-----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, Od7hEdfCcvCeTjG22xMqfKmANoCe95L1vWGDe8d7UeWefNlnpPbQwZMzEqUpDiTF za+yE7IY6h/ObGj6eHRKdQ== 0000927016-00-000972.txt : 20000327 0000927016-00-000972.hdr.sgml : 20000327 ACCESSION NUMBER: 0000927016-00-000972 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000324 FILER: COMPANY DATA: COMPANY CONFORMED NAME: OPTA FOOD INGREDIENTS INC /DE CENTRAL INDEX KEY: 0000883326 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS FOOD PREPARATIONS & KINDRED PRODUCTS [2090] IRS NUMBER: 043117634 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-19811 FILM NUMBER: 577598 BUSINESS ADDRESS: STREET 1: 25 WIGGINS AVE CITY: BEDFORD STATE: MA ZIP: 01730 BUSINESS PHONE: 6172765100 MAIL ADDRESS: STREET 1: 25 WIGGINS AVENUE CITY: BEDFORD STATE: MA ZIP: 01730 10-K405 1 FORM 10-K405 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 1999 or [_] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ________ to _________. Commission File Number 0-19811 ------- OPTA FOOD INGREDIENTS, INC. --------------------------- (Exact name of registrant as specified in its charter) Delaware 04-3117634 ------------------------------ ------------------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 25 Wiggins Avenue Bedford, Massachusetts 01730 ------------------------------------ ----------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (781) 276-5100 -------------- Securities registered pursuant to Section 12(b) of the Act: None ---- Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value per share -------------------------------------- (Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ____ --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value, based upon the closing sale price of the shares as reported by the Nasdaq National Market, of voting stock held by non- affiliates (without admitting that any person whose shares are not included in such calculation is an affiliate) at March 17, 2000 was $25,879,702. As of March 17, 2000, 10,897,864 shares of the registrant's Common Stock, $.01 par value per share, were issued and outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's definitive Proxy Statement for its 2000 Annual Meeting of Stockholders are incorporated by reference into Part III of this Report on Form 10-K. The following discussion of the Company's business in this Annual Report on Form 10-K contains, in addition to historical statements, forward-looking statements that involve risks and uncertainties. The Company's actual results could differ significantly from the results discussed in the forward-looking statements. Factors that could cause or contribute to such differences include the factors discussed in this section under the caption "Cautionary Statement Regarding Forward-Looking Statements." Item 1. Business - ---------------- GENERAL - ------- Opta Food Ingredients, Inc. (referred to herein as the "Company" or "Opta") was incorporated in Delaware on April 23, 1991 and its executive offices are located at 25 Wiggins Avenue, Bedford, Massachusetts 01730. The Company's telephone number is (781) 276-5100 and fax number is (781) 276-5101. Opta, CrystaLean, EverFresh, OptaFil, OptaGlaze, OptaGrade, Optex, OptaMax and Snowite are registered trademarks of the Company. Opta is a leading innovator, manufacturer and marketer of proprietary texturizing products sold to food processors in North America who focus on the dairy, dressings/sauces, meat and baked goods categories. Opta applies advanced enzymology, protein and carbohydrate chemistries to develop innovative food ingredient products such as fat replacers, bulking agents and other texturizing agents that solve specific customer problems. Opta creates its products through the modification of inexpensive, readily available raw materials to produce food ingredients that it considers to be Generally Recognized As Safe ("GRAS") under current U.S. Food and Drug Administration ("FDA") regulations. At December 31, 1999, Opta's products were being used in more than 35 different applications by over 200 customers, including 10 of the 15 largest U.S. consumer packaged food companies and three of the world's largest quick service restaurant chains. INDUSTRY BACKGROUND AND MARKET OPPORTUNITY - ------------------------------------------ Over the past few years, the food industry has experienced an unprecedented period of significant, fundamental change worldwide. The pace of change is accelerating and impacts every aspect of the food business. Key sectors of the industry are consolidating through mergers and acquisitions. Indeed, 1999 was another record year of food company mergers. Driving forces within the industry have shifted away from the manufacturer to the retailer and, ultimately, to the consumer. Food safety remains the number one concern of consumers. Public sector regulatory agencies as well as private sector consumer associations are becoming more vigilant. Consumer education, labeling requirements, and a high level of popular interest in extending and improving the quality of life have greatly increased consumer awareness of food and its role in promoting and maintaining a healthy lifestyle. Since 1994, consumer spending on food prepared outside the home has continued to increase and has exceeded consumer spending on food prepared at home. Consumers are demanding foods that are safe, convenient, nutritious, healthful, readily available, competitively priced and that taste great. Food processors are under tremendous pressure to remove undesirable components such as fat and sugar or unwanted additives from foods through reformulation of their products. This trend has now gone a step further. Not only are undesired components being formulated out, but ingredients with purported health benefits are being incorporated into a growing number of everyday foods. In the face of these challenges, consumer food and food service companies are seeking ways to increase their ability to respond quickly and effectively to an extremely dynamic marketplace. In addition, as the industry further consolidates and becomes more competitive, pressure has mounted to cut costs. Investment in basic research and new product development by consumer food and foodservice companies over the past decade has not kept pace with these demands. As a result, a "technology gap" now exists between the demand for reformulation of current products and the development of new, healthier foods. This is especially true in the lack of development of new, highly functional food ingredients that deliver the taste and textural attributes that consumers are demanding. -2- Opta's strategy is to capture the opportunity represented by this "technology gap" by utilizing its proprietary technologies, know-how and experience to create healthy, safe, inexpensive food ingredients with taste and textural qualities that appeal to consumers. Opta is a customer driven, flexible, responsive food ingredient supplier to consumer food and foodservice companies with particular emphasis on the dairy, baked goods and meat segments of the market. Opta's core expertise in the development, modification and maintenance of specific food textures coupled with the