise been required to pay in respect of the same or any substantially similar claim, and no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations to contribute hereunder are several in proportion to their respective underwriting obligations and not joint, and contributions among Underwriters shall be governed by the provisions of the Agreement Among Underwriters. For purposes of this Section 8.4, each person, if any, who controls an Underwriter within the meaning of Section 15 of the Act or Section 20 of the Exchange Act shall have the same rights to contribution as such Underwriter, and each director of the Company, each officer of the Company who signed the Registration Statement and each person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, shall have the same right to contribution as the Company as the case may be. SECTION 9. DEFAULT OF UNDERWRITERS If one or more Underwriters default in their obligations to purchase Firm Shares, or Option Shares hereunder and the aggregate number of such Shares that such defaulting Underwriter or Underwriters agreed but failed to purchase is ten percent or less of the aggregate number of Firm Shares or Option Shares to be purchased by all of the Underwriters at such time hereunder, the other Underwriters may make arrangements satisfactory to the Representatives for the purchase of such Shares by other persons (who may include one or more of the non-defaulting Underwriters, including the Representatives), but if no such arrangements are made by the Firm Closing Date or the related Option Closing Date, as the case may be, the other Underwriters shall be obligated severally in proportion to their respective commitments hereunder to purchase the Firm Shares, or Option Shares that such defaulting Underwriter or Underwriters agreed but failed to purchase. In the event of any default by one or more Underwriters as described in this Section 9, the Representatives shall have the right to postpone the Firm Closing Date or the Option Closing Date, as the case may be, established as provided in Section 3 hereof for not more than seven business days in order that any necessary changes may be made in the arrangements or documents for the purpose and delivery of the Firm Shares or Option Shares, as the case may be. As used in this Agreement, the term "Underwriter" includes any persons substituted for an Underwriter under this Section 9. Nothing herein shall relieve any defaulting Underwriter from liability for its default. 26 SECTION 10. SURVIVAL The respective representations, warranties, agreements, covenants, indemnities and other statements of the Company, its officers and directors and the several Underwriters set forth in this Agreement or made by or on behalf of them, respectively, pursuant to this Agreement shall remain in full force and effect, regardless of (a) any investigation made by or on behalf of the Company, any of its officers or directors, any Underwriter or any controlling person referred to in Section 8 hereof and (b) delivery of and payment for the Shares. The respective agreements, covenants, indemnities and other statements set forth in Sections 5 and 8 hereof shall remain in full force and effect, regardless of any termination or cancellation this Agreement. SECTION 11. TERMINATION 11.1 BY REPRESENTATIVES. This Agreement may be terminated with respect to the Firm Shares or any Option Shares in the sole discretion of the Representatives by notice to the Company given prior to the Firm Closing Date or the related Option Closing Date, respectively, in the event that the Company shall have failed, refused or been unable to perform all obligations and satisfy all conditions on its part to be performed or satisfied hereunder at or prior thereto or, if at or prior to the Firm Closing date or such Option Closing Date, respectively: (a) the Company shall have sustained any material loss or interference with its business or properties from fire, flood, hurricane, accident or other calamity, whether or not covered by insurance, or from any labor dispute or any legal or governmental proceeding or there shall have been any material adverse change, or any development involving a prospective material adverse change (including financial or otherwise), in the business prospects, net worth or results of operations of the Company, except in each case as described in or contemplated by the Prospectus (exclusive of any amendment or supplement thereto); (b) trading in the Common Stock shall have been suspended by the Commission or the National Association of Securities Dealers Automated Quotation SmallCap Market or trading in securities generally on the New York Stock Exchange or the American Stock Exchange shall have been suspended or minimum or maximum prices shall have been established on any such exchange or market system; (c) a banking moratorium shall have been declared by New York, California, or United States authorities; or (d) there shall have been (i) an outbreak or escalation of hostilities between the United States and any foreign power, (ii) an outbreak or escalation of any other insurrection or armed conflict involving the United States or (iii) any other calamity or crisis having an effect on the financial markets that, in the reasonable judgment of the Representatives, makes it 27 impracticable or inadvisable to proceed with the public offering or the delivery of the Shares as contemplated by the Registration Statement, as amended as of the date hereof. 11.2 EFFECT OF TERMINATION HEREUNDER. Termination of this Agreement pursuant to this Section 11 shall be without liability of any party to any other party, except as provided in Section 10 hereof. SECTION 12. INFORMATION SUPPLIED BY UNDERWRITERS The statements set forth in the last paragraph on the front cover page and under the heading "Underwriting" in any Preliminary Prospectus or the Prospectus, to the extent such statements relate to the Underwriters constitute the only information furnished by any Underwriter through the Representatives to the Company for the purposes of Section 8 and 10 hereof. The Underwriters represent and warrant to the Company that such statements, to such extent, are correct as of the date hereof and at each Closing Date. SECTION 13. NOTICES All communications hereunder shall be in writing and, if sent to any of the Underwriters, shall be mailed (certified or registered mail, postage prepaid, return receipt requested) or delivered or sent by facsimile transmission and confirmed in writing to Spelman & Co., Inc., 2355 Northside Drive, Suite 200, San Diego, California 92108, Attention: Mr. Jason Rogers (with a copy to Dennis J. Doucette, Esq., Luce, Forward, Hamilton & Scripps LLP, 600 West Broadway, Suite 2600, San Diego, CA 92101), if sent to the Company, shall be mailed (certified or registered mail, postage prepaid, return receipt requested), delivered or sent by facsimile transmission and confirmed in writing to the Company at 550 Monterey Highway, Morgan Hill, California 95037 Attention: Floyd Hill, CEO, (with a copy to Gary A. Agron, Esq., Law Offices of Gary A. Agron, 5445 DTC Parkway, Suite 520, Englewood, Colorado 80111). Notices shall be effective if mailed, 48 hours after deposit in the mail properly addressed, sent by facsimile, upon receipt and in any other instance, when delivered. SECTION 14. SUCCESSORS This Agreement shall inure to the benefit of and shall be binding upon the several Underwriters, the Company and their respective successors and legal representatives, and nothing expressed or mentioned in this Agreement is intended or shall be construed to give any other person any legal or equitable right, remedy or claim under or in respect of this Agreement, or any provisions herein contained, this Agreement and all conditions and provisions hereof being intended to be and being for the sole and exclusive benefit of such persons and for the benefit of no other person except that (a) the indemnities of the Company contained in Section 8 of this Agreement shall also be for the benefit of any person or persons who control any Underwriter within the meaning of Section 15 of the Act or Section 20 of the Exchange Act and (b) the indemnities of the Underwriters contained 28 in Section 8 of this Agreement shall also be for the benefit of the directors of the Company, the officers of the Company who have signed the Registration Statement and any person or persons who control the Company within the meaning of Section 15 of the Act or Section 20 of the Exchange Act. No purchaser of Shares from any Underwriter shall be deemed a successor because of such purchase. SECTION 15. APPLICABLE LAW The validity and interpretation of this Agreement, and the terms and conditions set forth herein, shall be governed by and construed in accordance with the laws of the State of California without giving effect to any provisions relating to conflicts of laws. SECTION 16. COUNTERPARTS This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. If the foregoing correctly sets forth our understanding, please indicate your acceptance thereof in the space provided below for that purpose, whereupon this letter shall constitute an agreement binding the Company, and each of the several Underwriters. Very truly yours, ORGANIC FOOD PRODUCTS By: --------------------------------- Floyd Hill Chief Executive Officer The foregoing Agreement is hereby confirmed and accepted as of the date first above written. Sentra Securities Corporation Spelman & Co., Inc. (As Representatives of the several Underwriters named in Schedule 1 hereto) By: -------------------------------------- Richard P. Woltman, President SCHEDULE 1 UNDERWRITERS Underwriter Number of Firm Shares - ----------- to be purchased --------------- Sentra Securities Corporation Spelman & Co., Inc. Total --------------- EX-1.05 3 EXHIBIT 1.05 ORGANIC FOOD PRODUCTS 1,300,000 Shares SELECTED DEALER AGREEMENT __________________, 1997 Dear Sirs: Sentra Securities Corporation, a California corporation, and Spelman & Co., Inc., a California corporation, and the other Underwriters named in the Prospectus relating to the above shares (the "Underwriters"), acting through us as Representatives, is severally offering for sale an aggregate of 1,300,000 Shares (the "Firm Shares") of common stock ("Common Stock") of Organic Food Products (the "Company") at a price of $4.00 per Share. In addition, the several Underwriters have been granted an option to purchase from the Company up to an additional 180,000 Shares (the "Option Shares") to cover over-allotments in connection with the sale of the Firm Shares. The Firm Shares and any Option Shares purchased are herein called the "Shares". The Shares and the terms under which they are to be offered for sale by the several Underwriters are more particularly described in the Prospectus. The Underwriters are offering the Shares pursuant to a Registration Statement (the "Registration Statement") under the Securities Act of 1933, as amended, subject to the terms of (a) their Underwriting Agreement with the Company, (b) this Agreement, and (c) the Representatives' instructions which may be forwarded to the Selected Dealers from time to time. This invitation is made by the Representatives only if the Shares may be lawfully offered by dealers in your state. The terms and conditions of this invitation are as follows: 1. OFFER TO SELECTED DEALERS. The Representatives are hereby soliciting offers to buy, upon the terms and conditions hereof, a portion of the Shares from Selected Dealers who are to act as principal. Shares are to be offered to the public at a price of $4.00 per Share (the "Offering Price"). Selected Dealers who are members of the National Association of Securities Dealers, Inc. (the "NASD") will be allowed, on all Shares sold by them, a concession of $______ payable as hereinafter provided. Selected Dealers may reallow other dealers who are members of the NASD a portion of that concession up to the amount of $_____ per Share with respect to Shares sold by or through them. No NASD member may reallow commissions to any non-member broker-dealer including foreign broker-dealers registered pursuant to the Securities Exchange Act of 1934. This offer is solicited subject to the Company's issuance and delivery of certificates and other documents evidencing its Shares and the acceptance thereof by the Representatives, to the approval of legal matters by counsel, and to the terms and conditions set forth herein. 2. REVOCATION OF OFFER. The Selected Dealer's offer to purchase, if made prior to the effective date of the Registration Statement, may be revoked in whole or in part without obligation or commitment of any kind by it any time prior to acceptance and no offer may be accepted by the Representatives and no sale can be made until after the Registration Statement covering the Shares has become effective with the Securities and Exchange Commission. Subject to the foregoing, upon execution by the Selected Dealer of the Offer to Purchase below and the return of same to the Representatives, the Selected Dealer shall be deemed to have offered to purchase the number of Shares set forth in its offer on the basis set forth in Section 1 above. Any oral offer to purchase made by the Selected Dealer shall be deemed subject to this Agreement and shall be confirmed by the Representatives by the subsequent execution and return of this Agreement. Any oral notice by the Representatives of acceptance of the Selected Dealer's offer shall be followed by written or telegraphic confirmation preceded or accompanied by a copy of the Prospectus. If a contractual commitment arises hereunder, all the terms of this Selected Dealer Agreement shall be applicable. The Representatives may also make available to the Selected Dealer an allotment to purchase Shares, but such allotment shall be subject to modification or termination upon notice from the Representatives any time prior to an exchange of confirmations reflecting completed transactions. All references hereafter in this Agreement to the purchase and sale of Shares assume and are applicable only if contractual commitments to purchase are completed in accordance with the foregoing. 3. SELECTED DEALER SALES. Any Shares purchased by a Selected Dealer under the terms of this Agreement may be immediately re-offered to the public at the Offering Price in accordance with the terms of the offering thereof set forth herein and in the Prospectus, subject to the securities or blue sky laws of the various states or other jurisdictions. Shares shall not be offered or sold by the Selected Dealers below the Offering Price. The Selected Dealer agrees to advise the Representatives, upon request, of any Shares purchased by it remaining unsold and, the Representatives have the right to purchase all or a portion of such Shares, at the Public Offering Price less the selling concession or such part thereof as the Representatives shall determine. 4. PAYMENT FOR SHARES. Payment for Shares which the Selected Dealer purchases hereunder shall be made by the Selected Dealer on or before three (3) business days after the date of each confirmation by certified or bank cashier's check payable to the Representatives. Certificates for the securities shall be delivered as soon as practicable after delivery instructions are received by the Representatives. 5. OPEN MARKET TRANSACTIONS; STABILIZATION. 5.1 For the purpose of stabilizing the market in the Shares, the Representatives have been authorized to make purchases and sales of the Company's Shares in the open market or otherwise, and, in arranging for sales, to overallot. If, in connection with such stabilization, the Representatives contract for or purchase in the open market any Shares sold to the Selected Dealer hereunder and not effectively placed by the Selected Dealer, the Representatives may charge the Selected Dealer for the accounts of the several Underwriters an amount equal to the Selected Dealer concession on such Shares, together with any applicable transfer taxes, and the Selected Dealer 2 agrees to pay such amount to the Representatives on demand. Certificates for Shares delivered on such repurchases need not be the identical certificates originally purchased. 5.2 The Selected Dealer will not, until advised by the Representatives that the entire offering has been distributed and closed, bid for or purchase Shares in the open market or otherwise make a market in the Shares or otherwise attempt to induce others to purchase Shares in the open market. Nothing contained in this section shall prohibit the Selected Dealer from acting as an agent in the execution of unsolicited orders of customers in transactions effectuated for them through a market maker. 6. ALLOTMENTS. The Representatives reserve the right to reject all subscriptions, in whole or in part, to make allotments and to close the subscription books at any time without notice. If an order from a Selected Dealer is rejected or if a payment is received which proves insufficient, any compensation paid to the Selected Dealer shall be returned by the Selected Dealer either in cash or by a charge against the account of the Selected Dealer, as the Representatives may elect. 7. RELIANCE ON PROSPECTUS. The Selected Dealer agrees not to use any supplemental sales literature of any kind without prior written approval of the Representatives unless it is furnished by the Representatives for such purpose. In offering and selling the Company's Shares, the Selected Dealer will rely solely on the representations contained in the Prospectus. Additional copies of the current Prospectus will be supplied by the Representatives in reasonable quantities upon request. 8. REPRESENTATIONS OF SELECTED DEALER. By accepting this Agreement, the Selected Dealer represents that it: (a) is registered as a broker-dealer under the Securities Exchange Act of 1934, as amended; (b) is qualified to act as a Dealer in the States or other jurisdictions in which it offers the Shares; (c) is a member in good standing with the NASD; (d) will maintain all such registrations, qualifications, and memberships throughout the term of this Agreement; (e) will comply with all applicable Federal laws relating to the offering, including, but not limited to, Rule 15c2-8 under the Securities Exchange Act of 1934 and Release No. 4968 under the Securities Act of 1933 relating to delivery of preliminary and final prospectuses, and Regulation M governing the activities of participants in a distribution of securities; (f) will comply with the laws of the state or other jurisdictions concerned; (g) will comply the rules and regulations of the NASD including, but not limited to, full compliance with Rules 2100, 2730 2740, 2720 and 2750 of the Conduct Rules of the NASD and the interpretations of such sections promulgated by the Board of Governors of the NASD including an interpretation with respect to "Free-Riding and Withholding" dated November 1, 1970, and as thereafter amended; and (h) confirms that the purchase of the number of Shares it has subscribed for and may be obligated to purchase will not cause it to violate the net capital requirements of Rule 15c3-1 under the Exchange Act. 9. BLUE SKY QUALIFICATION. The Selected Dealer agrees that it will offer to sell the Shares only (a) in states or jurisdictions in which it is licensed as a broker-dealer under the laws of such states, and (b) in which the Representatives have been advised by counsel that the Shares have been 3 qualified for sale under the respective securities or Blue Sky laws of such states. The Representatives assume no obligations or responsibilities as to the right of any Selected Dealer to sell the Shares in any state or as to any sale therein. 10. EXPENSES. No expenses will be charged to Selected Dealers. A single transfer tax, if any, on the sale of the Shares by the Selected Dealer to its customers will be paid when such Shares are delivered to the Selected Dealer for delivery to its customers. However, the Selected Dealer will pay its proportionate share of any transfer tax or any other tax (other than the single transfer tax described above) if any such tax shall be from time to time assessed against the Underwriters and other Selected Dealers. 11. NO JOINT VENTURE. No Selected Dealer is authorized to act as the Underwriters' agent, or otherwise to act on our behalf, in the offering or selling of Shares to the public or otherwise. Nothing contained herein will constitute the Selected Dealers an association or other separate entity or partners with the Underwriters, or with each other, but each Selected Dealer will be responsible for its share of any liability or expense based on any claim to the contrary. 12. COMMUNICATIONS. This Agreement and all communications to the Underwriters shall be sent to the Representatives at the following address or, if sent by facsimile, to the number set forth below: Ms. Patty Allen Sentra Securities Corporation 2355 Northside Drive, Ste. 200 San Diego, CA 92108 Fax No. (619) 584-7010 Any notice to the Selected Dealer shall be properly given if mailed, telephoned, or transmitted by facsimile to the Selected Dealer at its address or number set forth below its signature to this Agreement. All communications and notices initially transmitted by facsimile shall be confirmed in writing. 13. GOVERNING LAW. This Agreement shall be governed by and construed according to the laws of the State of California. 14. REPRESENTATIVES' AUTHORITY AND OBLIGATIONS. The Representatives shall have full authority to take such actions as may they deem advisable in respect of all matters pertaining to the offering or arising thereunder. The Representatives shall not be under any liability to the Selected Dealer, except such as may be incurred under the Securities Act of 1933 and the rules and regulations thereunder, except for lack of good faith and except for obligations assumed by the Representatives in this Agreement, and no obligation on their part shall be implied or inferred herefrom. 4 15. ASSIGNMENT. This Agreement may not be assigned by the Selected Dealer without the Representatives' prior written consent. 16. TERMINATION. The Selected Dealer will be governed by the terms and conditions of this Agreement until it is terminated. This Agreement will terminate upon the termination of the Offering. 