Company's capabilities in new ingredient development and commercialization has enabled the Company to create a portfolio of highly functional, innovative, GRAS food ingredients. Opta's portfolio includes ingredients that have achieved industry recognition and commercial use as fat replacers as well as agents that function as stabilizers, bulking agents, thickeners, gelling agents and extenders in a wide variety of food applications. According to industry sources, the worldwide market for high value-added food ingredients is approximately $20 billion per year. Opta's primary target market of North America accounts for nearly 1/3 of this total. The Company's products compete functionally within broad categories of the food ingredients industry, including but not limited to, hydrocolloids, fibers, fat replacers, emulsifiers and proteins. The Company estimates that the value of the ingredients with which Opta directly competes is between $500 and $800 million in North America. Dairy and bakery applications account for a significant portion of this total opportunity; therefore, Opta has focused its sales and marketing efforts, as well as its technical efforts, primarily on these two sectors of the domestic market and more recently has expanded its reach into the meat category. OPTA'S STRATEGY - --------------- The Company works closely with consumer food and foodservice companies to identify product formulation, cost and/or productivity issues and develop solutions to these problems based on proprietary, value-added, highly functional food ingredients. Core elements of the Company's strategy include: Solving Customer Problems Through Innovation. Opta's primary focus is on solving its customers' problems rapidly through innovation rather than through the traditional approach of selling basic raw materials or products derived through chemical syntheses. The Company works closely with its customers to identify each of their specific needs, establish probable solutions, develop prototype food ingredients or formulations and to develop finished products that meet or exceed the required sensory, functional, physical and nutritional parameters. Also, the finished food containing Opta's ingredient should fit existing manufacturing processes in a cost-effective manner. Opta differentiates itself from its competitors by not being dependent upon any one raw material or a single type of technology. This provides Opta the flexibility to take whatever approach is most appropriate to solve the customer problem at hand. Opta makes a significant investment in establishing long term customer/supplier relationships with all its key current and prospective accounts. This investment includes an outstanding level of service at all phases of the customer's product development effort, from small scale formulation work and analytical support through full commercial scale processing in their manufacturing facilities. The return on this investment is chiefly captured via ingredient sales, but this approach has other intangible benefits for the Company including long-term customer relationships and a high degree of credibility in the marketplace. -3- Focusing on Technology Platforms as Sources of Innovation. The Company intends to continue leveraging the expertise and knowledge base that it has developed since its inception to further the development of families of related, highly functional, value-added food ingredients. In order to best exploit both internal and external resources and play to its strengths, the Company has organized its product portfolio and continuing new product development efforts on the basis of two main technology platforms: fiber-based texturizing agents and starch-based texturizing agents. These technology platforms serve as an organizing principle around which new learning can be captured, intellectual property can be expanded, new products and applications can be developed, and existing products can be effectively supported. These platforms have enabled the development of the Company's current proprietary products and will serve as a solid base for the addition of future ingredients with physical properties and functionality targeted to specific end uses and the solution of specific customer problems. Opta believes that the technology platform approach permits it to solve multiple customer and industry problems without requiring a separate investment for each solution while retaining the flexibility to customize solutions for a wider variety of industry problems. The Company also believes that future growth will be derived from internally developed technology as well as from acquisitions of complementary product lines and technologies to which Opta is confident that it can add value and generate incremental revenue growth. Employing Sophisticated Science and Practical Food Industry Experience to Develop GRAS Food Ingredients. The Company relies upon its ability to combine proprietary technological advances with practical food industry experience to solve highly complex and specific food formulation problems presented by its customers. Opta's research and development effort is conducted by a team of scientists with expertise in the relevant sciences, including enzymology and protein and carbohydrate chemistries, who work alongside experts in food science and food engineering. The Company seeks to modify inexpensive raw materials to produce value-added, natural food ingredients that meet the requirements for GRAS status and that permit customers to have consumer-friendly labels which may enable all-natural or other claims for their products. Utilizing a Technically Sophisticated Customer Account Team and Marketing Force. Opta believes the most effective way to solve a customer's problem is to gain a thorough understanding of each customer at all levels, build solid working relationships throughout the customer's organization, be knowledgeable of the market segment in which the customer competes, and have a detailed technical understanding of the customer's problem as well as their preferred solution. The Company takes a multidisciplinary approach in order to achieve this level of customer understanding and level of service. Members of Opta's direct sales force are teamed up with the appropriate technical personnel to work as "consultants" in defining and developing a range of potential solutions to their formulation and product development problems. Through an iterative process, the solution is refined and ultimately delivered according to the customer's specification. In all cases, Opta's strategy is to provide outstanding service and responsiveness, which the Company believes, will lead to additional opportunities with existing and prospective customers. OPTA'S PRODUCT DEVELOPMENT AND COMMERCIALIZATION PROCESS - -------------------------------------------------------- All of the Company's product development efforts are driven by specifically stated and defined customer or market needs. In order to respond quickly to market needs that represent credible opportunities for the Company, Opta employs a simple, efficient system for integrating its development and commercialization activities. The system has three primary stages: Discovery, Assessment and Planning, and Execution and Review. -4- The Discovery Stage The Company's management, marketing, applications and technical service, research and development personnel, as well as its direct sales team, maintain close working relationships with leading consumer food and foodservice companies. Opta actively seeks to assist in the definition and assessment of its customers' ingredient-related needs whether the issue is quality, functionality, cost, processibility, or otherwise. Opta assimilates this information on customer needs into its Opportunity Portfolio, a database of new product ideas and concepts. The Opportunity Portfolio is reviewed on a regular basis to keep the pipeline of new developmental ingredients full. The review examines certain criteria such as technical feasibility, market opportunity, the specific customer need that is to be fulfilled, ability to patent or maintain as proprietary, potential manufacturing costs and efficiencies, availability of raw materials and qualification for GRAS status. Once an opportunity is judged to be credible and achievable, the program proceeds to the next step. The Assessment and Planning Stage In this phase, key questions and critical hurdles regarding successful outcome of a specific ingredient development effort are identified and evaluated. An in-depth assessment is then made of the opportunity as technical hurdles are defined, and a manufacturing strategy is developed. The purpose of this stage is to ensure that there is a clear and common understanding within the Company of the exact nature of the opportunity, the resources that will be required to execute such opportunity and the deadline for its completion. The Execution and Review Stage Opta pursues its new product development and commercialization efforts by employing cross-functional project teams and classic project management techniques. A clear objective and deadline is set, the appropriate team members from each of Opta's functional groups are assembled, and a Project Team Leader is appointed. A formal project plan is put in place that contains the key milestones, critical path activities, and other pertinent information for driving the development and commercialization effort. Opta works closely with its customers at all stages of new ingredient development--bench, pilot and commercial scale--by the sampling of prototypes to the appropriate customers for real world testing. This approach is essential in maximizing the chances for success of newly commercialized ingredients. Another main feature of this development stage is periodic project review. As any project proceeds, the original objective and project plan may be modified based on new information or the results of customer testing. Opta's process allows for flexibility and provides opportunities to ensure that the ingredient under development is on target with the customer need to be filled. Once Opta and a potential customer agree that a test ingredient is functional and of practical value, production scale-up commences, manufacturing process is verified and any regulatory clearances are obtained. After launching a new ingredient, Opta commercializes the ingredient for other applications and other customers. Whenever possible, Opta manufactures and markets its own products and distributes them through its direct sales organization within the U.S. and through strategic partners internationally. -5- PRODUCTS - -------- Opta has organized its product portfolio on the basis of two main technology platforms: fiber-based texturizers which include Opta Oat Fibers, Canadian Harvest oat fiber products, konjac flour and microcrystalline cellulose (MCC) and starch-based texturizers which include OptaGrade, OptaMist, OptaFil, CrystaLean, Opta Baking Gloss, OptaMax and stabilizer blends. In addition to helping food manufacturers improve the healthfulness of their food products, Opta's family of texturizing ingredients can improve the overall quality of food products, reduce formulation costs and meet specific processing requirements. The Company believes that all of its products are GRAS under current FDA regulations. Fiber-Based Products - -------------------- Opta Oat Fibers Opta Oat Fibers are a family of natural insoluble fiber products derived from oat hulls. Opta Oat Fibers are used commercially to increase yield and enhance texture in ground meat products, to add strength and reduce breakage of taco shells and ice cream cones, and to enhance texture in breads, cookies and crackers. Canadian Harvest On December 31, 1999, Opta acquired substantially all of the assets of Canadian Harvest, located in Cambridge, Minnesota, and all of the outstanding shares of common stock of Canadian Harvest Process, Ltd., located in St. Thomas, Ontario, Canada for $12 million in cash, with an additional $1.6 million paid for net working capital. Canadian Harvest is a major international manufacturer and supplier of dietary fiber with a product line which includes Snowite oat fibers as well as a line of stabilized fibers. Konjac Flour In 1997, Opta signed an agreement with Shimizu International, Inc. of Japan to become its exclusive North American distributor for konjac flour. A unique and very versatile texturizing agent obtained from the konjac plant commonly cultivated in East Asia, konjac flour provides excellent heat and freeze thaw stability when used to thicken or gel processed foods. The potential advantages and uses of konjac flour as a functional ingredient in food are just beginning to be realized by the North American food industry. In Asia, konjac flour is valued not only for its use as a food ingredient, but also for its beneficial role as a soluble fiber in the diet. For example, there are many published studies, which demonstrate the ability of konjac flour to reduce serum cholesterol levels in humans. Konjac flour is currently being utililzed in poultry and surimi applications and is being evaluated by a number of food companies for a variety of applications including vegetarian burgers and ground meat. Microcrystalline Cellulose (MCC) In 1998, Opta signed an agreement with Blanver Farmoquimica, Ltda. of Brazil to become its exclusive North American distributor for MCC. MCC, commonly known and labeled as cellulose gel, is a naturally derived stabilizer, texturizing agent and fat replacer. It is used extensively in reduced fat salad dressings, numerous dairy products including cheese, frozen desserts and whipped toppings and bakery products. MCC is currently being evaluated by a number of food companies for a variety of applications including reduced fat salad dressings and sauces. -6- Starch-Based Products - --------------------- OptaGrade OptaGrade is a natural, starch-based texturizing agent that is used commercially in a variety of dairy products including natural, imitation and processed cheeses, sour cream, cream cheese and cottage cheese. Fat free cheeses made with OptaGrade have shown superb meltability with none of the off-taste or rubbery texture found in most fat free and reduced fat cheeses. By using OptaGrade in cottage cheese, food manufacturers are able to reduce total formulation costs while delivering