17. COUNTERPARTS. This Agreement may be executed in counterparts, each of which shall be deemed an original, and all of which together shall constitute one instrument. A copy of an executed counterpart of this Agreement may be sent via facsimile by any party to the other party, and the other party may deem such facsimile copy of the executed counterpart to be an original. 18. APPLICATION. If you desire to purchase any of the Shares, please confirm your application by signing and returning to us your confirmation on the duplicate copy of this letter, even though you may have previously advised us thereof by telephone or telegraph. Our signature hereon may be by facsimile. SENTRA SECURITIES CORPORATION Dated: _____________, 1997 By: ---------------------------------- Richard P. Woltman, President Dated: _____________, 1997 ---------------------------------- By: ---------------------------------- 5 OFFER TO PURCHASE The undersigned does hereby offer to purchase (subject to the right to revoke set forth in Section 2) _______ Shares in accordance with the terms and conditions set forth above. ---------------------------------- By: --------------------------------- Its: -------------------------------- Address: Facsimile Number: Telephone Number: ("Selected Dealer") Date of Acceptance: ----------------------- Accepted By: ------------------------------ IRS Employer Identification No.: ---------- Share Allocation: ------------------------- 6 EX-1.06 4 EXHIBIT 1.06 THESE SECURITIES MAY NOT BE PUBLICLY OFFERED OR SOLD UNLESS AT THE TIME OF SUCH OFFER OR SALE, THE PERSON MAKING SUCH OFFER OR SALE DELIVERS A PROSPECTUS MEETING THE REQUIREMENTS OF SECTION 10 OF THE SECURITIES ACT OF 1933 FORMING A PART OF A REGISTRATION STATEMENT, OR POST-EFFECTIVE AMENDMENT THERETO, WHICH IS EFFECTIVE UNDER SAID ACT, UNLESS IN THE OPINION OF COUNSEL TO THE COMPANY SUCH OFFER AND SALE IS EXEMPT FROM THE PROVISIONS OF SECTION 5 OF SAID ACT. WARRANT For the Purchase of Shares of Common Stock of ORGANIC FOOD PRODUCTS Void After 5 P.M. _______________, 2002 No. 1 Warrant to Purchase One Hundred Thirty Thousand (130,000) Shares of Common Stock THIS IS TO CERTIFY, that, for value received, Sentra Securities Corporation (the "Underwriter") or registered assigns, is entitled, subject to the terms and conditions hereinafter set forth, on or after ____________, 1998 and at any time prior to 5 P.M., Pacific Standard Time ("PST"), on _______________, 2002, but not thereafter, to purchase such number of shares of Common Stock (the "Shares") of Organic Food Products, a California corporation (the "Company"), from the Company as is set forth above and upon payment to the Company of $4.80 per Share (the "Purchase Price"), if and to the extent this Warrant is exercised, in whole or in part, during the period this Warrant remains in force, subject in all cases to adjustment as provided in Section 2 hereof, and to receive a certificate or certificates representing the Shares so purchased, upon presentation and surrender to the Company of this Warrant, with the form of subscription attached hereto, including changes thereto reasonably requested by the Company, duly executed, and accompanied by payment of the Purchase Price of each Share. SECTION 1. TERMS OF THIS WARRANT 1.1 TIME OF EXERCISE. Subject to the provisions of Sections 1.5 and 3.1 hereof, this Warrant may be exercised at any time and from time to time after 9:00 A.M., PST, on __________, 1998 (the "Exercise Commencement Date"), but no later than 5:00 P.M., _________, 2002 (the "Expiration Time") at which it shall become void, and all rights hereunder shall thereupon cease. 1.2 MANNER OF EXERCISE. 1.2.1 The holder of this Warrant (the "Holder") may exercise this Warrant, in whole or in part, upon surrender of this Warrant with the form of subscription attached hereto duly executed, to the Company at its corporate office in Morgan Hill, California, together with the full Purchase Price for each Share to be purchased in lawful money of the United States, or by certified check, bank draft or postal or express money order payable in United States dollars to the order of the Company, and upon compliance with and subject to the conditions set forth herein. 1.2.2 Upon receipt of this Warrant with the form of subscription duly executed and accompanied by payment of the aggregate Purchase Price for the Shares for which this Warrant is then being exercised, the Company shall cause to be issued certificates for the total number of whole Shares for which this Warrant is being exercised in such denominations as are required for delivery to the Holder, and the Company shall thereupon deliver such certificates to the Holder or its nominee. 1.2.3 In case the Holder shall exercise this Warrant with respect to less than all of the Shares that may be purchased under this Warrant, the Company shall execute a new Warrant for the balance of the Shares that may be purchased upon exercise of this Warrant and deliver such new Warrant to the Holder. 1.2.4 The Company covenants and agrees that it will pay when due and payable any and all taxes which may be payable in respect of the issue of this Warrant, or the issue of any Shares upon the exercise of this Warrant. The Company shall not, however, be required to pay any tax which may be payable in respect of any transfer involved in the issuance or delivery of this Warrant or of the Shares in a name other than that of the Holder at the time of surrender, and until the payment of such tax the Company shall not be required to issue such Shares. 1.3 EXCHANGE OF WARRANT. This Warrant may be split-up, combined or exchanged for another Warrant or Warrants of like tenor to purchase a like aggregate number of Shares. If the Holder desires to split-up, combine or exchange this Warrant, he shall make such request in writing delivered to the Company at its corporate office and shall surrender this Warrant and any other Warrants to be so split-up, combined or exchanged, the Company shall execute and deliver to the person entitled thereto a Warrant or Warrants, as the case may be, as so requested. The Company shall not be required to effect any split-up, combination or exchange which will result in the issuance of a Warrant entitling the Holder to purchase upon exercise a fraction of a Share. The Company may require the Holder to pay a sum sufficient to cover any tax or governmental charge that may be imposed in connection with any split-up, combination or exchange of Warrants. 2 1.4 HOLDER AS OWNER. Prior to due presentment for registration of transfer of this Warrant, the Company may deem and treat the Holder as the absolute owner of this Warrant (notwithstanding any notation of ownership or other writing hereon) for the purpose of any exercise hereof and for all other purposes, and the Company shall not be affected by any notice to the contrary. 1.5 TRANSFER AND ASSIGNMENT. Prior to one year from the date hereof, this Warrant may not be sold, hypothecated, exercised, assigned or transferred, except to individuals who are officers of the Underwriter or any successor to its business or pursuant to the laws of descent and distribution, and thereafter and until its expiration shall be assignable and transferable in accordance with and subject to the provisions of the Securities Act of 1933 and applicable state securities laws; provided, however, that if not exercised immediately upon such transfer, this Warrant shall lapse. 1.6 METHOD OF ASSIGNMENT. Any assignment permitted hereunder shall be made by surrender of this Warrant to the Company at its principal office with the form of assignment attached hereto duly executed and funds sufficient to pay any transfer tax. In such event, the Company shall, without charge, execute and deliver a new Warrant in the name of the assignee named in such instrument of assignment and this Warrant shall promptly be canceled. This Warrant may be divided or combined with other Warrants which carry the same rights upon presentation thereof at the corporate office of the Company together with a written notice signed by the Holder, specifying the names and denominations in which such new Warrants are to be issued. 1.7 RIGHTS OF HOLDER. Nothing contained in this Warrant shall be construed as conferring upon the Holder the right to vote or to consent or to receive notice as a shareholder in respect of any meetings of shareholders for the election of directors or any other matter, or as having any rights whatsoever as a shareholder of the Company. If, however, at any time prior to the expiration of this Warrant and prior to its exercise, any of the following shall occur: (a) the Company shall take a record of the holders of its shares of Common Stock for the purpose of entitling them to receive a dividend or distribution payable otherwise than in cash, or a cash dividend or distribution payable otherwise than out of current or retained earnings; as indicated by the accounting treatment of such dividend or distribution on the books of the Company; or (b) the Company shall offer to the holders of its Common Stock any additional shares of capital stock of the Company or securities convertible into or exchangeable for shares of capital stock of the Company, or any option, right or warrant to subscribe therefor; or (c) there shall be proposed any capital reorganization or reclassification of the Common Stock, or a sale of all or substantially all of the assets of the Company, or a consolidation or merger of the Company with another entity; or 3 (d) there shall be proposed a voluntary or involuntary dissolution, liquidation or winding up of the Company; then, in any one or more of said cases, the Company shall cause to be mailed to the Holder, at the earliest practicable time (and, in any event, not less than twenty (20) days before any record date or other date set for definitive action), written notice of the date on which the books of the Company shall close or a record shall be taken to determine the shareholders entitled to such dividend, distribution, convertible or exchangeable securities or subscription rights, or entitled to vote on such reorganization, reclassification, sale, consolidation, merger, dissolution, liquidation or winding up, as the case may be. Such notice shall also set forth such facts as shall indicate the effect of such action (to the extent such effect may be known at the date of such notice) on the Purchase Price and the kind and amount of the Shares and other securities and property deliverable upon exercise of this Warrant. Such notice shall also specify the date as of which the holders of the Common Stock of record shall participate in said distribution or subscription rights or shall be entitled to exchange their Common Stock for securities or other property deliverable upon such reorganization, reclassification, sale, consolidation, merger, dissolution, liquidation or winding up, as the case may be (on which date, in the event of voluntary or involuntary dissolution, liquidation or winding up of the Company, the right to exercise this Warrant shall terminate). Without limiting the obligation of the Company to provide notice to the holder of actions hereunder, it is agreed that failure of the Company to give notice shall not invalidate such action of the Company. 1.8 LOST CERTIFICATES. If this Warrant is lost, stolen, mutilated or destroyed, the Company shall, on such reasonable terms as to indemnity or otherwise as it may impose (which shall, in the case of a mutilated Warrant, include the surrender thereof), issue a new Warrant of like denomination and tenor as, and in substitution for, this Warrant, which shall thereupon become void. Any such new Warrant shall constitute an additional contractual obligation of the Company, whether or not the Warrant so lost, stolen, destroyed or mutilated shall be at any time enforceable by anyone. 1.9 COVENANTS OF THE COMPANY. The Company covenants and agrees as follows: 1.9.1 At all times it shall reserve and keep available for the exercise of this Warrant such number of authorized shares of Common Stock as are sufficient to permit the exercise in full of this Warrant. 1.9.2 Prior to the issuance of any Shares upon exercise of this Warrant, the Company shall secure the listing of such Shares upon any securities exchange or automated quotation system upon which the Company's Common Stock is listed for trading. 1.9.3 The Company covenants that all Shares when issued upon the exercise of this Warrant will be validly issued, fully paid, non-assessable and free of preemptive rights. 4 SECTION 2. ADJUSTMENT OF PURCHASE PRICE AND NUMBER OF SHARES PURCHASABLE UPON EXERCISE 2.1 STOCK SPLITS. If the Company at any time or from time to time after the issuance date of this Warrant effects a subdivision of the outstanding Common Stock, the Purchase Price then in effect immediately before that subdivision shall be proportionately decreased, and conversely, if the Company at any time or from time to time after the issuance date of this Warrant combines the outstanding shares of Common Stock, the Purchase Price then in effect immediately before the combination shall be proportionately increased. Any adjustment under this subsection 2.1 shall become effective at the close of business on the date the subdivision or combination becomes effective. 2.2 DIVIDENDS AND DISTRIBUTIONS. In the event the Company at any time, or from time to time after the issuance date of this Warrant makes, or fixes a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in additional shares of Common Stock, then and in each such event the Purchase Price then in effect shall be decreased as of the time of such issuance or, in the event such a record date is fixed, as of the close of business on such record date, by multiplying the Purchase Price then in effect by a fraction (i) the numerator of which is the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date, and (ii) the denominator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date plus the number of shares of Common Stock issuable in payment of such dividend or distribution; provided, however, that if such record date is fixed and such dividend is not fully paid or if such distribution is not fully made on the date fixed therefor, the Purchase Price shall be recomputed accordingly as of the close of business on such record date and thereafter the Purchase Price shall be adjusted pursuant to this subsection 2.2 as of the time of actual payment of such dividends or distributions. 2.3 RECAPITALIZATION OR RECLASSIFICATION. If the Shares issuable upon the exercise of the Warrant are changed into the same or a different number of shares of any class or classes of stock, whether by recapitalization, reclassification or otherwise (other than a subdivision or combination of shares or stock dividend or a reorganization, merger, consolidation or sale of assets, provided for elsewhere in this Section 2, then and in any such event each holder of Warrants shall have the right thereafter to exercise such Warrant as to the kind and amount of stock and/or other securities and property receivable upon such reclassification or other change, by the holder of the number of shares of Shares as to which such Warrant might have been exercised immediately prior to such reclassification or exchange, all subject to further adjustment as provided herein. 2.4 SALE OF THE COMPANY. If at any time or from time to time there is a capital reorganization of the Common Stock (other than a recapitalization, subdivision, combination, reclassification or exchange of shares provided for elsewhere in this Section 2 or a merger or 5 consolidation of the Company with or into another Company, or the sale of all or substantially all of the Company's properties and assets to any other person, then, as a part of such reorganization, merger, consolidation or sale, provision shall be made so that the holders of the Warrants shall thereafter be entitled to receive upon exercise of the Warrants, the number of shares of stock or other securities or property of the Company, or of the successor Company resulting from such merger or consolidation or sale, to which a holder of Shares deliverable upon exercise would have been entitled on such capital reorganization, merger, consolidation, or sale. In any such case, appropriate adjustment shall be made in the application of the provisions of this Section 2 with respect to the rights of the holders of the Warrants after the reorganization, merger, consolidation or sale to the end that the provisions of this Section (including adjustment of the Purchase Price then in effect and number of shares purchasable upon exercise of the Warrants) shall be applicable after that event and be as nearly equivalent to the provisions hereof as may be practicable. 2.5 OBSERVANCE OF DUTIES. The Company will not, by amendment of its Certificate of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Company but will at all times in good faith assist in the carrying out of all the provisions of this section 2 and in the taking of all such action as may be necessary or appropriate in order to protect the Exercise Rights of the holders of the Warrants against dilution or other impairment. SECTION 3. REGISTRATION UNDER THE SECURITIES ACT OF 1933 3.1 REGISTRATION AND LEGENDS. This Warrant and the Shares issuable upon exercise of this Warrant have not been registered under the Securities Act of 1933, as amended ("the Act"). Upon exercise, in part or in whole, of this Warrant, the certificates representing the Shares shall bear the following legend: THIS SECURITY HAS NOT BEEN REGISTERED OR QUALIFIED UNDER THE SECURITIES ACT OF 1933 ("ACT") OR THE SECURITIES OR BLUE SKY LAWS OF ANY STATE AND MAY NOT BE OFFERED AND SOLD UNLESS REGISTERED AND/OR QUALIFIED PURSUANT TO THE RELEVANT PROVISIONS OF FEDERAL AND STATE SECURITIES OR BLUE SKY LAWS OR AN EXEMPTION FROM SUCH REGISTRATION OR QUALIFICATION APPLICABLE. THEREFORE, NO SALE OR TRANSFER OF THIS SECURITY SHALL BE MADE, NO ATTEMPTED SALE OR TRANSFER SHALL BE VALID, AND THE ISSUER SHALL NOT BE REQUIRED TO GIVE ANY EFFECT TO ANY SUCH TRANSACTION UNLESS (A) SUCH TRANSACTION SHALL HAVE BEEN DULY REGISTERED UNDER THE ACT AND QUALIFIED OR APPROVED UNDER APPROPRIATE STATE OR BLUE SKY LAWS, OR (B) THE ISSUER SHALL HAVE FIRST RECEIVED AN OPINION OF COUNSEL 6 SATISFACTORY TO IT THAT SUCH REGISTRATION, QUALIFICATION OR APPROVAL IS NOT REQUIRED. 3.2 NO ACTION LETTER. The Company agrees that it shall be satisfied that no post-effective amendment or new registration is required for the public sale of the Shares if it shall be presented with a letter from the Staff of the Securities and Exchange Commission (the "Commission") stating in effect that, based upon stated facts which the Company shall have no reason to believe are not true in any material respect, the Staff will not recommend any action to the Commission if such shares are offered and sold without delivery of a prospectus, and that, therefore, no post-effective amendment to the Registration Statement under which such Shares are to be registered or new registration statement is required to be filed. 3.3 DEMAND REGISTRATION RIGHTS. On one occasion at any time after the Exercise Commencement Date and before the Expiration Time, the Company shall, upon the demand of the holders of a majority of the Shares, register the Shares, file a new Registration Statement, and file all necessary undertakings with the Commission so as to permit the Underwriter, or any assignee of the Underwriter, the right to sell publicly the Shares issued on exercise of this Warrant. The Company will bear all expenses attendant to registering the securities (subject to Section 3.5(e)). 3.4 PIGGYBACK REGISTRATION RIGHTS. In the event that the Underwriter does not exercise its right to demand that the Shares be registered, the Company agrees to include any appropriate Shares issuable upon exercise of the Warrants in any Registration Statement filed by the Company at any time within five (5) years from the effective date of the Company's first Registration Statement as filed in 1997 (except for any registration on Forms S-4 or S-8 or similar forms). 3.5 COVENANTS REGARDING REGISTRATION. In connection with any registration under Section 3.3 or 3.4 hereof, the Company covenants and agrees as follows: (a) The Company will, within twenty days after written request from the Representative, take all steps necessary to effectuate preparation and filing with the Securities and Exchange Commission of the registration statement as required by and in compliance with the Act. (b) The Company shall keep such registration statement effective for the lesser of (i) one hundred twenty (120) days, or (ii) the period of time in which the Holders of such securities have effected the distribution of their Shares. During such period the Company shall prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Act with respect to the disposition of all securities covered by such registration statement. (c) The Company shall notify each Holder of Shares covered by such registration statement at any time when a prospectus relating thereto is required to be delivered under the Act of the happening of any event as a result of which the prospectus included in such 7 registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing. (d) The Company shall furnish to the Holders such numbers of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Act, and such other documents as they may reasonably request in order to facilitate the disposition of the Shares owned by them. (e) The Company shall pay all costs, fees, and expenses in connection with new registration statements under Section 3.3 (excluding the costs attendant to a second demand registration) and Section 3.4 hereof including, without limitation, the Company's legal and accounting fees, printing expenses, blue sky fees and expenses, except that the Company shall not pay for any of the following costs and expenses: (i) underwriting discounts and commissions allocable to the Shares, (ii) state transfer taxes, (iii) brokerage commissions, (iv) fees and expenses of counsel and accountants for the holders of this Warrant or the Shares. (f) The Company will take all necessary action which may be required in qualifying or registering the Shares included in any Registration Statement or post-effective amendment or new registration statement for offering and sale under the securities or blue sky laws of such states as are reasonably requested by the holders of such Shares, provided that the Company shall not be obligated to execute or file any general consent to service or process or to qualify as a foreign corporation to do business under the laws of any such jurisdiction. (g) The Holder shall be entitled to pay the Purchase Price for the Shares purchasable upon the exercise of this Warrant out of the proceeds of any sale of the Shares purchasable upon its exercise. 