excellent taste, texture and appearance. OptaGrade is also used to improve the taste and texture of reduced fat and fat free cream cheeses. In sour cream, OptaGrade is used to create a smooth, creamy texture and can replace up to eight other ingredients allowing for a "cleaner" ingredient label. OptaMist OptaMist is also a starch-based texturizing agent that improves the taste, texture and appearance of dairy products, yogurt, natural and processed cheese products, salad dressings and mayonnaise. While the functionality of OptaMist is similar to that of OptaGrade, its unique processing flexibility allows it to be used in food products made within a wide variety of processing systems. OptaFil Optafil is a starch-based opacifying agent and whitener used in reduced fat or fat free dairy and non-dairy creamers, whipped toppings, beverages, cheeses and salad dressings. OptaFil has gained acceptance in the marketplace because it is easy to use and reduces residue on processing equipment. It is being used commercially in fat free non-dairy creamers. CrystaLean CrystaLean is an enzyme-resistant, starch-based bulking and texturizing agent designed to enhance texture and add fiber to food products including baked goods and extruded products such as cereals and snack foods. CrystaLean is being tested by a number of food companies for various applications and is being used commercially in a nutrition bar specifically marketed to diabetics. Opta Baking Gloss Baking Gloss is a ready-to-use product that provides outstanding shine and adhesion to baked goods. Launched in 1998, it is being marketed for use in commercial bakeries. OptaMax OptaMax, introduced in September 1999, is a starch-based texturizing agent developed to increase yields and improve the texture of reduced fat natural cheese including Mozzarella, Cheddar, Colby, Monterey Jack and Feta. OptaMax is being used commercially in a reduced fat cheddar cheese and is also being tested by a number of other food companies for use in reduced fat cheese applications. Stabilized Products On June 30, 1999, the Company acquired the assets of Stabilized Products, Inc. ("SPI"), a privately held manufacturer of specialized stabilizing ingredients for the dairy product industry, -7- for approximately $2.4 million in cash. SPI formulates and distributes dry and liquid food ingredients known as stabilizers, which enhance the texture, appearance and consistency of dairy products such as yogurt, ice cream, sour cream and cheese. Opta's priorities over the next few years are to expand sales and marketing efforts to increase market penetration of its core fiber-based and starch-based products in the categories currently being sold, as well as to extend their uses to other targeted product categories; to develop proprietary customized blends which utilize Opta's starch-based ingredients; to integrate the Canadian Harvest and SPI product lines into Opta's product portfolio; to continue the marketing and commercial development of OptaMax, MCC, konjac flour and baking gloss; and to continue to innovate next generation products and technologies based upon specific customer needs and requests. There can be no assurance that the Company will be successful in fulfilling any or all of these priorities on a timely basis, or at all, or that, for various reasons including market conditions, available capital and management resources, the Company will be able to continue to pursue these priorities. CUSTOMERS, SALES AND MARKETING - ------------------------------ Customers At December 31, 1999, Opta's products were being used in more than 35 different applications by over 200 customers, including 10 of the 15 largest U.S. consumer packaged food companies and three of the world's largest quick service restaurant chains. In the competitive consumer food and food service industries, product formulations are competitive assets, and, as a result, the Company's customers and prospective customers generally require Opta to retain their identity in strict confidence through the execution of confidentiality agreements. During 1999 and 1998, International Food Solutions (formerly Case Swayne) accounted for $8.5 million and $5.2 million or 44% and 37% of product sales, respectively. In addition, during 1999, 1998 and 1997, $3.0 million, $3.9 million and $3.5 million of product sales were to a group of independent bakeries that supply a quick service restaurant chain. There were no individual customers during the year ended December 31, 1997 representing greater than 10% of total revenue. International sales were $1.3 million ($512,000 to Europe; $258,000 to the Middle East; $189,000 to Canada; $30,000 to Asia and $291,000 to Latin America); $795,000 ($418,000 to Europe and $377,000 to the Middle East); and $1.2 million ($376,000 to Europe and $833,000 to the Middle East) for the years ended December 31, 1999, 1998, and 1997, respectively. Sales and Marketing Utilizing a technically sophisticated customer account team and marketing force, Opta believes that the most effective way to solve each customer's problem is to gain a thorough understanding of the customer at all levels, build solid working relationships throughout the customer's organization, be knowledgeable of the market segment in which the customer competes, and have a detailed technical understanding of the customer's problem as well as its preferred solution. The Company takes a multidisciplinary approach in order to achieve this level of customer understanding and service. Members of Opta's direct sales force are teamed up with the appropriate technical personnel to work as "consultants" in defining and developing a range of potential solutions to their formulation and product development problems. Through an iterative process, the solution is refined and ultimately delivered to the customer's specification. In all cases, Opta's strategy is to provide outstanding service and responsiveness, which the Company believes, will lead to additional opportunities with existing and prospective customers. -8- MANUFACTURING - ------------- On December 31, 1999, Opta acquired substantially all of the assets of Canadian Harvest which included a 60,000 sq. ft. oat fiber manufacturing facility in Cambridge, Minnesota and a 15,000 sq. ft. facility in St. Thomas, Ontario, Canada which manufactures a line of stabilized fibers. The Company plans to invest approximately $3 million in 2000 to expand the oat fiber production capacity of the Cambridge, Minnesota facility to produce Opta's oat fiber products. With the increase in production capacity due to the acquisition of Canadian Harvest, the Company expects to meet its customers' orders over the next few years. During 1998, the Company expanded its Opta Oat Fibers facility in Louisville, Kentucky increasing the plant's capacity by 40% to meet increased customer demand for Opta's oat fiber products. In addition, as a result of growing customer demand for OptaGrade, in May 1996, the Company acquired a 35,000 square foot manufacturing facility in Galesburg, Illinois. The facility was renovated during 1997 and began production in 1998. The Company anticipates that the facility will be able to produce all of its starch-based food ingredient products. The facility has significantly increased the Company's production capacity for its starch-based food ingredient products including OptaGrade, OptaMist and OptaMax. There can be no assurance that the demand for the Company's products will increase or remain at current levels to justify any such additional capacity, or that the Company's manufacturing capability will otherwise be sufficient to meet customer demands. The Company does not believe that there are any limitations on sources and availability of raw materials. COMPETITION - ----------- The food ingredients industry is intensely competitive. Competitors include major chemical companies with food ingredient divisions, other food ingredient companies, stabilizer companies and those consumer food companies that also engage in the development and sale of food ingredients. Many of these competitors have financial and technical resources as well as production and marketing capabilities substantially greater than those of the Company. In addition, many of the Company's competitors have experience significantly greater than that of the Company in the testing of new or improved products. The texturizing agent and stabilizer blend markets are particularly competitive. Many companies are engaged in the development of fat replacers, other texturizing agents and stabilizer blends, and have introduced a number of products in this area. Opta believes that specifically tailored texturizers and stabilizer blends must be developed to meet the particular textural, taste and processing requirements of each food category. The Company, therefore, is developing a number of separate and distinct products with functionality tailored to a specific end use. The fiber segment of the texturizing agent market is large and competitive. With the acquisition of Canadian Harvest, the Company believes that it is the world's largest supplier of oat fiber to the food industry. Besides competing with other oat fiber companies, Opta competes directly and indirectly with producers of other types of fiber including soy and sugar beet fibers. Opta believes that the Company will be able to use its scientific expertise and proprietary knowledge to manipulate oat fiber so that it can be used to improve the texture of foods in a manner that offers certain advantages over competitive fiber products, but there can be no assurance that any such advantages will be realized. The Company believes that its success in competing with others will be based on retaining scientific and technical expertise, identifying customer needs for food ingredient solutions to solve food processing problems, rapidly innovating and developing new food ingredients, developing food ingredients which are GRAS and successfully testing, producing -9- and marketing these products. PATENTS AND TRADE SECRETS - ------------------------- The Company's policy is to protect its technology by, among other things, filing patent applications for technology relating to the development of its business in the U.S. and in selected foreign jurisdictions. The Company has 34 issued U.S. patents and 11 pending U.S. patent applications relating to products at various stages of technological development as well as 58 corresponding issued or pending foreign patent applications. The Company's successes will depend, in part, on its ability to protect its products and technology under U.S. and international patent laws and other intellectual property laws. The Company believes that it owns or has the right to use all proprietary technology necessary to manufacture and market its products under development. There can be no assurance, however, that patent applications relating to the Company's products or technology will result in patents being issued or that current or additional patents will afford protection against competitors with similar technology. In addition, companies that obtain patents claiming products or processes that are necessary for or useful to the development of the Company's products can bring legal actions against the Company claiming infringement. The Company also relies on trade secrets and proprietary know-how and confidentiality agreements to protect certain of its technologies and processes. There can be no assurance that the Company's outside partners and contract manufacturers will be prevented from gaining access to the Company's proprietary technology and confidential information. REGULATORY FRAMEWORK - -------------------- Opta's food ingredient products are regulated under the 1958 Food Additive Amendments to the Federal Food, Drug and Cosmetic Act of 1938 (the "Act"), as administered by the FDA. Under the Act, pre-marketing approval by the FDA is required for the sale of a food ingredient which is a food additive unless the substance is GRAS under the conditions of its intended use by experts qualified by scientific training and experience to evaluate the safety of food ingredients. A food additive is any substance, "the intended use of which results or may reasonably be expected to result, directly or indirectly, in its becoming a component or otherwise affecting the characteristics of any food." Such pre-marketing approval for ingredients that are not GRAS, which is issued in the form of formal regulation, requires a showing both that the food ingredient is safe under its intended conditions of use and that it achieves the function for which it is intended. GRAS status can be established in two ways, either by "self-affirmation" in which the producer determines on its own that the ingredient is GRAS, or by the issuance of a "GRAS affirmation regulation" by the FDA in response to a GRAS petition. A food ingredient may be deemed GRAS under the conditions of its intended use based upon its history of common use in foods prior to 1958, or based upon scientific procedures which produce the same quantity and quality of scientific evidence as would be required for the FDA to issue a pre-market approval of the sale of a food additive. In either case, in order to establish that a product is GRAS, it must not only actually be safe in its intended use, but it must be generally recognized as such. If a food ingredient is not entitled to GRAS status, pre-market approval must be sought through the filing of a Food Additive Petition. Countries other than the U.S. also regulate the sale of food ingredients. Regulations vary substantially from country to country, and Opta takes appropriate steps to comply with such regulations as necessary. -10- Opta Oat Fibers, OptaGrade, OptaMist, CrystaLean, OptaMax and OptaFil are being marketed pursuant to GRAS self-affirmation. Opta believes that the other products for which it has retained commercial rights will also be determined to be GRAS. However, such status cannot be determined until actual formulations and uses are finalized. Thereafter, Opta will decide whether self-affirmation procedures or a GRAS petition will be appropriate. Certain of the Company's products may require a Food Additive Petition and in the event that one is required, the Company may elect to sell or license its rights to another party. There can be no assurance that the Company