3.6 INDEMNITY. 3.6.1 The Company shall indemnify and hold harmless each person registering securities pursuant to this Section (the "Seller") and each underwriter, within the meaning of the Act, who may purchase from or sell for any Seller any of the Common Stock from and against any and all losses, claims, damages, and liabilities caused by any untrue statement or alleged untrue statement of a material fact contained in any new registration statement or any supplemented prospectus under the Act included therein required to be filed or furnished by reason of this Section, or caused by any omission or alleged omission to state therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages or liabilities are caused by any untrue statement or alleged untrue statement or omission or alleged omission based upon information furnished or required to be furnished in writing to the Company by such Seller or underwriter within the meaning of such Act; provided, however, that the indemnity agreement set forth in this Section 3.6 with respect to any prospectus which shall be subsequently amended prior to the written confirmation of sale of any Shares shall not inure to the benefit of any Seller or underwriter from whom the person asserting any such losses, claims, damages or liabilities purchased such Shares 8 which are the subject thereof (or to the benefit of any person controlling such Seller or underwriter), if such Seller or underwriter failed to send or give a copy of the prospectus as amended to such person at or prior to the written confirmation of the sale of such Shares and if such amended prospectus did not contain any untrue statement or alleged untrue statement or omission or alleged omission giving rise to such cause, claim, damage, or liability. 3.6.2 Each Seller which avails itself of the procedures under this Section 3 shall indemnify and secure the agreement of any underwriter which the Seller employs to indemnify the Company, its directors, each officer signing the related post-effective amendment or registration statement and each person, if any, who controls the Company, within the meaning of the Act from and against any losses, claims, damages, and liabilities caused by any untrue statement or alleged untrue statement of a material fact contained in any post-effective amendment or registration statement or any prospectus required to be filed or furnished by reason of this Section 3 or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, insofar as such losses, claims, damages, or liabilities are caused by any untrue statement or alleged untrue statement or omission or alleged omission based upon information furnished in writing to the Company by any such Seller or underwriter expressly for use therein. 3.7 SURVIVAL OF OBLIGATIONS. The agreements in this Section 3 shall continue in effect regardless of the exercise and surrender of this Warrant. SECTION 4. OTHER MATTERS 4.1 PAYMENT OF TAXES. The Company will from time to time promptly pay, subject to the provisions of paragraph (4) of Section 1.2 hereof, all taxes and charges that may be imposed upon the Company in respect of the issuance or delivery of this Warrant or the Shares purchasable upon the exercise of this Warrant. 4.2 BINDING EFFECT. All the covenants and provisions of this Warrant by or for the benefit of the Company shall bind and inure to the benefit of its successors and assigns hereunder. 4.3 NOTICES. Notices or demands pursuant to this Warrant to be given or made by the Holder to or on the Company shall be sufficiently given or made if sent by certified or registered mail, return receipt requested, postage prepaid, or facsimile and addressed, until another address is designated in writing by the Company, as follows: Organic Food Products 550 Monterey Highway Morgan Hill, California 95037 9 Notices to the Holder provided for in this Warrant shall be deemed given or made by the Company if sent by certified or registered mail, return receipt requested, postage prepaid, and addressed to the Holder at his last known address as it shall appear on the books of the Company. 4.4 GOVERNING LAW. The validity, interpretation and performance of this Warrant shall be governed by the laws of the State of California. 4.5 PARTIES BOUND AND BENEFITTED. Nothing in this Warrant expressed and nothing that may be implied from any of the provisions hereof is intended, or shall be construed, to confer upon, or give to, any person or corporation other than the Company and the Holder any right, remedy or claim under promise or agreement hereof, and all covenants, conditions, stipulations, promises and agreements contained in this Warrant shall be for the sole and exclusive benefit of the Company and its successors and of the Holder, its successors and, if permitted, its assignees. 4.6 HEADINGS. The Section headings herein are for convenience only and are not part of this Warrant and shall not affect the interpretation thereof. IN WITNESS WHEREOF, this Warrant has been duly executed by the Company under its corporate seal as of the ___ day of ________, 1997. ORGANIC FOOD PRODUCTS By: ----------------------------------- Floyd Hill, Chief Executive Officer 10 ORGANIC FOOD PRODUCTS ASSIGNMENT OF WARRANT FOR VALUE RECEIVED, Sentra Securities Corporation hereby sells, assigns and transfers unto ____________________________________________ the within Warrant and the rights represented thereby, and does hereby irrevocably constitute and appoint _______________________________ Attorney, to transfer said Warrant on the books of the Company, with full power of substitution. Dated: --------------------------- Signed: ----------------------------- Signature guaranteed: - --------------------------------- 11 ORGANIC FOOD PRODUCTS 550 Monterey Highway Morgan Hill, California 95037 Subscription Agreement for the Exercise of Warrants The undersigned hereby irrevocably subscribes for the purchase of _____________ Shares pursuant to and in accordance with the terms and conditions of this Warrant, and herewith makes payment, covering such Shares which should be delivered to the undersigned at the address stated below, and, if said number of Shares shall not be all of the Shares purchasable hereunder, that a new Warrant of like tenor for the balance of the remaining Shares purchasable hereunder be delivered to the undersigned at the address stated below. The undersigned agrees that: (1) the undersigned will not offer, sell, transfer or otherwise dispose of any Shares unless either (a) a registration statement, or post-effective amendment thereto, covering the Shares has been filed with the Securities and Exchange Commission pursuant to the Securities Act of 1933, as amended (the "Act"), such sale, transfer or other disposition is accompanied by a prospectus meeting the requirements of Section 10 of the Act forming a part of such registration statement, or post-effective amendment thereto, which is in effect under the Act covering the Shares to be so sold, transferred or otherwise disposed of, and all applicable state securities laws have been complied with, or (b) counsel to Organic Food Products satisfactory to the undersigned has rendered an opinion in writing and addressed to Organic Food Products that such proposed offer, sale, transfer or other disposition of the Shares is exempt from the provisions of Section 5 of the Act in view of the circumstances of such proposed offer, sale, transfer or other disposition; (2) Organic Food Products may notify the transfer agent for the Shares that the certificates for the Shares acquired by the undersigned are not to be transferred unless the transfer agent receives advice from Organic Food Products that one or both of the conditions referred to in (1)(a) and (1)(b) above have been satisfied; and (3) Organic Food Products may affix the legend set forth in Section 3.1 of this Warrant to the certificates for the Shares hereby subscribed for, if such legend is applicable. Dated: Signed: ----------------------- ----------------------------- Signature guaranteed: Address: ---------------------------- - --------------------------------- 12 EX-1.07 5 EXHIBIT 1.07 LOCK-UP AGREEMENT FOR DIRECTORS AND OFFICERS This Lock-Up Agreement ("Agreement") is effective as of ____________, 1997 by and among Organic Food Products, Inc., a California corporation (the "Company"), ______________, a director and/or officer of the Company (the "Executive"), and _____________, a California corporation (the "Underwriter"). The parties hereto agree as follows: 1. LOCK-UP. The Company has filed a registration statement on Form SB-2 (the "Registration Statement") with the Securities and Exchange Commission which will register certain shares of the Company's common stock to be sold by the Underwriter on a "firm commitment" basis. To satisfy Section 7.7 of the Underwriting Agreement (the "Underwriting Agreement") to be entered into between the Company and the Underwriter as representative of the several underwriters named in Schedule I thereto, and in order to induce the Underwriter to undertake the firm commitment public offering of the Company's common stock, the Executive agrees that it will not, directly or indirectly, without the Underwriter's prior written consent, offer, sell, contract to sell, grant any option to purchase, pledge, or otherwise dispose (or announce any offer, sale, grant of an option to purchase or other disposition) of, any shares of the Company's common stock or any security or other instrument which by its terms is convertible into, exercisable for, or exchangeable for shares of the Company's common stock for a period of twelve (12) months from the effective date of the Registration Statement. 2. SUCCESSORS. The provisions of this Agreement shall be deemed to obligate, extend to and inure to the benefit of the successors, assigns, transferees, grantees, and indemnitees of each of the parties to this Agreement. 3. ATTORNEYS FEES. In the event of a dispute between the parties concerning the enforcement or interpretation of this Agreement, the prevailing party in such dispute, whether by legal proceedings or otherwise, shall be reimbursed immediately for the reasonably incurred attorney's fees and other costs and expenses by the other parties to the dispute. 4. CHOICE OF LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of California without reference to its choice of law rules. 5. ARBITRATION. Any dispute or claim arising to or in any way related to this Agreement shall be settled by arbitration in San Diego, California. All arbitration shall be conducted in accordance with the rules and regulations of the American Arbitration Association ("AAA"). AAA shall designate an arbitrator from an approved list of arbitrators following both parties' review and deletion of those arbitrators on the approved list having conflict of interest with either party. Each party shall pay its own expenses associated with such arbitration (except as set forth in Section 3 above). A demand for arbitration shall be made within reasonable time after the claim, dispute or other matter has arisen and in no event shall such demand be made after the date when institution of legal or equitable proceedings based on such claim, dispute or other matter in question would be barred by the applicable statutes of limitations. The decision of the arbitrators shall be rendered within 60 days of submission of any claim or dispute, shall be in writing and mailed to all parties included in the arbitration. The decision of the arbitrator shall be binding upon the parties and judgment in accordance with that decision may be entered in any court having jurisdiction thereof. 6. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which, taken together, shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date set forth next to his or its signature. ORGANIC FOOD PRODUCTS, INC. By: ------------------------------------ Its: ----------------------------------- EXECUTIVE ---------------------------------------- ---------------- ---------------- By: ------------------------------------ Its: ----------------------------------- 2 EX-10.6 6 EXHIBIT 10.6 LOAN AND INVESTMENT AGREEMENT This LOAN AND INVESTMENT AGREEMENT is made and entered into as of October 13, 1995, by and between S&D FOODS, INC., a California corporation ("Borrower"), and KENNETH A. STEEL ("Lender") with respect to the following facts: RECITALS A. Borrower is engaged in the wholesale foods business and has need for additional capital for purposes of financing its business in anticipation of a private and subsequent public offering of its common stock. B. Lender is willing, upon the terms and subject to the conditions set forth in this Agreement, to make a loan to Borrower for the purposes described above. NOW, THEREFORE, in consideration of the foregoing premises and the warranties, representations, covenants, agreements and undertakings contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: ARTICLE I DEFINITIONS AND ACCOUNTING TERMS SECTION 1.1 CERTAIN DEFINED TERMS. As used in the Transaction Documents or in any other documents made or delivered pursuant thereto, unless otherwise defined therein or the context shall otherwise require, the following terms shall have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined): "AGREEMENT" means this agreement and any amendments, supplements or modifications thereto. "BUSINESS DAY" means a day on which banks are open for business in San Francisco, California. "COLLATERAL" is defined in the Security Agreement. "COLLATERAL DOCUMENTS" means all present and future documents delivered and to be delivered hereunder to create, perfect or maintain a security interest or lien on any property to secure payment of the Indebtedness under the Transaction Documents, or otherwise granting a lien to the Lender pursuant to the Transaction Documents, including the Security Agreement the UCCs. "CONVERSION SHARES" means "Conversion Shares" as defined in the Note and any other securities that may be issued or distributed therewith or with respect thereto or in exchange or substitution therefor. "CURRENT STOCKHOLDERS" means the persons shown as stockholders in SCHEDULE 3.1.3. "EFFECTIVE DATE" means the date of this Agreement. "EVENT OF DEFAULT" is defined in Section 5.1. "FINANCIAL STATEMENTS" means Borrower's Statements of Assets, Liabilities and Equity as of June 30, 1995 and July 31, 1995 and Borrower's Statements of Revenues, Expenses and Net Income for the Twelve months ended June 30, 1995 and the one month ended July 31, 1995. "INDEBTEDNESS" means, for any Person, (i) all indebtedness or other obligations of such Person for borrowed money or for the deferred purchase price of property or services, (ii) lease obligations direct, contingent or otherwise, which have been or which in accordance with Statement of Financial Accounting Standards No. 13, as from time to time amended, should be capitalized, (iii) all indebtedness or other obligations of any other Person for borrowed money or for the deferred purchase price of property or services the payment or collection of which such Person has guaranteed (except by reason of endorsement for collection in the ordinary course of business) or in respect of which such Person is liable, contingently or otherwise, including, without limitation, liability by way of agreement to purchase, to provide funds for payment, to supply funds to or otherwise to invest in such other Person, or otherwise to assure a creditor against loss, and (iv) all indebtedness or other obligations of any other Person for borrowed money or for the deferred purchase price of property or services secured by (or for which the holder of such indebtedness has an existing right, contingent or otherwise, to be secured by) any mortgage, deed of trust, pledge, lien security interest or other charge or encumbrance upon or in property (including, without limitation, accounts and contract rights) owned by such person, whether or not such Person has assumed or become liable for the payment of such indebtedness or obligations; PROVIDED, HOWEVER, that Indebtedness shall not include trade accounts payable, accrued payroll and other similar current liabilities incurred in the ordinary course of business. "LIENS" means any deed of trust, mortgage, pledge, security interest, encumbrance, lien or charge of any kind. "NOTE" means the Convertible Promissory Note of Borrower to Lender in the form of Exhibit A hereto, and any extensions, amendments, supplements or modifications thereof. "OBLIGATIONS" means all obligations of every nature of the Borrower from time to time owed to the Lender under the Transaction Documents. 2 "PAYMENT SHARES" means "Payment Shares" as defined in the Note and any other securities that may be issued or distributed therewith or with respect thereto or in exchange or substitution therefor. "PERSON" means an individual, corporation, partnership, joint venture, trust, or unincorporated organization, or a government or any agency or political subdivision thereof. "SECURITIES ACT" means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder. "SECURITY AGREEMENT" means the Security Agreement of the Borrower in the form of Exhibit B hereof, and any amendments, supplements and modifications thereof. "STOCKHOLDERS AGREEMENT" means the Stockholders Agreement among Borrower, the Current Stockholders, and Lender in the form of Exhibit C hereto, and any amendments, supplements and modifications thereof. "SECURITIES" means the Note, the Conversion Shares, the Payment Shares and the Warrant Shares. "SECURITIES ACT" means the Securities Act of 1933, as amended. "TRANSACTION DOCUMENTS" means this Agreement, the Note, the Security Agreement, the Stockholders Agreement, the UCCs, the Warrant, and any other documents to be executed and/or delivered under this Agreement or in connection with the transactions contemplated hereby. "WARRANT" means the warrant to Purchase Stock of Borrower to Lender in the form of Exhibit D hereto, and any amendments, supplements and modifications thereof, and any warrant issued in replacement thereof or in exchange or substitution therefor. "WARRANT SHARES" means "Warrant Shares" as defined in the Warrant and any other securities that may be issued or distributed therewith or with respect thereto or in exchange or substitution therefor. SECTION 1.2 ACCOUNTING TERMS. All accounting terms, unless otherwise specifically defined herein, shall be construed in accordance with generally accepted accounting principles consistently applied, and all financial data submitted pursuant to this Agreement shall be prepared in accordance with such principles. ARTICLE II AMOUNT AND TERMS OF LOAN 3 SECTION 2.1 LOAN. Subject to the terms and conditions of this Agreement, Lender agrees to make a loan (the "Loan") to Borrower in the amount of Five Hundred Thousand Dollars ($500,000.00) on the Effective Date. SECTION 2.2 NOTE. The obligation of Borrower to repay the Loan made by Lender shall be evidenced by, and the Loan shall be payable in accordance with the terms of, the Note. SECTION 2.3 OTHER TRANSACTION DOCUMENTS. To induce Lender to enter into this Agreement and make this Loan, (i) Borrower shall execute and deliver to Lender, on the Effective Date, concurrently with the execution and delivery of this Agreement, the Note, the Security Agreement, the UCC'S, and the Warrant, and (ii) Borrower and the Current Stockholders shall execute and deliver to Lender, on the Effective Date, concurrently with the execution and delivery of this Agreement, the Stockholders Agreement. ARTICLE III REPRESENTATIONS AND WARRANTIES SECTION 3.1 REPRESENTATIONS AND WARRANTIES BY BORROWER. In order to induce Lender to enter into this Agreement and to make the Loan, Borrower represents and warrants to Lender that: 3.1.1 ORGANIZATION AND QUALIFICATIONS. Borrower is a corporation duly organized, validly existing and in good standing under the laws of the State of California, and has all requisite authority and power (corporate and other), all material governmental licenses, authorizations, consents and approvals to carry on its business as presently conducted and as contemplated to be conducted, to own, hold and operate its material properties and assets as now owned, held and operated by it, to enter into the Transaction Documents, to issue the Securities and to carry out the provisions of the Transaction Documents and the Securities. 3.1.2 ARTICLES OF INCORPORATION AND BYLAWS. The copies of the Articles of Incorporation ("Articles") and Bylaws of Borrower which have been delivered to Lender prior to the execution of this Agreement, are true and complete copies of such documents and have not been made or repealed. Borrower is not in violation or breach of any of the provisions of the Articles, the Bylaws or any of its other governing documents. 