will be successful in bringing its products to market based on its determination that such products meet these criteria. Opta has established an independent Regulatory Board, a panel of industry experts, to review the publicly available information and certify that they have reviewed such data and regard an ingredient as GRAS. HUMAN RESOURCES - --------------- At December 31, 1999, Opta employed 88 full-time employees, 6 of whom hold Ph.D. or other advanced scientific degrees. Many of the Company's management and professional employees have had prior experience with consumer food companies. Management considers relations with its employees to be good. CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS - --------------------------------------------------------- Statements in this Annual Report on Form 10-K under the captions "Business" and "Management's Discussion and Analysis of Financial Condition and Results of Operations," as well as oral statements that may be made by the Company or by officers, directors or employees of the Company acting on the Company's behalf, that are not historical fact constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward- looking statements involve known and unknown risks, uncertainties and other factors that could cause the actual results of the Company to be materially different from the historical results or from any results expressed or implied by such forward-looking statements. Factors which could cause actual results to differ from these expectations include the size and timing of significant orders, as well as deferral of orders, over which the Company has no control; the extended product testing cycles of the Company's potential customers; the variation in the Company's sales cycles from customer to customer; increased competition posed by food ingredient manufacturers; changes in pricing policies by the Company and its competitors; the adequacy of existing, or the need to secure or build additional manufacturing capacity in order to meet the demand for the Company's products; the Company's success in expanding its sales and marketing programs and its ability to gain increased market acceptance for its existing product lines; the Company's ability to timely develop and successfully introduce new products in its pipeline at acceptable costs; the ability to scale up and successfully produce its products; the potential for significant quarterly variations in the mix of sales among the Company's products; the gain or loss of significant customers; shortages in the availability of raw materials from the Company's suppliers; the impact of new government regulations on food products; the challenges of integrating the operations of acquired businesses; and general economic conditions. Item 2. Properties The Company owns a 45,000 sq. ft. building in Bedford, Massachusetts which the Company uses for its headquarters, pilot plant, research and development laboratories and general corporate offices. Approximately 15,000 sq. ft. of space in this building is leased to a third party under a lease expiring in September 2002. In addition, the Company subleases approximately 24,000 sq. ft. in Louisville, Kentucky, for a term expiring in 2005. This space is occupied by the Company's Opta Oat Fibers manufacturing plant, warehouses, related laboratories and offices. -11- In May 1996, the Company acquired a 35,000 sq. ft. manufacturing facility in Galesburg, Illinois. This facility supports the production of the Company's starch-based food ingredient products. In June 1999, the Company acquired Stabilized Products, Inc. which leases a facility through June 2002 with approximately 15,000 sq. ft. in High Ridge, Missouri supporting the manufacturing of stabilizer blends. In December 1999, the Company acquired the assets of Canadian Harvest which included a 60,000 sq. ft. oat fiber manufacturing facility located in Cambridge, Minnesota and a 15,000 sq. ft. manufacturing facility located in St. Thomas, Ontario, Canada, which produces a line of stabilized fibers. Item 3. Legal Proceedings From time to time, the Company is involved in litigation relating to claims arising out of its operations in the normal course of business. The Company is currently not a party to any legal proceedings, the adverse outcome of which, individually or in the aggregate, management believes would have a material adverse effect on the financial position or results of operations of the Company. Item 4. Submission of Matters to a Vote of Security Holders Not applicable. -12- PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters - ----------------------------------------------------------------------------- The Company's Common Stock is traded on the Nasdaq Stock Market under the symbol "OPTS", and is listed on Nasdaq's National Market. The following table sets forth the high and low closing sales prices for the Company's Common Stock as reported by the Nasdaq National Market for each of the periods indicated: Year Ended December 31, 1998 High Low ---------------------------- ---- --- First Quarter 5 7/8 3 3/34 Second Quarter 6 3/16 4 3/4 Third Quarter 5 25/32 3 Fourth Quarter 4 1/2 3 1/16 Year Ended December 31, 1999 ---------------------------- First Quarter 4 7/16 2 1/4 Second Quarter 3 9/16 2 13/32 Third Quarter 4 3/8 2 3/4 Fourth Quarter 3 5/8 2 9/16 The Company has never paid a cash dividend. The Company intends to retain all of its earnings, if any, for use in its business and does not intend to pay cash dividends in the foreseeable future. In addition, certain of the Company's loan agreements contain covenants that restrict the Company's ability to pay dividends. Future dividend policy will depend, among other factors, upon the Company's earnings and its financial condition. As of March 20, 2000, there were approximately 225 holders of record of the Company's Common Stock and the Company believes that the number of beneficial holders exceeds 2,400. -13- Item 6. Selected Financial Data (in thousands, except per share data) - --------------------------------------------------------------------- The following selected financial data for the five years ended December 31, 1999 have been derived from the Company's financial statements audited by PricewaterhouseCoopers LLP, independent accountants. The Company's financial statements and the report thereon are included elsewhere in this Annual Report on Form 10-K. The information below should be read in conjunction with the Company's financial statements and the related notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations".
For the Years Ended December 31, ------------------------------------------------ 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- Statement of Operations Data: Revenue $19,289 $13,971 $ 8,799 $ 9,229 $ 7,067 Cost of revenue 12,408 10,146 6,730 7,409 6,340 Selling, general and admin expenses 4,553 4,033 3,874 3,868 2,725 Research and development expenses 3,275 3,665 4,236 4,038 3,102 Restructuring costs 350 - - - - Loss from operations (1,297) (3,873) (6,041) (6,086) (5,100) Net loss (157) (2,482) (4,569) (4,527) (4,197) Basic and diluted net loss per share (1) (.01) (.22) (.41) (.42) (.48)
(1) Computed on the basis described in Note 2 of Notes to Financial Statements.
December 31, ----------------------------------------------- 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- Balance Sheet Data: Current assets $21,733 $34,720 $37,808 $42,876 $48,848 Total assets 47,815 47,888 50,965 55,903 61,269 Current liabilities 3,546 2,685 3,847 3,117 3,152 Long term liabilities 2,733 3,126 2,625 4,417 6,125 Total stockholders' equity 41,536 42,077 44,493 48,369 51,992
Item 7. Management's Discussion and Analysis of Financial Condition and Results - ------------------------------------------------------------------------------- of Operations - ------------- The following Discussion and Analysis of the Company's Financial Condition and Results of Operations contained in this Annual Report on Form 10-K contains, in addition to historical statements, forward-looking statements that involve risks and uncertainties. The Company's actual results could differ significantly from the results discussed in the forward-looking statements. Factors that could cause or contribute to such differences include the factors discussed in the section titled "Business" under the caption "Cautionary Statement Regarding Forward-Looking Statements" as well as other factors in this Annual Report on Form 10-K. Introduction Opta is a fully integrated developer, manufacturer and marketer of proprietary food ingredients used by consumer food companies to improve the nutritional content, healthfulness and taste of a wide variety of foods. The Company modifies inexpensive raw materials and produces natural food ingredients that can be considered Generally Recognized as Safe ("GRAS") under current U.S. Food and Drug Administration ("FDA") regulations. -14- This discussion should be read in conjunction with the section titled "Business", the financial statements, and the notes to the financial statements, included elsewhere in this Annual Report on Form 10-K. Results of Operations 1999 Compared to 1998 - --------------------- Revenue. Revenue for the year ended December 31, 1999 was $19.3 million, representing an increase of $5.3 million or 38% as compared to 1998 revenue of $14.0 million. The increase in 1999 revenue was largely the result of increased demand from two of the Company's existing major customers as well as the additional revenue related to the business acquired from Stabilized Products, Inc. ("SPI") on June 30, 1999. Cost of Revenue. Cost of revenue for the year ended December 31, 1999 was $12.4 million representing an increase of $2.3 million or 22% in comparison to 1998 cost of revenue of $10.1 million. Cost of revenue as a percentage of revenue decreased to 64% in 1999 as compared to 73% in 1998. This percentage decrease was largely the result of certain improvements in fiber-based and starch-based product margins resulting from operating efficiencies as well as a reduction in manufacturing costs. In addition, the Company's margins in 1999 were impacted favorably by a supply agreement with one of the Company's major customers. Selling, General and Administrative Expenses. Selling, general and administrative ("SG&A") expenses for the year ended December 31, 1999 were $4.6 million, representing an increase of $520,000 or 13% in comparison to SG&A expenses of $4.0 million in 1998. SG&A expenses as a percentage of revenue decreased to 24% in 1999 from 29% in 1998. The increase in SG&A expenses was principally due to an increase in legal, consulting and recruitment costs in 1999 as well as the additional expenses attributable to the business acquired from SPI. Research and Development. Research and development ("R&D") expenses for the year ended December 31, 1999 were $3.3 million, representing a decrease of $390,000 or 11% in comparison to R&D expenses of $3.7 million in 1998. R&D expenses as a percentage of revenue decreased to 17% in 1999 from 26% in 1998. The decrease in R&D expenses was the result of the reduction in personnel costs related to the Company's restructuring program which discontinued research on its protein coatings and encapsulation technology platform in January 1999. Restructuring Costs. The Company recorded a restructuring charge of $350,000 during the first quarter of 1999 which is included in operating expenses for the year ended December 31, 1999. This charge was the result of a cost reduction program which included a reduction in headcount at its corporate headquarters as a result of discontinuing research on its protein coatings and encapsulation technology platform. Other Income. Other income for the year ended December 31, 1999 was $1.1 million, representing a decrease of $251,000 or 18% in comparison to other income of $1.4 million in 1998. The decrease is due to decreased interest income on reduced amounts of cash and short term investments during 1999 as compared to 1998. -15- 1998 Compared to 1997 - --------------------- Revenue. Revenue for the year ended December 31, 1998 was $14.0 million representing an increase of $5.2 million or 59% over 1997 revenue of $8.8 million. The increase in 1998 revenue was largely the result of increased demand from two of the Company's existing major customers as well as the addition of a new major customer during 1998. Cost of Revenue. Cost of revenue for the year ended December 31, 1998 was $10.1 million representing an increase of $3.4 million or 51% over 1997 cost of revenue of $6.7 million. Cost of revenue as a percentage of revenue decreased to 73% in 1998 as compared to 76% in 1997. This percentage decrease was largely the result of certain improvements in Opta Oat Fibers margins resulting from production efficiencies related to increased production capacity as well as a reduction in manufacturing costs. Selling, General and Administrative Expenses. SG&A expenses for the year ended December 31, 1998 were $4.0 million representing an increase of $159,000 or 4% over 1997 SG&A expenses of $3.9 million. SG&A expenses as a percentage of revenue decreased to 29% in 1998 from 44% in 1997. The increase in SG&A expenses was principally due to additional staffing and bonus costs as well as an increase in public/investor relations costs offset by a reduction in consulting costs in 1998. Research and Development. R&D expenses for the year ended December 31, 1998 were $3.7 million representing a decrease of $571,000 or 13% over 1997 R&D expenses of $4.2 million. R&D expenses as a percentage of revenue decreased to 26% in 1998 from 48% in 1997. The decrease in R&D expenses is the result of initial start-up costs of the Galesburg, Illinois production facility incurred during 1997. Other Income. Other income for the year ended December 31, 1998 was $1.4 million representing a decrease of $81,000 or 6% as compared to 1997 other income of $1.5 million. The decrease is due to decreased interest income on reduced amounts of cash and cash equivalents offset in part by decreased interest expense on lower long term debt during 1998. Income Taxes At December 31, 1999, the Company had available net operating loss carryforwards of approximately $31.2 million for income tax purposes. In addition, the Company had approximately $881,000 of unused research and development tax credits. Ownership changes, as