3.1.3 CAPITALIZATION AND RELATED MATTERS. (a) As of the Effective Date and prior to giving effect to the transactions contemplated in this Agreement, the authorized and issued capital stock of Borrower and the options, warrants, calls, subscriptions, rights (including any preemptive rights or rights of first refusal), agreements or commitments of any character obligating Borrower to issue or 4 register for sale under the Securities Act shares of capital stock or any other equity security of Borrower consist solely of those described on SCHEDULE 3.1.3. (b) There are no outstanding contractual obligations (contingent or otherwise) of Borrower to retire, repurchase, redeem or otherwise acquire any outstanding shares of capital stock of, or other ownership interests in, Borrower, or to provide funds to or make any investment (in the form of a loan, capital contribution or otherwise) in any other entity. (c) The offer, issuance and sale of all outstanding capital stock of Borrower were (i) exempt from the registration and prospectus delivery requirements of the Securities Act, (ii) registered or qualified (or exempt from registration or qualification) under the registration or qualification requirements of all applicable state securities laws, and (iii) accomplished in conformity with all other federal and applicable state securities laws, rules and regulations. (d) The issuance of the Securities has been duly authorized and, upon delivery to Lender of a certificate or other instrument evidencing any Securities, such Securities will have been validly issued, will have the rights specified in the Transaction Documents, will be free of preemptive rights, will be fully paid and non-assessable, and will be free and clear of all Liens and restrictions, other than restrictions on transfer imposed by the Transaction Documents. (e) Borrower is not a participant in any joint venture, partnership, joint operation or similar arrangement. Borrower does not own or have any interest (by way of stock ownership or otherwise) in any firm, corporation, association or business. 3.1.4 STOCKHOLDERS. SCHEDULE 3.1.3 contains a true and complete list of the names and addresses of the record holders of all of the outstanding equity securities of Borrower and of the holders of all outstanding options or other rights to acquire equity securities of Borrower, such list setting forth with respect to each holder the type and amount of the equity securities beneficially owned or for which there exist acquisition rights. No holder of any security of Borrower or any other Person is entitled to any preemptive right, right of first refusal or similar right as a result of the issuance of any Securities or otherwise. Except for this Stockholders Agreement, there is no voting trust, agreement or arrangement among any of the beneficial holders of the equity securities of Borrower affecting the exercise of the voting rights of any such equity securities. 3.1.5 AUTHORIZATION AND VALIDITY OF TRANSACTION DOCUMENTS. The execution, delivery and performance by Borrower of the Transaction Documents and the offer, sale, issuance and delivery of the Securities, (a) are within Borrower's corporate powers, (b) have been duly authorized by all necessary corporate action, (c) do not require from the board of directors or shareholders of Borrower any consent or approval that has not been validly and lawfully obtained, (d) require no authorization, consent, approval, license, exemption of or filing 5 or registration with any court or governmental department, commission, board, bureau, agency or instrumentality of government, except for post-sale filings with the Securities and Exchange Commission and state securities commissions, which filings shall be carried out in a timely fashion, (e) do not and will not violate or contravene (i) any provision of law, (ii) any rule or regulation of any agency or government, domestic or foreign, (iii) any order, writ, judgment, induction, decree, determination or award, or (iv) any provision of the Articles or Bylaws of Borrower, (f) do not and will not violate or be in conflict with, result in a breach of or constitute (with or without notice or lapse of time or both) a default under, or result in the termination of, or accelerate the performance required by (or give any party any rights to terminate or accelerate upon notice or lapse of time or both), any indenture, license, franchise, loan or credit agreement, note, deed of trust, mortgage, security agreement or other agreement, lease or instrument, commitment or arrangement to which Borrower is a party or by which Borrower or its properties, assets or gifts is bound or affected, (g) except as expressly provided in the Security Agreement, do not and will not result in the creation of imposition of any Lien, (h) do not and will not require the consent, approval or authorization of any other party to agreements, licenses, leases, sales orders, permits, franchises, rights and other obligations of Borrower, and (i) will not permit any governmental body to impose any restrictions or limitations of any nature on Borrower or its activities. 3.1.6 COMPLIANCE WITH LAWS. The business and operations of Borrower has been and are being conducted in all material respects in accordance with all applicable foreign, federal, state and local laws, rules and regulations and all applicable orders, injunctions, decrees, writs, judgments, determinations and awards of all courts and governmental agencies and instrumentalities. Borrower is in compliance in all material respects with all applicable federal and state securities laws, rules and regulations. 3.1.7 BINDING OBLIGATIONS. The Transaction Documents constitute the legal, valid and binding obligations of Borrower and are and will be enforceable against Borrower in accordance with their respective terms, and the Stockholders Agreement constitute the legal, valid and binding obligation of Borrower and the Current Stockholders and is and will be enforceable against such parties in accordance with its terms. 3.1.8 SECURITIES LAWS. The offer, issue and sale of the Securities are and will be (a) exempt from the registration and prospectus delivery requirements of the Securities Act, (b) have been registered or qualified (or are exempt from registration and qualification) under the registration, permit or qualification requirements of all applicable state securities laws and (c) accomplished in conformity with all applicable federal and state securities laws, rules and regulations. 3.1.9 BROKERS OR FINDERS. No Person has, or as a result of the transactions contemplated by the Transaction Documents, will have, any right or claim against Borrower or Lender for any commission, fee or other compensation as a finder, broker, or any similar capacity as a result of any action by or on behalf of Borrower or any of its officers, directors, 6 employees, agents or stockholders, except for Spelman & Co., Inc. whose fee of $50,000 plus a $15,000 expense allowance will be paid by Borrower as provided in the letter agreement between Spelman & Co., Inc. and Borrower dated July 10, 1995 (the "Spelman Agreement"), which amount will be credited against the fee payable in connection with the private placement offering referred to in the Spelman Agreement, and Borrower will indemnify and hold Lender harmless against any liability or expense arising out of, or in connection with, any such right or claim. 3.1.10 FINANCIAL STATEMENTS. The Financial Statements (a) are in accordance with the books and records of Borrower, (b) present fairly the financial condition of Borrower at the dates therein specified and the results of its operations and changes in financial condition for the periods therein specified, and (c) have been prepared in accordance with generally accepted accounting principles applied on a basis consistent with prior accounting periods. Specifically, but not by way of limitation, the financial statements disclose all of the debts, liabilities and obligations of any nature (whether absolute, accrued, contingent or otherwise and whether due or to become due) of Borrower as of each date which must be disclosed on a balance sheet in accordance with generally accepted accounting principles. Borrower maintains its books, record and accounts in accordance with good business practice and in sufficient detail to reflect accurately and fairly the transactions and disposition of its assets, liabilities and equities. 3.1.11 ABSENCE OF UNDISCLOSED LIABILITIES. Except as provided in Schedule 3.1.11, there is not any material debt, obligation or liability (whether accrued, absolute, contingent, liquidated or otherwise, whether due or to become due, whether or not known to Borrower) arising out of any transaction entered into at or prior to the Effective Date, or any act or omission at or prior to the Effective Date, or any state of facts existing at or prior to the Effective Date, including taxes with respect to or based upon the transactions or events occurring at or prior to the Effective Date, and including, without limitation, unfunded past service liabilities under any pension, profit sharing or similar plan, except (a) to the extent set forth on or reserved against in the Financial Statements, and (b) current liabilities incurred and obligations under agreements entered into, in the usual and ordinary course of business since the last date covered by the financial statements contained therein, none of which (individually or in the aggregate) materially and adversely affect the business, properties, finances or prospects of Borrower. 3.1.12 CHANGES. Except as provided in Schedule 3.1.12, since the last date covered by the Financial Statements, Borrower has not: (a) Incurred any material debts, obligations or liabilities, absolute, accrued, contingent or otherwise, whether due or to become due, except current liabilities incurred in the usual and ordinary course of business, none of which current liabilities (individually or in the aggregate) materially and adversely affects the business, finances, properties or prospects of Borrower. 7 (b) entered into any transaction other than in the usual and ordinary course of business, except for the Transaction Documents and the transactions contemplated hereby; (c) issued, granted or sold any shares of capital stock or other equity securities of Borrower; (d) declared, paid or set aside any dividends on or made any other distributions with respect to, or purchased or redeemed, any of its outstanding capital stock; (e) suffered or experienced any change in, or affecting, its condition (financial or otherwise), properties, assets, liabilities, business, operations, results of operations or prospects other than changes, events or conditions in the usual and ordinary course of its business, none of which (either by itself or in conjunction with all such other changes, events and conditions) has been materially adverse; (f) made any loans to its employees, officers or directors other than travel advances made in the ordinary course of business; or (g) suffered or experienced any change in the relationship or course of dealings between it and any of its suppliers or customers which has had or is likely to have an adverse effect on the results of operations, conditions (financial or other), assets, liabilities, business or prospects of Borrower. 3.1.13 TRADE NAMES, COPYRIGHTS, TRADEMARKS AND OTHER INTANGIBLE ASSETS. Except as provided in Schedule 3.1.13, Borrower owns or has the right to use all trademarks, trade names, service marks, copyrights, licenses and patents and rights with respect to the foregoing used in or necessary for the conduct of its business as now conducted or proposed to be conducted without infringing upon or otherwise acting adversely to the right or claimed right of any Person under or with respect to any of the foregoing (such trademarks, trade names, service marks, copyrights, licenses and patents and rights with respect thereto being herein referred to as the "Intellectual Property"). 3.1.14 TITLE TO PROPERTY AND ENCUMBRANCES. Except as provided in Schedule 3.1.14, Borrower has good and marketable title to all of its respective properties and assets, subject to no Lien, except those Liens, if any, which are shown and described in the Financial Statements. The consummation of the transactions contemplated by this Agreement will not have any adverse effect on the title to any of Borrower's assets. Except for changes in the ordinary course of business, Borrower currently owns all of the assets shown on the latest balance sheet included in the Financial Statements. 3.1.15 CONDITION OF PROPERTIES. All facilities, machinery, equipment, fixtures, vehicles and other properties owned, leased or used by Borrower are in good operating condition and repair, are reasonably fit and usable for the purposes for which they are being used, are 8 adequate and sufficient for borrower's business and conform in all material respects with all applicable ordinances, regulations and laws. 3.1.16 INSURANCE COVERAGE. There is in full force and effect one or more policies of insurance issued by insurers of recognized responsibility, insuring Borrower and its properties and business against such losses and risks, and in such amounts, as are customary in the case of corporations of established reputation engaged in the same or similar business and similarly situated and as required by any contract, agreement or understanding to which Borrower is a party, or as required by any governmental authority having jurisdiction over Borrower, its property or business operations. Borrower has not been refused any insurance coverage sought or applied for, and Borrower has no reason to believe that it will be unable to renew its existing insurance coverage as and when the same shall expire upon terms at least as favorable as those presently in effect, other than possible increases in premiums that do not result from any act of omission of Borrower. Borrower is not in default with respect to any material provision contained in any insurance policy, and Borrower has not failed to give any notice or present any presently existing claims under any insurance policy in due and timely fashion. 3.1.17 LITIGATION. Except as provided in Schedule 3.1.17, there is no legal action, suit arbitration or other legal, administrative or other governmental litigation, inquiry or proceeding (whether federal, state, local or foreign) pending or threatened against or affecting Borrower or its properties, assets or business. Borrower (including without limitation Borrower's respective properties, assets and business) is not subject to any order, writ, judgment, injunction, decree, determination or award of any court or of any governmental agency or instrumentality (whether federal, state, local or foreign). 3.1.18 LICENSES. Borrower possesses from the appropriate agency, commission, board, bureau, and governmental body and authority, whether state, local, federal or foreign, all licenses, permits, authorizations, approvals, franchises and rights which are necessary for Borrower to engage in the businesses currently conducted and proposed to be conducted by them, including without limitation the development, use, sale and marketing of its existing and proposed products and services; and all such certificates, licenses, permits, authorizations and rights have been lawfully and validly issued, are in full force and effect, and to the knowledge of Borrower will not be revoked, canceled, withdrawn, terminated or suspended. 3.1.19 INTERESTED PARTY TRANSACTIONS. Except as disclosed in SCHEDULE 3.1.19, no officer, director or stockholder owning 5% or more of any class of securities of Borrower or any "affiliate" or "associate" (as such terms are defined in Rule 405 promulgated under the Securities Act) of any such Person has or had, either directly or indirectly, (a) an interest in any Person which) (i) furnishes or sells services or products which are furnished or sold or are proposed to be furnished or sold by Borrower, or (ii) purchases from or sells or furnishes to, or proposes to purchase from, sell to or furnish to, Borrower any goods or services, or (b) a beneficial interest in any contract or agreement to which Borrower is a party or by which it may be bound or affected. 9 3.1.20 USE OF PROCEEDS. Borrower will use the proceeds from the Loan exclusively for the purposes of sales, marketing, inventory, and receivables. 3.1.21 DISCLOSURE. No representation or warranty contained in this Agreement or information appearing in any writing furnished by Borrower to Lender pursuant hereto or in connection herewith contains any untrue statement of a material fact or facts or omits to state a material fact or facts necessary to make the statements herein or therein not misleading. There is no fact which Borrower has not disclosed to Lender in writing which materially and adversely affects nor, insofar as Borrower can now foresee, will materially and adversely affect, the properties, business, prospects, results of operations or condition (financial or other) of Borrower or the ability of Borrower to perform this Agreement. SECTION 3.2. REPRESENTATIONS AND WARRANTIES BY LENDER. In order to induce Borrower to enter into the Transaction Documents, Lender represents and warrants to Borrower that: 3.2.1 NO REGISTRATION, ETC. Lender understands that (i) none of the Securities have been registered under the Securities Act or registered or qualified under any state securities law; (ii) none of the Securities may be sold or otherwise transferred without either (A) registration under the Securities Act and registration and/or qualification under applicable state securities laws, or (B) an exemption therefrom; (iii) except as provided in this Agreement, Borrower will have no obligation to register any of the Securities under the Securities Act or to register or qualify any of the Securities under any state securities law, and Lender will not have any right of any kind to require Borrower to register any of the Securities under the Securities Act or to register or qualify any of the Securities under any state securities laws. 3.2.2 OWN ACCOUNT. The Securities acquired by Lender are being acquired, or will be acquired, by Lender solely for Lender's own account (or, if Lender is a trustee, for the trust account for which Lender is a trustee) for investment and not for resale or distribution, and not with a view to or for sale in connection with any distribution of the Securities. 3.2.3 KNOWLEDGE, ETC. Lender has sufficient knowledge and experience in financial and business matters to be capable of evaluating the risks and merits of investing in the Securities. 3.2.4 QUESTIONS, ETC . Lender, either individually or through his investment and professional advisers, has had the opportunity to ask questions of and receive answers from the Company concerning Borrower and the Securities and has asked all questions and received all answers as Lender deems necessary to invest in the Securities. 10 3.2.5 ACCREDITED INVESTOR. Lender is an "accredited investor" under the individual net worth and individual income tests of Rule 501(a) of Regulation D under the Securities Act. ARTICLE IV COVENANTS OF BORROWER SECTION 4.1 AFFIRMATIVE COVENANTS OF BORROWER. Borrower covenants and agrees that, so long as the Note shall remain unpaid and any obligations exist under any of the Transaction Documents, unless Lender shall otherwise consent in writing, Borrower shall do all of the following: 4.1.1 PAYMENT OF INDEBTEDNESS, TAXES, ETC. Pay and perform its Indebtedness and Obligations promptly and in accordance with normal terms and pay and discharge all taxes, assessments and governmental charges or levies imposed upon it or upon its income or profits, or upon any properties belonging to it, prior to the date on which penalties attach thereto, and all lawful claims which, if unpaid, might become liens or charges upon any properties of Borrower, provided that Borrower shall not be required to pay except as otherwise provided for in any Transaction Document, any such tax, assessment, charge, levy or claim during the period when such is being contested in good faith and by proper proceedings, and adequate reserves for the accrual of any of the same are maintained, if required by generally accepted accounting principles. 4.1.2 MAINTENANCE OF INSURANCE. Maintain insurance in such form and in such amounts and covering such risks as is usually carried by companies engaged in similar business and owning similar properties in the same general areas in which Borrower operates. 4.1.3 DIRECTORS/OFFICERS. Take all actions (and cause its directors and stockholders to take all actions) necessary to (i) elect Floyd Hill as the Chief Operating Officer of Borrower and (ii) if and when requested by Lender, elect a person designated by Lender as a director to serve on the Board of Directors (and each committee thereof) of Borrower and each subsidiary of Borrower and replace any such person with another person designated by Lender. The obligations of Borrower under this Section 4.1.3 shall terminate at such time as any Conversion Shares, Payment Shares or Warrant Shares are issued. 4.1.4 PRESERVATION OF CORPORATE EXISTENCE, AND RIGHTS. Preserve and maintain its corporate existence, rights, franchises and privileges in its jurisdictions of incorporation, and qualify and remain qualified as a corporation in each jurisdiction in which such qualification is necessary in view of its business and operations and the ownership of its properties. 4.1.5 PRIVATE PLACEMENT. Take all such actions necessary to offer and sell not less than $2,140,000 of shares of Common Stock of Borrower pursuant to the terms of the 11 Spelman Agreement (the "Private Placement"). In connection with the Private Placement, Lender and the Current Stockholders shall enter into an agreement with the principal subscribers in the Private Placement (e.g., each person who subscribe for an equity interest of 5% or more) pursuant to which such parties shall agree that, if any one or more of such parties proposes to sell any equity securities of Borrower in any transaction (or series of transactions) in which 25% or more of the outstanding equity securities of any class of equity securities of Borrower are to be sold, each of the other such parties shall be given the opportunity to sell a pro rata amount of their equity securities of Borrower of the same class (which pro rata amount would be the percentage that the total number of equity securities of such class then held by each such party represents of the total number of equity securities of such class than held by all such parties). 4.1.6 COMPLIANCE WITH LAWS. Comply with the requirements of all applicable laws, rules, regulations, ordinances, and orders of any governmental authority , non-compliance with which might adversely affect its business or credit, and comply with all provisions of its Articles of Incorporation and Bylaws. 4.1.7 INSPECTION/AUDIT RIGHTS. Upon reasonable notice, at any reasonable time and from time to time, permit Lender or any agents or representatives thereof, to examine and make copies of and abstracts from and to otherwise audit the records and books of account of, and (at Lender's expense) visit its properties to discuss the affairs, finances and accounts of Borrower and its subsidiaries with any of its officers or directors. Borrower shall furnish and make available to Lender all such documents and information relating to Borrower and any subsidiary of Borrower as Lender may from time to time reasonably request, and Lender (or a representative of Lender) shall have the right to attend or participate by telephone in all meetings of the Board of Directors (and each committee thereof) of Borrower and each subsidiary of Borrower. 4.1.8 KEEPING OF RECORDS AND BOOKS OF ACCOUNT. Maintain records and books of account in accordance with generally accepted accounting principles on a basis consistently applied; and to furnish the same to Lender at no expense to Lender reflecting all financial transactions. 4.1.9 MAINTENANCE OF PROPERTIES, ETC. Maintain and preserve all of its properties, necessary or useful in the proper conduct of its business, in good working order and condition, ordinary wear and tear excepted. 4.1.10 MAINTENANCE OF LICENSES. Maintain and keep in effect licensing, permits, approvals, know-how and similar agreements necessary in the proper conduct of its business. 4.1.11 NOTICE OF CERTAIN EVENTS. Promptly notify Lender in writing of the occurrence of (a) any Event of Default or of any event which would become an Event of Default upon the giving of notice, the lapse of time, or otherwise, which notice shall be accompanied by a written notice of the action that Borrower proposes to take as a result of such Event of Default; 12 (b) change in the location of Borrower's chief executive office; (c) change in the name or trade name of Borrower; (d) commencement of any litigation or proceedings before any governmental or regulatory agency affecting Borrower, except litigation or proceedings which, if adversely determined, could not materially and adversely affect the financial condition of Borrower. 4.1.12 ADDITIONAL COVENANTS REGARDING TRANSACTION DOCUMENTS. Obtain or cause to be obtained any consent or approval of any person or entity that may be required to the execution, delivery or performance of the Transaction Documents. 4.1.13 COMPLIANCE WITH LAWS. Comply in all respects with all federal, state, local or foreign environmental protection laws and regulations where the failure to comply with such laws and regulations would have a material adverse effect upon the financial condition, business or operations of Borrower. 4.1.14 RESERVATION OF SECURITIES. Borrower shall at all times reserve and keep available out of its authorized and unissued stock and other securities, for issuance and delivery to Lender as provided in the Transaction Documents, all Securities that Borrower could be obligated to issue or deliver under the provisions of the Transaction Documents. 4.1.15 FURTHER ASSURANCES. Upon the reasonable request of Lender, do, execute, acknowledge and deliver or cause to be done, executed, acknowledged and delivered all such other instruments, acts, deeds, and assurances as may be required by Lender for the purpose of carrying out the provisions and intent of the Transaction Documents. SECTION 4.2 NEGATIVE COVENANTS OF BORROWER. So long as the Note shall remain unpaid and obligations exist under this Agreement, without the prior written consent of Lender, Borrower shall not: 4.2.1 INDEBTEDNESS, LIENS, ETC. Incur any Indebtedness, or create, incur, assume or suffer to exist any mortgage, deed of trust, pledge, lien, security interest, or other charge or encumbrance (including the lien or retained security title of a conditional vendor) of any nature, upon or with respect to any of its assets or properties, or assign or otherwise convey any right to receive income or sell, convey, lease, assign or transfer any substantial part of its assets outside the ordinary course of business, or change the character of its business as conducted on the date hereof. 4.2.2 MERGERS, ETC. Merge into or consolidate with or into, or sell, assign, lease or otherwise dispose of (whether in one transaction or in a series of transactions) all or substantially all of its assets (whether now owned or hereafter acquired in the ordinary course of business). 4.2.3 DIVIDENDS. Declare or pay any dividends or purchase, redeem, retire or otherwise acquire for value any of its capital stock now or hereafter outstanding, or return any 13 capital to its shareholders as such, or make any distribution of assets to its shareholders as such, or issue any additional shares of capital stock or in any way cause a dilution in the stock ownership interests in Borrower. 4.2.4 CHANGE IN NATURE OF BUSINESS. Make any material change in the nature of its business. SECTION 4.3 REGISTRATION RIGHTS. Lender (and any transferee of any of the Securities) shall have the right to require Borrower to register the Conversion Shares, the Payment Shares and the Warrant Shares under the Securities Act and/or to register and/or to qualify (or exempt from registration and/or qualification) the Conversion Shares, the Payment Shares and the Warrant Shares under the registration, permit or qualification requirements of any state securities laws, whenever Borrower takes any such action with respect to any stock or other equity securities held by any other Person, all on terms and subject to conditions no less favorable to Lender (or such transferee) than the terms and conditions applicable to any such other Person. SECTION 4.4 STOCKHOLDER RIGHTS. So long as Lender and/or his heirs, executors, personal representatives and transferees continue to hold at least 50% of the Conversion Shares, Payment Shares or Warrant Shares, as the case may be, that are issued, Borrower shall do all of the following: 4.4.1 DIRECTORS/OFFICERS. Unless consented otherwise in writing by Lender (or any such heir, executor, personal representative or transferee), take all actions (and cause its directors and stockholders to take all actions) necessary to (i) elect Floyd Hill as the Chief Operating Officer of Borrower, and (ii) if and when requested by Lender (or any such heir, executor, personal representative or transferee), elect a person designated by Lender (or any such heir, executor, personal representative or transferee) as a director to serve on the Board of Directors (and each committee thereof) of Borrower and each subsidiary of Borrower and replace any such person with another person designated by Lender (or any such heir, executor, personal representative or transferee). If there is more than one Person holding Conversion Shares, Payment Shares or Warrant Shares, the rights granted under this Section 4.4.1 shall be exercised by the Person or Persons holding a majority of the outstanding Conversion Shares, Payment Shares or Warrant Shares, as the case may be, held by Lender and/or his heirs, executors, personal representatives and transferees or, if there is no such Person or Persons, such rights shall be exercised by the Lender or his designee. 4.4.2 INSPECTION/AUDIT RIGHTS, Upon reasonable notice, at any reasonable time and from time to time, permit Lender (and any such heir, executor, personal representative or transferee) or any agents or representatives thereof, to examine and make copies of and abstracts from and to otherwise audit the records and books of account of, and, at Lender's (or such heir's, executor's, personal representative's or transferee's) expense, visit its properties to discuss the affairs, finances and accounts of Borrower and its subsidiaries with any of its officers or directors. Borrower shall furnish and make available to Lender (and any such heir, executor, 14 personal representative or transferee) all such documents and information relating to Borrower and any subsidiary of Borrower as Lender (or such heir, executor, personal representative or transferee) may from time to time reasonably request, and Lender (and any such heir, executor, personal representative or transferee) or a representative of Lender (or any such heir, executor, personal representative or transferee) shall have the right to attend or participate by telephone in all meetings of the Board of Directors (and each committee thereof) of Borrower and each subsidiary of Borrower. 4.4.3 PREEMPTIVE RIGHTS. Give Lender (and any such heir, executor, personal representative or transferee) the preemptive right to purchase (at the same price and on the same terms and conditions as any other Person) Lender's (or such heir's, executor's, personal representative's or transferee's) pro rata share of any stock or other equity securities that Borrower or any subsidiary may propose to sell or otherwise issue (which pro rata share shall be based upon the percentage of the outstanding common stock of Borrower represented by the shares of common stock of Borrower owned by Lender (or such heir, executor, personal representative or transferee). ARTICLE V EVENTS OF DEFAULT AND REMEDIES SECTION 5.1 EVENTS OF DEFAULT. The occurrence of any of the following events shall be an Event of Default. 5.1.1 Failure to pay in full the amount of any principal of the Note, or failure to pay any interest on the Note, when any such payment shall be or become due; or 5.1.2 Any representation or warranty made in any of the Transaction Documents or in any certificate, agreement, instrument or statement contemplated by or made or delivered pursuant to or in connection with any Transaction Documents, shall prove to have been incorrect when made in any respect that is material to the transactions contemplated by the Transaction Documents; or 5.1.3 Failure of Borrower or any other party other than Lender to perform or observe any other term, covenant or agreement contained in any of the Transaction Documents; or 5.1.4 Any of the Transaction Documents at any time after execution and delivery and for any reason, shall cease to be in full force and effect or shall be declared to be null and void, or the validity or enforceability thereof shall be contested by Borrower or the Current Stockholders or Borrower shall deny or disclaim any further liability or obligation under any of the Transaction Documents to which Borrower and/or the Current Stockholders are a party; or 15 5.1.5 A decree or order for relief shall be entered by a court having jurisdiction in the premises in respect of Borrower in an involuntary case under the Federal bankruptcy laws, as now or hereafter constituted, or any other applicable federal or state bankruptcy, insolvency or other similar law, or a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official shall be appointed for borrower or for any substantial part of its properties, or the winding-up or liquidation of its affairs shall be ordered and any such decree, order or appointment shall continue unstayed and in effect for a period of 30 consecutive days. 5.1.6 Borrower shall commence a voluntary case under the federal bankruptcy laws, as now constituted or hereafter amended, or any other applicable federal or state bankruptcy, insolvency or other similar law, or shall consent to the appointment of or taking possession by a receiver, liquidator, assignee, trustee, custodian, sequestrator (or other similar official) of or for Borrower or any substantial part of its properties or Borrower shall make any assignment for the benefit of creditors, or Borrower shall fail generally to pay its debts as such debts become due, or Borrower shall take corporate action in furtherance of any of the foregoing. 5.1.7 There shall occur any material adverse change in the financial condition, business or operations of Borrower; 5.1.8 There shall occur any material adverse change in the Collateral; 5.1.9 A final judgment or judgments for the payment of money in excess of $25,000 in the aggregate shall have been rendered against Borrower and the same shall have remained unsatisfied and in effect, without stay of execution, for any period of sixty (60) days. And in the case of events (other than (i) Note payment defaults, (ii) Collateral defaults, (iii) any act, event or condition resulting in or relating to an emergency situation or is incurable in the reasonable judgment of Lender, or (iv) an event for which Borrower fails to give Lender notice as required in Section 4.1.11(a) within a period of 10 days after obtaining knowledge of any Event of Default or other event referred to therein, in each of which cases, notice and opportunity to cure shall not be applicable), such failure remains unremedied for 30 days after written notice thereof shall have been given to Borrower. SECTION 5.2 REMEDIES UPON DEFAULT. Upon the occurrence of and during the continuance of any Event of Default, the Lender may exercise any and all right and remedies granted to Lender under the Transaction Documents or by law. ARTICLE VI MISCELLANEOUS SECTION 6.1 NO WAIVER; CUMULATIVE REMEDIES. No failure or delay on the part of Lender, or any other holder of the Note in exercising any right, power or remedy hereunder or 16 under the Note shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy hereunder or under the Note. The remedies in the Transaction Documents are cumulative and not exclusive of any remedies provided by law. SECTION 6.2 AMENDMENTS, ETC. No amendment, modification, termination or waiver of any provision of any Transaction Document nor consent to any departure by Borrower or any other party other than Lender therefrom, shall in any event be effective unless the same shall be in writing and signed by Lender and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. No notice to or demand on Borrower in any case shall entitle Borrower to any other or further notice or demand in similar or other circumstances. SECTION 6.3 ADDRESSES FOR NOTICES, ETC. All notices, requests, demands, directions and other communications provided for under this Agreement shall be in writing and mailed, sent by FAX or otherwise delivered to the applicable party at the address or FAX number indicated below: If to Borrower: S&D Foods, Inc. 1333 Marsten Road Burlingame, California 94010 Attn: President FAX: (415) 579-5566 If to Lender: Kenneth A. Steel c/o K.A. Steel Chemicals Inc. 1001 Main Street Lemont, IL 60439 FAX: 708-257-3922 or, as to each party, at such other FAX number or address as shall be designated by such party in a written notice to each other party complying as to delivery with the terms of this Section. All such notices, requests, demands, directions and other communications shall, when mailed, be effective when deposited in the mails addressed as aforesaid. SECTION 6.4 COSTS, EXPENSES AND TAXES. Borrower shall pay any and all documentary and other taxes (other than income or gross receipts taxes generally applicable to banks) and fees or charges payable or determined to be payable in connection with the execution, delivery, filing, or recording of the Transaction Documents, or any other instrument or writing to be delivered 17 thereunder, or in connection with any transaction pursuant thereto, and shall reimburse, hold harmless, and indemnify Lender for, from, and against any and all loss, liability, or legal or other expense with respect to or resulting from any delay in paying or failing to pay any tax, fee or charge or that any of them may suffer or incur by reason of the failure of Borrower to perform any of its obligations under the Transaction Documents or any event of default hereunder; PROVIDED, HOWEVER, that each party shall pay its own attorneys' fees in connection with the preparation and review of the Transaction Documents. The covenants and agreements of this Section 6.4 shall survive the repayment of the Note and the cancellation thereof. SECTION 6.5 EXECUTION IN COUNTERPARTS. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which counterparts of this Agreement taken together shall constitute but one and the same instrument. SECTION 6.6 BINDING EFFECT; ASSIGNMENT. This Agreement shall become effective when it shall have been executed by the parties hereto and thereafter shall be binding upon and inure to the benefit of and be enforced by the parties hereto and their respective successors, assigns, heirs, executors and personal representatives, and, in the case of any Security, any person to whom such Security may be conveyed, transferred or assigned, except that Borrower shall not have the right to assign its rights or obligations hereunder or any interest herein without the prior written consent of Lender. Lender shall be entitled to assign the Transaction Documents, in whole or in part, by way of participation or otherwise, at any time. SECTION 6.7 GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Illinois, without regard to the choice of law provisions thereof. SECTION 6.8 SEVERABILITY OF PROVISIONS. Any provision of any Transaction Document which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof or thereof or affecting the validity or enforceability of such provision in any other jurisdiction. SECTION 6.9 HEADINGS. Article and Section headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose. SECTION 6.10 SECURITY. The Obligations, all amounts owing to Lender under the Collateral Documents, and all amounts advanced or expended by Lender for the maintenance or preservation of collateral shall be secured by liens on the property described in the Collateral Documents. 18 SECTION 6.11 PAYMENTS ON NON-BUSINESS DAYS. If any payment to be made hereunder or under the Note shall become due on a day other than a Business Day, such payment shall be made on the next Business Day and such extension of time shall be included in computing any interest in respect of such payments. SECTION 6.12 INTEGRATION; ENTIRE AGREEMENT. This Agreement, the Note, the Transaction Documents, and other instruments and documents to be delivered hereunder and thereunder are intended by the parties hereto and thereto to be an integrated contract, which together, except as otherwise provided herein, contain the entire understandings of the parties with respect to the subject matter contained herein and therein. There are no restrictions, warranties, representations, covenants or undertakings other than those expressly set forth herein and therein. This Agreement, the Note, the Transaction Documents and other documents to be delivered hereunder and thereunder, except as otherwise provided for herein, supersede all prior agreements and understandings between the parties with respect to such subject matter. All exhibits attached to this Agreement are incorporated herein by reference as though fully set forth. SECTION 6.13 SURVIVAL OF AGREEMENTS. All agreements, covenants, representations and warranties made herein shall survive the execution and delivery of the Transaction Documents and the making of the Loan hereunder. SECTION 6.14 FAILURE OR INDULGENCE NOT WAIVER. No failure or delay on the part of the Lender or any holder of any Security in the exercise of any power, right or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other right, power or privilege. All rights and remedies existing under the Transaction Documents are cumulative to, and not exclusive of, any rights or remedies otherwise available. SECTION 6.15 INDEMNITY BY BORROWER. Borrower agrees to indemnify, save, defend and hold harmless Lender and its directors, officers, agents, and employees (collectively the "indemnitees") from and against any and all claims, demands, actions, or causes of action that are asserted against any indemnitee by any Person if the claim, demand, action or cause of action directly or indirectly relates to a claim, demand, action or cause of action that the Person has or asserts against Borrower, except to the extent such claim, demand, action or cause of action arises from the negligence or misconduct of Lender. SECTION 6.16 FURTHER ASSURANCES. At any time or from time to time upon the request of Lender, Borrower will execute and deliver such further documents and do such other acts and things as Lender may reasonably request in order to effect fully the purposes of the Transaction Documents and to provide for the payment of all Obligations in accordance with the terms of the Transaction Documents. SECTION 6.17 TIME OF THE ESSENCE. With respect to all of the Transaction Documents, time is of the essence. 19 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized, on the date first above written. S&D FOODS, INC. By: /s/ DEAN NICHOLAS ---------------------------------- Its: President ---------------------------------- /s/ KENNETH A STEEL ---------------------------------- KENNETH A STEEL 20 EXHIBIT A S&D FOODS, INC. CONVERTIBLE PROMISSORY NOTE THIS NOTE AND THE SHARES THAT MAY BE ISSUED UNDER THE PROVISIONS OF THIS NOTE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR REGISTERED OR QUALIFIED UNDER ANY STATE SECURITIES LAW AND MAY NOT BE OFFERED FOR SALE,, SOLD OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO (A) AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 AND REGISTRATION AND/OR QUALIFICATION OF THE SAME UNDER ANY APPLICABLE STATE SECURITIES LAW OR (B) AN EXEMPTION THEREFROM. $500,000 OCTOBER __, 1995 SAN FRANCISCO, CALIFORNIA FOR VALUE RECEIVED, S&D FOODS, INC., a California corporation ("Maker"), promises to pay to KENNETH A. STEEL ("Holder"), or order, the principal amount of Five Hundred Thousand Dollars ($500,000), together with interest on such amount, all as set forth below: LOAN AND INVESTMENT AGREEMENT. This Note is the Convertible Promissory Note referred to in that certain Loan and Investment Agreement of even date herewith (the "Loan Agreement") between Maker and Holder. All terms used in this Note that are defined in the Loan Agreement and not otherwise defined herein shall have the meanings assigned to such terms in the Loan Agreement. INTEREST RATE. The outstanding principal of this Note shall bear interest at the rate of ten and a quarter percent (10.25%) per annum. Interest shall accrue on the outstanding principal of this Note from and after the date of this Note and shall be calculated on the basis of a 365-day year. MAXIMUM INTEREST. In no event whatsoever shall the amount paid, or agreed to be paid, to Holder for the use, forbearance or detention of money loaned hereunder or for the performance or payment of any covenant or obligation contained herein, as interest or 1 otherwise, exceed the maximum amount permissible under applicable law. If under any circumstance fulfillment of any covenant or obligation hereunder exceeds the limit of validity prescribed by law, then, IPSO FACTO, the obligation to be fulfilled shall be reduced to the limit of such validity, and if under any circumstance Holder shall ever receive as interest under this Note or otherwise an amount that would exceed the highest lawful rate, such amount that would be excessive interest shall be applied to the reduction of the unpaid principal hereof and not to the payment of interest or, if such amount that would be excessive interest exceeds the unpaid principal hereof, the amount thereof in excess of the unpaid principal hereof shall be refunded to Maker. Nothing contained in this paragraph shall limit or restrict Maker's covenants and obligations under the provisions of CONVERSION RIGHT, STOCK PAYMENT RIGHT, DIVIDENDS/DISTRIBUTIONS, or ADJUSTMENT EVENTS below. MATURITY DATE/PAYMENT. All unpaid principal of this Note, together with all accrued and unpaid interest, shall be due on March 31, 1996 ("Stated Maturity Date"). Any payment with respect to this Note shall be applied first to the payment of attorneys fees and costs and expenses of collection, if any, then to accrued and unpaid interest, and then to unpaid principal. All payments of principal and interest are to be made to Holder at K.A. Steel Chemicals Inc., 1001 Main Street, Lemont, IL 60439, Attn: Kenneth A. Steel, or such other address as Holder may specify to be the Place of Payment by notice given to Maker as provided below under NOTICES (the "Place of Payment"), and, except as expressly provided below under STOCK PAYMENT RIGHT, all payments of principal and interest are to be made in lawful money of the United States of America. All principal, interest and other amounts payable under this Note that remain unpaid after the Stated Maturity Date shall bear interest from such date until paid at the rate specified above under INTEREST PATE. SECURITY. The payment of principal and interest and all other obligations of Maker in respect of this Note are secured by a first lien and security interest in the Collateral under the Security Agreement. CONVERSION RIGHT. Maker is currently contemplating a private placement of its Common Stock (the "Private Placement"). This Note shall be convertible at any time on or prior to the Stated Maturity Date (but in no event later than the Stated Maturity Date) at the option of Holder (the "Conversion Right") into shares of Maker's Common Stock ("Common Stock") at the lowest price per share at which Common Stock is offered or sold in connection with the Private Placement (the "Conversion Price"). If the Conversion Right is exercised, the number of shares of Common Stock that Holder shall be entitled to receive upon exercise of the Conversion Right shall equal the greater of (i) $500,000 divided by the Conversion Price or (ii) the number of shares necessary to give Holder a __% equity interest in Maker on a fully diluted basis as of the Conversion Date (as defined below). The shares of Common Stock acquired upon exercise of the Conversion Right are hereinafter referred to as the "Conversion Shares"). The Conversion Right may be 2 exercised by Holder by giving notice to Maker as provided below under NOTICES stating that Holder is exercising the Conversion Right. The date on which such notice is given to Maker is the "Conversion Date", and all Conversion Shares shall be issued to Holder as of the Conversion Date, with the result that Holder shall be treated as the holder of record of the Conversion Shares on and as of the Conversion Date. Within a period of ten (10) days after the Conversion Date, Maker shall deliver to Holder, at the Place of Payment, a stock certificate, dated the Conversion Date, for the Conversion Shares and a check in payment of all accrued and unpaid interest on this Note, against delivery to Maker by Holder of this Note marked canceled (or an Affidavit of Loss and Indemnity Agreement in the form attached hereto duly completed and signed by Holder). STOCK PAYMENT RIGHT. If (i) prior to the Stated Maturity Date, Maker raises at least $2,140,000 in cash from the sale of its Common Stock in the Private Placement, (ii) on or prior to the Stock Payment Date (as defined below), no Event of Default has occurred and is continuing, and no event has occurred and is continuing which, upon the giving of notice, the lapse of time, or otherwise, could become an Event of Default, and (iii) on or prior to the Stated Maturity Date, Maker delivers to Holder a written certification from the President, of Maker that the conditions described in clauses (i) and (ii) of this paragraph have been satisfied (the date on which such certification is delivered to Maker is the "Stock Payment Date"), then Maker shall have the right (the "Stock Payment Right") to pay the unpaid principal of this Note, by delivering to Holder, on the Stock Payment Date (but in no event later than the Stock Payment Date), the number of shares of its Common Stock equal the greater of (i) $500,000 divided by the Conversion Price or (ii) the number of shares necessary to give Holder a __% equity interest in Maker on a fully diluted basis as of the Stock Payment Date. The shares of Common Stock so delivered are hereinafter referred to as the "Payment Shares"). The Payment Shares shall be issued to Holder as of the Stock Payment Date, with the result that Holder shall be treated as the holder of record of the Payment Shares on and as of the Stock Payment Date. On the Stock Payment Date, Maker shall deliver to Holder, at the Place of Payment, a stock certificate, dated the Stock Payment Date, for the Payment Shares and a check in payment of all accrued and unpaid interest on this Note through the Stock Payment Date, against delivery to Maker by Holder of this Note marked canceled (or an Affidavit of Loss and Indemnity Agreement in the form attached hereto duly completed and signed by Holder). Maker acknowledges and agrees that, on the Stock Payment Date, the fair market value of the Payment Shares, together with any other stock, securities or property that may be delivered to Holder as provided below under DIVIDENDS/DISTRIBUTIONS, does not and will not exceed the amount of unpaid principal and accrued and unpaid interest that is being paid with the Payment Shares. DIVIDENDS/DISTRIBUTIONS. Whenever any Conversion Shares or Payment Shares are issued, Maker shall also deliver to Holder, at the time the certificate representing such Conversion Shares or Payment Shares 3 are delivered to Holder, any and all dividends and other distributions that would have been paid or made to the Holder in respect of the Conversion Shares or the Payment Shares if Holder had been the holder of record of such Conversion Shares or Payment Shares on and as of the date of this Note and at all times subsequent thereto through and including the Conversion Date or the Stock Payment Date, as the case may be. The provisions of this paragraph shall survive the surrender and cancellation of this Note. ADJUSTMENT EVENTS. In the event that, on or after the date of this Note and prior to the Conversion Date or the Stock Payment Date, as the case may, there should be a merger, consolidation, reorganization, recapitalization, stock dividend, stock split or other similar change in the corporate structure or capitalization of Maker which affects the outstanding Common Stock (an "Adjustment Event"), then, in the case of each such Adjustment Event, an appropriate adjustment to reflect such Adjustment Event, as reasonably determined in good faith by Maker and Holder, shall be made with respect to the Conversion Price and the number and character of the securities which may be issued in connection with the Conversion Right and the Payment Right and any and all other provisions of this Note that may be affected thereby. Notice of each Adjustment Event will be delivered to Holder by Maker not less than ten (10) days prior to the date on which such Adjustment Event is to occur. The provisions of this paragraph shall survive the surrender and cancellation of this Note. TRANSFER OF NOTE. RIGHT TO TRANSFER. Subject to the provisions of SECURITIES LAWS below, Holder may sell, assign or otherwise transfer this Note, in whole or in part, (i) at any time prior to the exercise of the Conversion Right or the Stock Payment Right, or (ii) if neither such right is exercised, at any time prior to the payment of all principal, interest and other amounts payable hereunder. TRANSFER PROCEDURE. (i) This Note will be deemed to have been transferred only if and when Maker has received all of the following items (the date on which all of such items are received by Maker is hereinafter sometimes referred to as the "Transfer Date"): (A) This Note (or an Affidavit of Loss and Indemnity Agreement in the form attached hereto duly completed and signed by Holder) with a Notice of Transfer in the form attached hereto duly completed and signed by Holder and the proposed transferee; and (B) Any written agreement that Maker may require Holder to furnish pursuant to the provisions of SECURITIES LAWS below. 4 (ii) Within a period of ten days after the Transfer Date, Maker shall deliver to the transferee and/or Holder, as the case may be: (A) A new Note dated the Transfer Date issued in the name of the transferee for the principal amount of this Note that is being transferred; and (B) If this Note is being transferred only in part, a new Note dated the Transfer Date issued in the name of Holder for the remaining principal amount of this Note. (iii) This Note will be deemed to have been transferred to the proposed transferee on the Transfer Date, and the proposed transferee will be deemed for all purposes to have become the holder of this Note (with respect to the principal amount of this Note that is being transferred) on and as of the Transfer Date. SECURITIES LAWS. By acceptance of this Note and any Conversion Shares or Payment Shares, Holder agrees that: SECURITIES LAW COMPLIANCE. Any sale, assignment or other transfer of this Note, any Conversion Shares or any Payment Shares (and any other securities that may be issued or distributed therewith or with respect thereto or in exchange or substitution therefor) must be made in compliance with applicable federal and state securities laws, and no sale, assignment or other transfer of this Note, any Conversion Shares or any Payment Shares (or any other securities that may be issued or distributed with respect thereto or issued in exchange or substitution therefor) may be made that would violate any applicable federal and state securities laws. TRANSFEREE AGREEMENT. As a condition precedent to any proposed sale, assignment or other transfer of this Note, any Conversion Shares or any Payment Shares (and any other securities that may be issued or distributed therewith or with respect thereto or in exchange or substitution therefor), Maker may require that Holder furnish to Maker a written agreement from the proposed transferee, in form and substance reasonably satisfactory to Maker and its legal counsel, concerning the investment intent of the proposed transferee and other matters relating to federal and state securities law compliance. LEGENDS. Unless and until this Note, all Conversion Shares and all Payment Shares (and any other securities that may be issued or distributed therewith or with respect thereto or in exchange or substitution therefor) are freely transferable without registration under the Securities Act of 1933 and/or registration and/or qualification under any applicable state securities laws, this Note and each certificate representing Conversion Shares or Payment Shares (and any other securities that may be issued or distributed therewith or with respect thereto or in exchange or substitution therefor) shall have endorsed thereon a legend substantially as follows: 5 "THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR REGISTERED OR QUALIFIED UNDER ANY STATE SECURITIES LAW AND MAY NOT BE OFFERED FOR SALE, SOLD OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO (A) AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 AND REGISTRATION AND/OR QUALIFICATION OF SUCH SHARES UNDER ANY APPLICABLE STATE SECURITIES LAW OR (B) AN EXEMPTION THEREFROM." Maker may place such additional legends on this Note and any certificate representing Conversion Shares or Payment Shares (and any other securities that may be issued or distributed therewith or with respect thereto or in exchange or substitution therefor) as Maker, upon the advice of its legal counsel, may from time to time deem necessary or appropriate to comply with any applicable federal or state securities laws. SHARES DULY AUTHORIZED, ETC. All Conversion Shares and all Payment Shares will, when delivered to Holder, be duly authorized, validly issued, fully paid and nonassessable. EVENTS OF DEFAULT/ACCELERATION. Upon the occurrence and during the continuance of any Event of Default, at the election of Holder, all unpaid principal of this Note, together with all accrued and unpaid interest may be declared (and, if so declared, shall be and become) immediately due and payable, all without demand, presentment or notice, each of which is hereby waived by Maker, and, following any such election, Holder shall have and may exercise any and all rights and remedies to which Holder may be entitled under this Note, the Security Agreement or any other agreement or by law. The date on which such election is made is the "Accelerated Maturity Date". All principal, interest and other amounts payable under this Note that remain unpaid after the Accelerated Maturity Date shall bear interest from such date until paid at the rate specified above under INTEREST RATE. ATTORNEYS' FEES AND COSTS. If Holder brings any legal action against Maker to enforce any of the provisions of this Note or because of a breach or default by Maker under this Note, Holder shall be entitled, in addition to any other relief granted, to recover from Maker all costs and expenses incurred by Holder in connection with such legal action, including, without limitation, all reasonable attorneys' fees, and the right to recover such costs and expenses shall be deemed to have accrued upon the commencement of such legal action and shall be enforceable whether or not such legal action is prosecuted to judgment. WAIVERS. Maker hereby (i) waives diligence, demand, presentment, notice of non-payment, protest and notice of protest, (ii) expressly agrees that this Note and any payment hereunder may be renewed, modified or extended from time to time and at any time, (iii) consents to the acceptance or release of security for this Note, and (iv) waives to 6 the fullest extent permitted by law the right to plead any and all statutes of limitations as a defense to any demand on this Note or to any agreement to pay this Note. GOVERNING LAW/JURISDICTION AND VENUE. This Note shall be governed by and coded in accordance with the internal laws of the State of Illinois, without reference to its conflict of laws rules. Maker hereby consents and agrees that any federal or state court located in the State of Illinois shall have jurisdiction over Maker for any legal action that may be brought against Maker to enforce any of the provisions of this Note or because of a breach or default by Maker under this Note. Maker hereby waives any and all objections based on venue or jurisdiction to any legal action brought in any such court for such purpose, and Maker hereby agrees that, to the fullest extent permitted by law, service in any such legal action may be made on Maker as provided below under NOTICES. NOTICES. All notices, requests, demands and other communications under this Note must be in writing and shall be deemed to have been duly given and delivered (i) on the date of delivery if delivered personally or by fax to the party to whom notice is to be given, or (ii) on the third (3rd) day after mailing if mailed to the party to whom notice is given, by first class mail, registered or certified, postage prepaid, and properly addressed as follows: If to Holder: Kenneth A. Steel. K.A. Steel Chemicals Inc. 1001 Main Street Lemont, IL 60439 FAX: (708) 257-3922 If to Maker: S&D Foods, Inc. 1333 Marsten Road Burlingame, California 94010 Attn: President FAX: (415) 579-5566 Either party may change the address or FAX number to which notices to such party are to be addressed by giving the other party notice of such change in the manner set forth above. MISCELLANEOUS. The provisions of this Note shall inure to the benefit of and be binding upon and enforceable against (i) the undersigned Maker and its successors and assigns, including any person or entity that succeeds to all or any substantial part of the business and assets of Maker, whether or not such person or entity expressly assumes this 7 Note, and (ii) the named Holder and his heirs, executors, personal representations, and any person or entity to whom this Note or any interest herein may be conveyed, transferred or assigned. As used herein, the term "Maker" shall include the undersigned Maker and its successors and assigns, including any person or entity that succeeds to all or any substantial part of the business and assets of Maker, whether or not such person or entity expressly assumes this Note, and the term "Holder, shall include the named Holder and his heirs, executors, personal representations, and any person or entity to whom this Note or any interest herein may be conveyed, transferred or assigned. Maker represents and warrants to Holder that all obligations under this Note arise out of or in connection with business purposes and do not relate to any personal, family or household purpose. IN WITNESS WHEREOF, Maker has caused this Note to be executed by one of its duly authorized officer on October __, 1995. S&D FOODS, INC., a California corporation By: ------------------------------------ Its: ------------------------------- 8 NOTICE OF TRANSFER The Holder hereby: (i) sells, assigns and offers this Note as to __________ unpaid principal of this Note to the following proposed transferee: Name: -------------------------- Address: -------------------------- -------------------------- -------------------------- Taxpayer I.D. No.: -------------------------- (ii) Requests that a new Note be issued in the name of the transferee for the principal amount of this Note that is being transferred and that the same be delivered to the transferee at the address set forth above; and (iii) if this Note is being transferred only in part, requests that a new Note be issued in the name of Holder for the remaining balance of the unpaid principal of this Note and that the same be delivered to the Holder at the Place or Payment. Dated: 19 --------------, -- --------------------------------- Signature (Sign exactly as your name appears in this Note) The undersigned, being the proposed transferee named in this Notice of Transfer, hereby accepts and agrees to be bound by all of the terms and conditions of the new Note that is being issued to the undersigned. Dated: 19 --------------, -- --------------------------------- Signature (Sign exactly as your name appears in this Notice of Transfer) 10 EX-10.07 7 EXHIBIT 10.07 STOCK REDEMPTION AGREEMENT This Stock Redemption Agreement is entered into as of November 15, 1995, by and between S & D FOODS, INC., a California corporation (the "Corporation"), and DEAN NICHOLSON ("Nicholson") and STEVEN REEDY ("Reedy"), with reference to the following facts: A. Nicholson and Reedy each owns 1,000,000 shares of common stock of the Corporation. B. Nicholson and Reedy each desire to sell to the Corporation, and the Corporation desires to purchase from each of Nicholson and Reedy, 550,000 shares of the common stock of the Corporation owned by them, pursuant to the terms and conditions hereof. NOW, THEREFORE, the parties hereto agree as follows: 1. PURCHASE AND SALE. Effective upon the closing of the private placement of 1,100,000 shares of common stock for a purchase price of $2.00 per share (the "Private Placement"), Nicholson and Reedy each shall sell to the Corporation, and the Corporation shall purchase from each of Nicholson and Reedy 160,000 shares of the common stock of the Corporation for the purchase price indicated in Section 2.a, and immediately thereafter, the Corporation shall purchase from each of Nicholson and Reedy 390,000 shares of the common stock of the Corporation for the purchase price indicated in Section 2.b (collectively, the "Shares"). Upon the closing of the Private Placement, Nicholson and Reedy shall deliver to the Corporation certificates representing the Shares, duly endorsed to the Corporation or accompanied by stock assignments, executed by Nicholson and Reedy, respectively. 2. PURCHASE PRICE AND PAYMENT. The purchase price of the Shares shall be Two Million Two Hundred Thousand Dollars ($2,200,000), payable as follows: a. The Corporation shall pay to each of Nicholson and Reedy Three Hundred Twenty Thousand Dollars ($320,000) by check upon the closing of the Private Placement. b. The Corporation shall execute and deliver to each of Nicholson and Reedy the Promissory Notes in the forms attached hereto as Exhibit A, each in the original principal amounts of Seven Hundred Eighty Thousand Dollars ($780,000) (the "Promissory Notes"). The Corporation shall pay Nicholson and Reedy, 1 respectively, the principal amounts under the Promissory Notes upon the earlier of (i) the date that is two years after the date of the closing of the Private Placement, or (ii) the closing of any initial public offering of the Corporation's securities. 3. SEVERABILITY. If any provision of this Agreement is held to be illegal, invalid, or unenforceable under current or future laws, that provision shall be fully severable, this Agreement shall be construed and enforced as if such illegal, invalid, or unenforceable provision had never composed a part of this Agreement, and the remaining provisions of this Agreement shall remain in full force and effect and shall not be affected by the illegal, invalid, or unenforceable provision or by its severance from this Agreement. Furthermore, in lieu of each such illegal, invalid, or unenforceable provision, there shall be added automatically as a part of this Agreement a provision as similar in terms to such illegal, invalid, or unenforceable provision as may be possible and be legal, valid, and enforceable, and the Corporation hereby requests the court or any arbitrator to whom disputes relating to this Agreement are submitted to reform the otherwise unenforceable covenant in accordance with the preceding provision. 4. CORPORATE DISTRIBUTIONS. Upon the closing of the Private Placement, the Corporation shall obtain a certificate from its outside CPA indicating whether the payment under this Agreement complies with Section 500 of the California Corporations Code and showing the calculations made by them. The Corporation's outside CPA shall also provide a certificate indicating whether the payment as of the due date of the Promissory Notes complies with Section 500. In regard to the portion of the payment that does not comply with Section 500, Nicholson and Reedy agree to subordinate equal amounts of that portion owing under the Promissory Notes to the then-existing creditors until such time as the payment of the Promissory Notes would comply with Section 500, without regard to compliance as of the date of the issuance of the Promissory Notes. 5. REPRESENTATIONS AND WARRANTIES OF NICHOLSON AND REEDY. Nicholson and Reedy represent and warrant that with respect to the shares to be sold by them under this Agreement that each is the owner of his respective Shares, beneficially and of record, free and clear of all security interests, pledges, charges, encumbrances and options. 6. REPRESENTATION AND WARRANTY OF THE CORPORATION. The Corporation represents and warrants that redemption of the Shares has been duly authorized by all necessary corporate action on the part of the Corporation. 2 7. ENTIRE AGREEMENT. This Agreement contains the entire agreement between the parties with respect to the subject matter contained herein. There are no representations, agreements, arrangements or understandings, oral or written, between the parties, with respect to such subject matter which are not fully expressed herein. 8. BINDING AGREEMENT. This Agreement shall be binding on, and shall inure to the benefit of, the parties to it and their respective heirs, legal representatives, successors and assigns. 9. GOVERNING LAW. This Agreement shall be construed in accordance with, and governed by, the laws of the State of California. 10. ATTORNEY'S FEES. If any dispute arises out of the terms of this Agreement, the prevailing party shall be entitled to recover reasonable attorney's fees and other costs incurred in connection with that dispute, in addition to any other relief to which he or it is entitled. IN WITNESS WHEREOF, the parties hereto have executed this Redemption Agreement as of the date first written above. S & D FOODS, INC., a California corporation By: /s/ DEAN NICHOLSON ----------------------------------- Its: President ----------------------------------- "Corporation" /s/ DEAN NICHOLSON --------------------------------------- DEAN NICHOLSON "Nicholson" /s/ STEVEN REEDY --------------------------------------- STEVEN REEDY "Reedy" 3 EXHIBIT A SECURED PROMISSORY NOTE $780,000 Burlingame, CA ,1995 ------------- FOR VALUE RECEIVED, the undersigned, S & D FOODS, INC., California corporation ("Maker"), promises to pay to DEAN NICHOLSON ("Payee"), or order, at ___________________________, California, or at such other place as Payee may from time to time designate by written notice to Maker, the principal sum of Seven Hundred Eighty Thousand Dollars ($780,000), without interest charged thereon. The principal under this Note shall be due and payable on the earlier of (i) two years after the date hereof or (ii) the closing of any initial public offering of Maker's securities. If the payment of the principal amount of this Note is held to be illegal, This Note may be prepaid, at any time, in whole or in part, without penalty. Maker hereby waives presentment, demand for payment, notice of dishonor and any and all other notices and demands in connection with the delivery, acceptance, and performance, default, or enforcement of this note, and hereby consents to any and all extensions of time, renewals, releases of liens, waivers, or modifications that may be made or granted by Payee to Maker. In regard to any payment of any portion of the principal amount of this Note that does not comply with Section 500 of the California Corporations Code, Payee agrees to subordinate that amount to the then-existing creditors as of the date when due until such time as the payment of that portion of the principal amount would comply with Section 500, without regard to compliance as of the date of the issuance of this Note. Maker agrees to pay all costs of collection hereof, including reasonable attorneys' fees. The interpretation and enforcement of this note shall be governed by California law. S & D FOODS, INC., a California Corporation By --------------------------------- Steve Reedy, Secretary "Maker" EXHIBIT A SECURED PROMISSORY NOTE $780,000 Burlingame, CA ,1995 ------------- FOR VALUE RECEIVED, the undersigned, S & D FOODS, INC., California corporation ("Maker"), promises to pay to STEVE REEDY ("Payee"), or order, at ___________________________, California, or at such other place as Payee may from time to time designate by written notice to Maker, the principal sum of Seven Hundred Eighty Thousand Dollars ($780,000), without interest charged thereon. The principal under this Note shall be due and payable on the earlier of (i) two years after the date hereof or (ii) the closing of any initial public offering of Maker's securities. If the payment of the principal amount of this Note is held to be illegal, This Note may be prepaid, at any time, in whole or in part, without penalty. Maker hereby waives presentment, demand for payment, notice of dishonor and any and all other notices and demands in connection with the delivery, acceptance, performance, default, or enforcement of this note, and hereby consents to any and all extensions of time, renewals, releases of liens, waivers, or modifications that may be made or granted by Payee to Maker. In regard to any payment of any portion of the principal amount of this Note that does not comply with Section 500 of the California Corporations Code, Payee agrees to subordinate that amount to the then-existing creditors as of the date when due until such time as the payment of that portion of the principal amount would comply with Section 500, without regard to compliance as of the date of the issuance of this Note. Maker agrees to pay all costs of collection hereof, including reasonable attorneys' fees. The interpretation and enforcement of this note shall be governed by California law. S & D FOODS, INC., a California corporation By --------------------------------- Dean Nicholson, President "Maker" 2 EX-10.08 8 EXHIBIT 10.08 SETTLEMENT AGREEMENT THIS SETTLEMENT AGREEMENT is entered into effective as of June 25, 1996, between DEAN NICHOLSON ("Nicholson"), and GARDEN VALLEY NATURALS, INC., a California corporation ("GVN"), with reference to the following facts: A. Nicholson and GVN entered into that certain Employment Agreement dated November 1, 1995 (the "Employment Agreement"), pursuant to which GVN agreed to employ Nicholson. B. Nicholson and GVN have agreed to terminate the Employment Agreement pursuant to the terms hereof. NOW, THEREFORE, the parties agree as follows: 1. Nicholson and GVN hereby terminate the Employment Agreement effective as of June 25, 1996 (the "Effective Date"). 2. In connection with the termination of the Employment Agreement, GVN shall pay to Nicholson a total of $175,000 payable in 24 equal installments of $7,291.67 on the last day of each month commencing on July 31, 1996, and continuing through June 30, 1998. If GVN fails to make an installment payment within 15 days when due, interest shall accrue on the unpaid installment at the rate of eight percent (8%) per annum from the due date until the date when paid. 3. After the Effective Date, the parties shall have no further obligations under the Employment Agreement and Nicholson shall not be entitled to receive any salary, employee benefits, or any other compensation or benefits under the Employment Agreement for any period after the Effective Date. 4. Nicholson and GVN hereby release each other from all claims, damages, liabilities, obligations, costs, and fees, including, without limitation, attorneys' fees, arising out of or related to the Employment Agreement and the employment of Nicholson by GVN (the "Released Matters"). This mutual release shall be a full and final accord and satisfaction and general release from all Released Matters. The parties acknowledge that they are familiar with Section 1542 of the California Civil Code which provides as follows: A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor. Excludes from Release any medical claim arising from injury sustained March 4, 1997. The parties waive any right which either of them has, or may have, under Section 1542 to the full extent that they may lawfully waive these rights pertaining to the Released Matters. 5. This Agreement contains the entire agreement between the parties with respect to the subject matter contained in it and supersedes any and all other agreements and understandings among the parties, oral and written, with respect to such subject matter. 6. This Agreement shall be governed by, and construed in accordance with, the laws of the State of California. 7. If any dispute arises out of the terms of this Agreement, the prevailing party or parties in any legal proceeding or arbitration shall be entitled to recover attorneys' fees and costs incurred by it or them in that proceeding or arbitration. 8. Nicholson agrees to hold in confidence and not disclose to any third party without the prior written consent of GVN any proprietary or confidential information of GVN. Proprietary or confidential information refers to any information not generally known among GVN's competitors and that has commercial value to GVN. By way of illustration, but not limitation, proprietary or confidential information includes (a) developments, improvements, trade secrets, formulae, processes, techniques, know-how and data; (b) plans for research, development, new products, marketing and selling; information related to business plans, budgets and unpublished financial statements; prices and costs; information regarding suppliers and customers; and (c) any information designated by GVN as confidential. For a period of two years after the date of this Agreement, Nicholson shall not induce or solicit (i) any employee or consultant of GVN to engage in any other employment or activity of any other person or entity or (ii) any client or potential client of GVN for goods and services similar to those provided by GVN. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. GARDEN VALLEY NATURALS, INC. By: /s/ Floyd Hill ----------------------------------- Floyd Hill, Chairman "GVN" /s/ DEAN NICHOLSON --------------------------------------- DEAN NICHOLSON "Nicholson" 2 EX-10.09 9 EXHIBIT 10.09 FIRST AMENDMENT TO STOCK REDEMPTION AGREEMENT This First Amendment to Stock Redemption Agreement is dated effective as of January 10,1996, by and among GARDEN VALLEY NATURALS, INC., formerly known as S & D FOODS, INC., a California corporation (the "Corporation"), DEAN NICHOLSON ("Nicholson"), and STEVEN REEDY ("Reedy"), with reference to the following facts: A. The parties entered into the Stock Redemption Agreement dated November 15, 1995, pursuant to which the Corporation agreed to redeem from each of Nicholson and Reedy 550,000 shares of the common stock of Corporation (the "Agreement"). B. Nicholson and Reedy subsequently each transferred to Marken Company ("Marken") 22,500 shares of the common stock of the Corporation, which shall be immediately redeemed by the Corporation. C. The parties desire to amend the Agreement to decrease the number of shares to be redeemed by the Corporation under the Agreement by the 45,000 shares transferred to Marken. NOW, THEREFORE, the parties agree as follows: 1. Section 1 of the Agreement shall be amended to read as follows: 1. PURCHASE AND SALE. Upon the execution and delivery of the First Amendment to the Agreement, Nicholson and Reedy each shall sell to the Corporation, and the Corporation shall purchase from each of Nicholson and Reedy 137,500 shares of the common stock of the Corporation for the purchase price indicated in Section 2.a, and immediately thereafter, the Corporation shall purchase from each of Nicholson and Reedy 390,000 shares of the common stock of the Corporation for the purchase price indicated in Section 2.b (collectively, the "Shares"). Nicholson and Reedy shall deliver to the Corporation certificates representing the Shares, duly endorsed to the Corporation or accompanied by stock assignments, executed by Nicholson and Reedy, respectively. 1 2. The introductory paragraph of Section 2 and Section 2.a shall be amended to read as follows: 2. PURCHASE PRICE AND PAYMENT. The purchase price of the Shares shall be Two Million One Hundred Ten Thousand Dollars ($2,110,000), payable as follows: a. the Corporation shall pay to each of Nicholson and Reedy $275,000 by check upon the execution and delivery of the First Amendment to this Agreement. 3. Except as amended hereby, the Agreement shall remain in full force and effect. This Amendment is entered into as of the date first written above. GARDEN VALLEY NATURALS, INC., a California corporation By: /s/ Floyd Hill -------------------------------- Floyd Hill, President By: /s/ Dean Nicholson -------------------------------- DEAN NICHOLSON By: /s/ Steven Reedy ------------------------------- STEVEN REEDY 2 PROMISSORY NOTE $780,000 Burlingame, CA January 10, 1996 FOR VALUE RECEIVED, the undersigned, GARDEN VALLEY NATURALS, INC., formerly known as S & D FOODS, INC., a California corporation ("Maker"), promises to pay to DEAN NICHOLSON ("Payee"), or order, at 2609 Hillside Drive, Burlingame, CA 94010, or at such other place as Payee may from time to time designate by written notice to Maker, the principal sum of Seven Hundred Eighty Thousand Dollars ($780,000), without interest charged thereon. The principal under this Note shall be due and payable on the earlier of (i) two years after the date hereof or (ii) the closing of any initial public offering of Maker's securities. This Note may be prepaid, at any time, in whole or in part, without penalty. Maker hereby waives presentment, demand for payment, notice of dishonor and any and all other notices and demands in connection with the delivery, acceptance, performance, default, or enforcement of this note, and hereby consents to any and all extensions of time, renewals, releases of liens, waivers, or modifications that may be made or granted by Payee to Maker. In regard to any payment of any portion of the principal amount of this Note that does not comply with Section 500 of the California Corporations Code, Payee agrees to subordinate that amount to the then-existing creditors as of the date when due until such time as the payment of that portion of the principal amount would comply with Section 500, without regard to compliance as of the date of the issuance of this Note. Maker agrees to pay all costs of collection hereof, including reasonable attorneys' fees. The interpretation and enforcement of this Note shall be governed by California law. This Note is issued pursuant to the Stock Redemption Agreement dated November 15, 1995, among Maker, Payee, and Steve Reedy. GARDEN VALLEY NATURALS, INC., a California corporation By: /s/ Floyd Hill ------------------------------- Floyd Hill, President "Maker" Payment of this Note is subordinated to the payment of all obligations of the maker hereof to Wells Fargo Bank, National Association pursuant to the terms of a Subordination Agreement dated as of February 19, 1997, as the same may be amended or modified from time to time by the parties thereto, and any substitutions therefor. PROMISSORY NOTE $780,000 Burlingame, CA January 10, 1996 FOR VALUE RECEIVED, the undersigned, GARDEN VALLEY NATURALS, INC., formerly known as S & D FOODS, INC., a California corporation ("Maker"), promises to pay to STEVE REEDY ("Payee"), or order, at 3103 Hillside Drive, Burlingame, CA 94010, or at such other place as Payee may from time to time designate by written notice to Maker, the principal sum of Seven Hundred Eighty Thousand Dollars ($780,000), without interest charged thereon. The principal under this Note shall be due and payable on the earlier of (i) two years after the date hereof or (ii) the closing of any initial public offering of Maker's securities. This Note may be prepaid, at any time, in whole or in part, without penalty. Maker hereby waives presentment, demand for payment, notice of dishonor and any and all other notices and demands in connection with the delivery, acceptance, performance, default, or enforcement of this note, and hereby consents to any and all extensions of time, renewals, releases of liens, waivers, or modifications that may be made or granted by Payee to Maker. In regard to any payment of any portion of the principal amount of this Note that does not comply with Section 500 of the California Corporations Code, Payee agrees to subordinate that amount to the then-existing creditors as of the date when due until such time as the payment of that portion of the principal amount would comply with Section 500, without regard to compliance as of the date of the issuance of this Note. Maker agrees to pay all costs of collection hereof, including reasonable attorneys' fees. The interpretation and enforcement of this Note shall be governed by California law. This Note is issued pursuant to the Stock Redemption Agreement dated November 15, 1995, among Maker, Payee, and Dean Nicholson. GARDEN VALLEY NATURALS, INC., a California corporation By: /s/ Floyd Hill ------------------------------- Floyd Hill, President "Maker" Payment of this Note is subordinated to the payment of all obligations of the maker hereof to Wells Fargo Bank, National Association pursuant to the terms of a Subordination Agreement dated as of February 19, 1997, as the same may be amended or modified from time to time by the parties thereto, and any substitutions therefor. FIRST AMENDMENT TO STOCK REDEMPTION AGREEMENT This First Amendment to Stock Redemption Agreement is dated effective as of January 10, 1996, by and among GARDEN VALLEY NATURALS, INC., formerly known as S & D FOODS, INC., a California corporation (the "Corporation"), DEAN NICHOLSON ("Nicholson"), and STEVEN REEDY ("Reedy"), with reference to the following facts: A. The parties entered into the Stock Redemption Agreement dated November 15, 1995, pursuant to which the Corporation agreed to redeem from each of Nicholson and Reedy 550,000 shares of the common stock of Corporation (the "Agreement"). B. Nicholson and Reedy subsequently each transferred to Marken Company ("Marken") 22,500 shares of the common stock of the Corporation, which shall be immediately redeemed by the Corporation. C. The parties desire to amend the Agreement to decrease the number of shares to be redeemed by the Corporation under the Agreement by the 45,000 shares transferred to Marken. NOW, THEREFORE, the parties agree as follows: 1. Section 1 of the Agreement shall be amended to read as follows: 1. PURCHASE AND SALE. Upon the execution and delivery of the First Amendment to the Agreement, Nicholson and Reedy each shall sell to the Corporation, and the Corporation shall purchase from each of Nicholson and Reedy 137,500 shares of the common stock of the Corporation for the purchase price indicated in Section 2.a, and immediately thereafter, the Corporation shall purchase from each of Nicholson and Reedy 390,000 shares of the common stock of the Corporation for the purchase price indicated in Section 2.b (collectively, the "Shares"). Nicholson and Reedy shall deliver to the Corporation certificates representing the Shares, duly endorsed to the Corporation or accompanied by stock assignments, executed by Nicholson and Reedy, respectively. 1 2. The introductory paragraph of Section 2 and Section 2.a shall be amended to read as follows: 2. PURCHASE PRICE AND PAYMENT. The purchase price of the Shares shall be Two Million One Hundred Ten Thousand Dollars ($2,110,000), payable as follows: a. the Corporation shall pay to each of Nicholson and Reedy $275,000 by check upon the execution and delivery of the First Amendment to this Agreement. 3. Except as amended hereby, the Agreement shall remain in full force and effect. This Amendment is entered into as of the date first written above. GARDEN VALLEY NATURALS, INC., a California corporation By: /s/ Floyd Hill --------------------------------- Floyd Hill, President /s/ Dean Nicholson ------------------------------------ DEAN NICHOLSON /s/ Steven Reedy ------------------------------------ STEVEN REEDY 2 EX-10.10 10 EXHIBIT 10.10 AMENDMENT TO PROMISSORY NOTE THIS AGREEMENT TO PROMISSORY NOTE is entered into as of June 9, 1997, between STEVE REEDY ("Payee") and ORGANIC FOOD PRODUCTS, INC., a California corporation formerly known as Garden Valley Naturals, Inc. ("Maker"), with reference to the following facts: A. Maker is the maker and Payee is the payee of the Promissory Note dated January 10, 1996, in the original principal amount of $780,000 (the "Promissory Note"). B. Maker and Payee desire to amend the terms of the Promissory Note pursuant to the terms hereof. NOW, THEREFORE, the parties agree as follows: 1. The first two paragraphs of the Promissory Note are hereby deleted and in their place shall be inserted the following: FOR VALUE RECEIVED, the undersigned, ORGANIC FOOD PRODUCTS, INC., a California corporation formerly known as Garden Valley Naturals, Inc. ("Maker"), promises to pay to STEVE REEDY ("Payee"), or order, at 3103 Hillside Drive, Burlingame, CA 94010, or at such other place as Payee may from time to time designate by written notice to Maker, the principal sum of Seven Hundred Eighty Thousand Dollars ($780,000), without interest thereon until the earlier of (i) the date on which Maker closes an initial public offering of its securities under the Securities Act of 1933 ("IPO") or (ii) January 10, 1998; thereafter, interest on the unpaid principal shall accrue at the rate of six percent (6%) per annum. Principal and interest shall be repaid as follows: At the closing of the IPO, Maker shall pay principal of $350,000. Thereafter, principal and interest shall be repaid in monthly installments of $20,000 on the last day of each month, commencing on the last day of the month immediately following the IPO. Any installment payments shall be applied first to accrued interest and then to principal. If the IPO does not occur prior to January 10, 1998, then this Note shall be due and payable as of that date. This Note may be prepaid at any time, in whole or in part, without penalty. If Maker fails to pay any installment when due and such failure continues for ten days after Maker's receipt of written notice from Payee of such failure, Payee may declare the principal and accrued interest hereof immediately due and payable. 2. Maker and Payee acknowledge that the Promissory Note, as modified, is subordinated to the payment of all obligations of Maker to Wells Fargo Bank, National Association, pursuant to the terms of a Subordination Agreement dated as of February 19, 1997, as the same may be amended or modified from time to time by the parties thereto, and any substitutions therefor. 3. Except as amended hereby, the Promissory Note shall remain in full force and effect. IN WITNESS WHEREOF, the parties have executed this Amendment to Promissory Note as of the date first written above. STEVE REEDY --------------------------------------- STEVE REEDY "Payee" ORGANIC FOOD PRODUCTS, INC. By: Floyd Hill ----------------------------------- Floyd Hill, Chief Executive Officer "Maker" 2 AMENDMENT TO PROMISSORY NOTE THIS AMENDMENT TO PROMISSORY NOTE is entered into as of June 10, 1997, between DEAN NICHOLSON ("Payee") and ORGANIC FOOD PRODUCTS, INC., a California Corporation formerly known as Garden Valley Naturals, Inc. ("Maker"), with reference to the following facts: A. Maker is the maker and Payee is the payee of the Promissory Note dated January 10, 1996, in the original principal amount of $780,000 (the "Promissory Note"). B. Maker and Payee desire to amend the terms of the Promissory Note pursuant to the terms hereof. NOW, THEREFORE, the parties agree as follows: 1. The first two paragraphs of the Promissory Note are hereby deleted and in their place shall be inserted the following: FOR VALUE RECEIVED, the undersigned, ORGANIC FOOD PRODUCTS, INC., a California corporation formerly known as Garden Valley Naturals, Inc. ("Maker"), promises to pay DEAN NICHOLSON ("Payee"), or order, at 2609 Hillside Drive, Burlingame, CA 94010, or at such other place as Payee may from time to time designate by written notice to Maker, the principal sum of Seven Hundred Eighty Thousand Dollars ($780,000), without interest thereon until the earlier of (i) the date on which Maker closes an initial public offering of its securities under the Securities Act of 1933 ("IPO") or (ii) January 10, 1998; thereafter, interest on the unpaid principal shall accrue at the rate of six percent (6%) per annum. Principal and interest shall be repaid as follows: As the closing of the IPO, Maker shall pay principal of $350,000. Thereafter, principal and interest shall be repaid in monthly installments of $20,000 on the last day of each month, commencing on the last day of the month immediately following the IPO. Any installment payments shall be applied first to accrued interest and then to principal. If the IPO does not occur prior to January 10, 1998, then this Note shall be due and payable as of that date. This Note may be prepaid at any time, in whole or in part, without penalty. If Maker fails to pay any installment when due and such failure continues for ten days after Maker's receipt of written notice from Payee of such failure, Payee may declare the principal and accrued interest hereof immediately due and payable. 2. Maker and Payee acknowledge that the Promissory Note, as modified, is subordinated to the payment of all obligations of Maker to Wells Fargo Bank, National Association, pursuant to the terms of a Subordination Agreement dated as of February 19, 1997, as the same may be amended or modified from time to time by the parties thereto, and any substitutions therefor. 3. Except as amended hereby, the Promissory Note shall remain in full force and effect. IN WITNESS WHEREOF, the parties have executed this Amendment to Promissory Note as of the date first written above. /s/ Dean Nicholson ----------------------------------- DEAN NICHOLSON "Payee" ORGANIC FOOD PRODUCTS, INC. By: /s/ Floyd Hill ------------------------------- Floyd Hill, Chief Executive Officer "Maker" 2 EX-10.11 11 EXHIBIT 10.11 SUBSCRIPTION AGREEMENT Floyd R. Hill, Chief Executive Officer Organic Food Products, Inc. 550 Monterey Road Morgan Hill, California 95037 RE: Private offering of unsecured promissory notes by Organic Food Products, Inc. (the "Company") Dear Mr. Hill, 1. SUBSCRIPTION AND OFFERING. The undersigned hereby subscribes for and agrees to purchase a promissory note (the "Note") issued by the Company in the principal amount of $______. The Note is unsecured, bears interest at 10% per annum and is payable in full, including interest, the earlier of one year from the date of the Note or the effective date of an initial public offering ("IPO") of the Company's securities. As additional consideration for purchasing the Note, the undersigned will receive ______ common stock purchase warrants ("Warrants") (at the rate of one Warrant for each $3.00 of Note purchased), each Warrant entitling the holder to purchase one share of the Company's Common Stock at $3.00 per share at any time until December 31, 1999. The Warrants provide certain registration rights as set forth in the form of Warrant attached hereto as Exhibit B. Notwithstanding the payment date set forth above, if the Note is not repaid by December 1, 1997, then each month thereafter for a period of five months the Company will convert at no cost 20% of the Warrants issued to the undersigned into an equal number of shares of its Common Stock. Accordingly, after five months, all Warrants will be converted into Common Stock. Additionally, at the undersigned's election, the Company will issue one Warrant for each $30.00 of Note purchased in lieu of interest on the Note. A copy of the Note is attached hereto as Exhibit A. The undersigned understands that the Company is offering up to $600,000 of Notes (the "offering") to a group of not more than ten investors and that the offering will close on May 30, 1997 or at such time as all of the Notes are sold, whichever is sooner. The Company may extend the offering for an additional 30-day period in its sole discretion. 2. ACCEPTANCE OR REJECTION; MINIMUM SUBSCRIPTION. The undersigned understands that the Company, in it sole discretion and for any reason, may accept or reject this subscription, in whole or in part. The undersigned acknowledges that he or she must purchase a Note in the minimum amount of $50,000, unless the minimum amount is reduced in the sole discretion of the Company. 3. ACKNOWLEDGEMENT. The undersigned acknowledges that: (1) the offering of Notes and Warrants as made only through direct personal communication between the undersigned and a representative of Spelman & Co., Inc. (the "Selling Agent"), who will receive a commission of 10% of the gross proceeds of the Notes sold; (2) the undersigned has had the opportunity to obtain all information concerning the Company, it operations, legal structure and any other materials or documentation requested by the undersigned; (3) the undersigned has reviewed the Company's preliminary prospectus dated March 7, 1997 filed with the Securities and Exchange Commission and is familiar with its content; (4) the undersigned has been advised by the Company that (i) he or she must be prepared to bear the economic risk of the investment in the Notes for an indefinite period; (ii) the Notes and Warrants have not been registered under the Securities Act of 1933, or applicable state securities laws and hence cannot be sold unless they are subsequently registered or an exemption from such registration is available; (iii) the Notes and Warrants are highly speculative, involve a high degree of risk and should only be purchased by individuals who can afford to lose their entire investment; and (iv) the certificates for the Notes and Warrants will contain an appropriate restrictive legend prohibiting their sale or transfer, except under certain circumstances in substantially the following form: "The securities represented by this Certificate have not been registered under the Securities Act of 1933 (the "Act") and are "restricted securities" as that term is defined in Rule 144 under the Act. The securities may not be offered for sale, sold or otherwise transferred except pursuant to an effective registration statement under the Act or pursuant to an exemption from registration under the Act, the availability of which is to be established to the satisfaction of the Company." 4. EXECUTION OF AGREEMENT. When accepted by the Company, in whole or in part, this subscription shall be valid and binding on the undersigned and the Company for all purposes. The undersigned represents and warrants that the undersigned has received, read and understands the contents hereof and has consulted with his attorney, business advisor and/or accountant concerning the offering of shares. 5. PERSONAL INVESTIGATION. The undersigned warrants and represents that, prior to making a decision whether to invest herein through purchase of the Note, he or she has conducted a personal investigation and has researched and considered all factors that bear on the advisability of investing in the Company, and that his or her investment decision has not been based solely upon the representations of the Selling Agent. The undersigned has had the opportunity to ask questions and receive answers from the Company regarding the terms and conditions of the offering and the business, properties, prospects and financial condition of the Company, and to obtain additional information (to the extent the Company possessed such information or could acquire it without unreasonable effort or expense) necessary to verify the accuracy of any information furnished to the undersigned. 2 6. PURCHASE FOR OWN ACCOUNT. The undersigned warrants and represents that the Notes and Warrants subscribed by the undersigned will be acquired for the undersigned's own account and benefit and not for the account of any other person or business entity, and the undersigned has no present intention of selling or distributing the Notes or Warrants. The undersigned is not acting as a nominee for any other person or entity. The undersigned understands that the Notes and Warrants may not be sold, hypothecated, pledged, transferred, assigned or disposed of except in accordance with the substantial restrictions on transfer described herein. 7. INVESTMENT EXPERIENCE. The undersigned warrants and represents that the undersigned is experienced in investments and business matters, has made similar speculative investments in the past, has sufficient investment acumen to analyze and evaluate the merits and risks of investing in the Notes and Warrants and has sufficient financial resources to hold the Notes and Warrants for an indefinite period of time. 8. SUITABILITY. The undersigned is an "accredited investor" as that term is defined in Rule 501 of the 1933 Act and has either (i) a net worth of at least $1,000,000 or (ii) individual income in excess of $200,000 in each of the last two years (or joint income of $300,000 including the undersigned's spouse's income) and a reasonable expectation of reaching the same income level during the current year. 9. CONFIDENTIALITY. The undersigned understands that this Subscription Agreement and all other documents delivered to the undersigned in connection with this subscription are confidential documents prepared solely for the benefit of a limited number of qualified investors associated with the Company. The undersigned agrees that he or she will not reproduce or distribute any of such documents in whole or in part. 10. INDEMNIFICATION. The undersigned recognizes that the sale of the Notes and Warrants will be based upon his or her representations and warranties set forth herein, and the undersigned hereby agrees to indemnify and defend the Company and to hold each officer and/or director thereof harmless from and against any and all loss, damage, liability or expense, including costs and reasonable attorneys' fees, to which they may be put or which they may incur by reason of, or in connection with, any misrepresentation made by the undersigned in this Subscription Agreement or elsewhere, any breach by the undersigned of his or her warranties and/or a failure to fulfill any of the covenants or agreements set forth herein or elsewhere or arising out of the sale or distribution of any Notes and Warrants by the undersigned in violation of the Securities Act of 1933, as amended, (the "1933 Act") and any other applicable state securities laws. 11. NASD AFFILIATIONS. The undersigned represents that he or she is not directly or indirectly associated with any member of the National Association of Securities Dealers, Inc. ("NASD"). 3 12. DELIVERY OF FUNDS. All investor checks must be payable to "Organic Food Products, Inc." and delivered to the Selling Agent. Dated at ____________, this _____ day of __________, 1997. -------------------------------------- Signature -------------------------------------- Print Name -------------------------------------- Residence Address -------------------------------------- City State Country -------------------------------------- Country Area Telephone Code Code Number -------------------------------------- Name In Which Share Are To Be Issued -------------------------------------- Social Security or Tax Identification Number -------------------------------------- Employer ACCEPTED: ORGANIC FOOD PRODUCTS, INC. By -------------------------------------- Floyd R. Hill, Chief Executive Officer on ----------------------------------- Date 4 EXHIBIT A THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT") AND ARE "RESTRICTED SECURITIES" AS THAT TERM IS DEFINED IN RULE 144 UNDER THE ACT. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE ACT, THE AVAILABILITY OF WHICH IS TO BE ESTABLISHED TO THE SATISFACTION OF THE COMPANY. PROMISSORY NOTE US$ Morgan Hill, California ------------ _________________, 1997 FOR VALUE RECEIVED, the undersigned Organic Food Products, Inc., a California corporation ("Payor"), with offices at 550 Monterey Road, Morgan Hill, CA 95037 hereby promises to pay to the order of ____________________ ("Payee") at such place as Payee may from time to time designate in writing, the principal sum of ____________________, and to pay interest from the date hereof on the unpaid principal balance at a rate of 10% per annum. The principal balance and all accrued interest outstanding under this promissory note ("Note"), are due and payable the earlier of (i) one year from the date of this Note or (ii) the effective date of any initial public offering of the securities of Payor. Payor may, at its option, at any time and from time to time, prepay all or any part of the principal balance of this Note, provided that concurrently with each such prepayment Payor shall pay accrued interest on the principal so prepaid to the date of such prepayment. The parties hereto hereby irrevocably consent to the jurisdiction of the courts of the State of California in connection with any action or proceeding arising out of or relating to this Note. This Note shall be governed by California law, without reference to any choice of law principles thereof. Payor shall be entitled to reasonable attorney's fees and court costs if legal proceedings are necessary to collect sums due under this Note. ORGANIC FOOD PRODUCTS, INC. By: ------------------------------ Floyd R. Hill, Chief Executive Officer EXHIBIT B COMMON STOCK PURCHASE WARRANT WARRANT NO. __________ THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT") AND ARE "REGISTERED SECURITIES" AS THAT TERM IS DEFINED IN RULE 144 UNDER THE ACT. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE ACT, THE AVAILABILITY OF WHICH IS TO BE ESTABLISHED TO THE SATISFACTION OF THE COMPANY. FOR VALUE RECEIVED ____________________________________________________, the registered holder (the "Holder"), is entitled to purchase from Organic Food Products, Inc., a California corporation, (the "Company") up to ________ shares of the Company's Common Stock at $3.00 per share (the "Warrant Price") at any time until December 31, 1999. The Holder will not have the rights or privileges as a shareholder of the Company prior to exercise of the common stock purchase warrant ("Warrant") represented by this certificate. At any time after one year from the effective date of the Company's IPO as defined in the accompanying subscription agreement ("Subscription Agreement") upon the written request of the Holders, the Company will register the shares issuable upon exercise of this Warrant. All expenses incurred by the Company in connection with such registration, including without limitation all registration and filing fees, listing fees, printing expenses, costs of counsel for the Company, the expense of any special audits incident to or required by any such registration and the expenses of complying with the securities or Blue Sky laws of any jurisdiction shall be paid by the Company. Holder shall pay all underwriting discounts or commissions with respect to the Common Stock sold by Holder. This Warrant may be exercised by presentation of this certificate and simultaneous payment of the Warrant Price at the offices of the Company in Morgan Hill, California, subject to applicable state and federal securities laws. Payment shall be made in cash or by certified check, at the option of the Holder. The Warrant evidenced hereby is of a duly authorized issue of common stock purchase warrants, is issued under and in accordance with the Subscription Agreement and is subject to the terms and provisions contained in the Subscription Agreement. The Holder consents by acceptance of the certificate to all the terms and conditions of the Subscription Agreement. This Warrant is exercisable in whole only and not in part. The issuance of Common Stock upon exercise of this Warrant will be rounded to the nearest whole share and no fractional shares will be issued. The Holder of this certificate shall be treated by the Company as the absolute owner hereof for all purposes and as the person entitled to exercise the rights represented hereby. This Warrant does not contain antidilution provisions. IN WITNESS WHEREOF, the Company has signed this Warrant and deliverd it in Morgan Hill, California as of __________________, 1997. ORGANIC FOOD PRODUCTS, INC. By: ----------------------------------- Floyd R. Hill Chief Executive Officer 2 EX-11.02 12 EXHIBIT 11.02 EXHIBIT 11 ORGANIC FOOD PRODUCTS, INC. COMPUTATION OF EARNINGS PER SHARE YEARS ENDED NINE MONTH PERIODS ENDED JUNE 30, MARCH 31, ----------------------- ----------------------- 1996 1995 1997 1996 --------- --------- --------- --------- PRIMARY EARNINGS PER SHARE:(1) COMMON STOCK EQUIVALENTS OPTIONS AND WARRANTS GRANTED AND UNEXERCISED 1,175,000 1,175,000 1,175,000 1,175,000 ASSUMED BUYBACK OF OPTIONS(2) (705,250) (705,250) (705,250) (705,250) --------- --------- --------- --------- 469,750 469,750 469,750 469,750 TOTAL WEIGHTED AVERAGE SHARES ISSUED 5,297,913 5,297,913 5,297,913 5,297,913 --------- --------- --------- --------- WEIGHTED AVERAGE SHARES OUTSTANDING 5,767,663 5,767,663 5,767,663 5,767,663 --------- --------- --------- --------- --------- --------- --------- --------- FULLY DILUTED EARNINGS PER SHARE:(1) COMMON STOCK EQUIVALENTS OPTIONS AND WARRANTS GRANTED AND UNEXERCISED 1,175,000 1,175,000 1,175,000 1,175,000 ASSUMED BUYBACK OF OPTIONS(2) (705,250) (705,250) (705,250) (705,250) --------- --------- --------- --------- 469,750 469,750 469,750 469,750 TOTAL WEIGHTED AVERAGE SHARES ISSUED 5,297,913 5,297,913 5,297,913 5,297,913 --------- --------- --------- --------- WEIGHTED AVERAGE SHARES OUTSTANDING 5,767,663 5,767,663 5,767,663 5,767,663 --------- --------- --------- --------- --------- --------- --------- ---------
(1) EARNINGS PER SHARE ARE BASED UPON THE WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING FOR EACH OF THE RESPECTIVE YEARS. ALL WEIGHTED AVERAGE SHARES OUTSTANDING GIVE RETROACTIVE EFFECT TO THE 2,000 FOR 1 STOCK SPLIT IN OCTOBER, 1995, AND THE ISSUANCE OF 2,250,000 IN RELATION TO THE PURCHASE COMBINATION. PURSUANT TO SECURITIES AND EXCHANGE COMMISSION RULES, COMMON STOCK ISSUED FOR CONSIDERATION BELOW THE ANTICIPATED OFFERING PRICE PER SHARE DURING THE PERIOD PRIOR TO FILING OF THE REGISTRATIONS STATEMENT HAS BEEN INCLUDED IN THE CALCULATION OF COMMON SHARE EQUIVALENT SHARES, USING THE TREASURY STOCK METHOD, AS IF THEY HAD BEEN OUTSTANDING FOR ALL PERIODS PRESENTED. (2) BUYBACK OF OPTIONS UNDER THE TREASURY STOCK METHOD IS AT THE ASSUMED IPO PRICE OF $4.00 PER SHARE. EX-23.02 13 EXHIBIT 23.02 INDEPENDENT AUDITORS' CONSENT We consent to the use in this Amendment No. 1 to Registration Statement No. 333-22997 of Organic Food Products, Inc. of our report dated February 28, 1997 appearing in the Prospectus, which is part of such Registration Statement, and to the reference to us under the heading "Experts" in the Prospectus. Semple & Cooper, LLP Phoenix, Arizona July 8, 1997 EX-27.02 14 FINANCIAL DATA SCHEDULE
5 9-MOS YEAR JUN-30-1997 JUN-30-1996 JUL-01-1996 JUL-01-1995 MAR-31-1997 JUN-30-1996 200 191,073 0 0 1,185,252 908,325 (40,000) (89,983) 3,014,630 1,429,743 4,434,861 2,723,845 1,091,082 809,616 (138,947) (59,030) 7,961,873 5,941,834 4,647,166 3,492,383 0 0 0 0 0 0 3,971,721 2,317,400 (1,066,988) (1,410,410) 7,961,873 5,941,934 9,067,049 7,641,539 9,067,049 7,641,539 6,085,139 5,822,337 2,393,770 2,199,022 0 257,468 0 0 152,340 349,122 450,514 (983,462) (107,092) (334,400) 343,422 (649,062) 0 0 0 0 0 0 343,422 (649,062) .06 (.11) .06 (.11)
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