defined in the Internal Revenue Code, resulting from the Company's initial public offering in March 1992 and a second public offering in August 1995, have limited the amount of net operating loss and tax credit carryforwards that can be utilized annually to offset future taxable income or tax liabilities. As a result, the amount of these net operating losses and tax credit carryforwards which can be utilized annually is $3.0 million for losses incurred prior to March 1992 and $9.1 million for losses incurred prior to August 1995. These net operating loss and tax credit carryforwards expire at various dates between 2006 and 2019. Subsequent changes in ownership could further affect the limitation in future years. Liquidity and Capital Resources At December 31, 1999, the Company had approximately $12.6 million in cash and short term investments and approximately $18.2 million of working capital. The Company used approximately $57,000 of cash in operations during 1999 compared with approximately $1.4 million of cash used in operations in 1998. -16- Capital expenditures for the years ended December 31, 1999 and 1998 were approximately $769,000 and $1.4 million, respectively. The Company's various debt agreements contain covenants that restrict the Company's ability to participate in merger discussions, pay dividends, limit the Company's annual capital expenditures and invest in certain types of securities and obtain additional debt financing without bank approval. The Company was in compliance with respect to all covenants and restrictions in its loan agreements at December 31, 1999 and 1998. The Company believes that its existing cash, short term investments, long and short term debt and product sales will be adequate to fund its planned operations, capital requirements and expansion needs through at least 2000. However, the Company may require additional capital in the longer term, which it may seek through equity or debt financing, collaborative arrangements with corporate partners, equipment lease financing or funds from other sources. No assurance can be given that these funds will be available to the Company on acceptable terms, if at all. In addition, because of the Company's need for funds to support future operations, it may seek to obtain capital when conditions are favorable, even if it does not have an immediate need for additional capital at such time. Year 2000 Compliance The Year 2000 issue concerns the ability of certain computerized information systems to properly recognize date sensitive information such as a date using "00" as the year 1900 rather than the year 2000. This could cause systems to fail or miscalculate, causing a disruption of operations. The Company may be at risk both with respect to its own Year 2000 compliance and the Year 2000 compliance of third parties, particularly suppliers of materials and services as well as customers. The Company relies on computer-based technology and utilizes a variety of third party hardware and software extensively for financial and administrative functions, such as accounting and management information. The Company had identified and verified that its internal information technology ("IT") systems are Year 2000 compliant, including accounting/financial reporting, manufacturing/production and sales/invoicing systems. The Company recently completed a Year 2000 compliance review of its non-IT systems in 1999. These systems include equipment or processes used in manufacturing, research and development, telecommunications and general office applications, which may contain embedded technology. All critical non-IT systems were found to be Year 2000 compliant. Management believed that the most significant risk to the Company relating to Year 2000 compliance issues was the effect such issues may have on its major suppliers and customers. The Company completed an evaluation to assess the Year 2000 readiness of its major suppliers and customers. The Company believes there is no material risk related to Year 2000 non-compliance of these suppliers and customers. Based on currently available information, management does not believe that the financial impact of the Year 2000 issues discussed above will have a material adverse effect on the Company's financial condition or results of operations; however, it is uncertain to what extent the Company may be affected by such issues, if any. -17- Item 7A. Quantitative and Qualitative Disclosures about Market Risk - ------------------------------------------------------------------- In January 1997, the Securities and Exchange Commission issued Financial Reporting Release No. 48, which expands the disclosure requirements for certain derivatives and other financial instruments. The Company does not utilize derivative financial instruments. See Notes 1 and 2 to the Financial Statements. The carrying amounts reflected in the balance sheet of cash and cash equivalents, trade receivables and trade payables approximates fair value at December 31, 1999 due to the short maturities of these instruments. Item 8. Financial Statements and Supplementary Data - --------------------------------------------------- Financial Statements and Supplementary Data appear at pages F-1 through F- 16 of this Report on Form 10-K. Item 9. Changes in and Disagreements with Accountants on Accounting and - ----------------------------------------------------------------------- Financial Disclosure - -------------------- Not applicable. -18- PART III Item 10. Directors and Executive Officers of the Registrant - ----------------------------------------------------------- (a) Directors. The information with respect to directors required by this item is incorporated herein by reference from the section entitled "Election of Directors" in the Company's definitive Proxy Statement for its Annual Meeting of Stockholders to be held May 23, 2000 (the "2000 Proxy Statement"), to be filed with the Securities and Exchange Commission not later than April 28, 2000. (b) Executive Officers. The executive officers of the Company, who are elected to serve at the discretion of the Company's Board of Directors, are as follows: Name Age Position - ---- --- ----------------------------------------------- Arthur J. McEvily, Ph.D. 48 President, Chief Executive Officer and Director Joel A. Stone 47 Vice President Operations Scott A. Kumf 43 Chief Financial Officer, Vice President Administration, Treasurer and Assistant Secretary Dr. McEvily was named President and Chief Executive Officer in February 2000. Previously, he was named Executive Vice President in January 1999, Senior Vice President, Commercial Development in December 1997 and served as Vice President Applications, Technical Service and New Product Commercialization from August 1996 to December 1997. He served as Vice President Sales and Business Development of the Company from December 1993 to August 1996. From May 1991 to December 1993 he held various positions at Opta, ranging from Senior Research Scientist to Product Director to Director of Business Development. Dr. McEvily served in various scientific capacities at Enzytech from October 1988 to May 1991. Dr. McEvily received a B.Sc. in Biochemistry from Marlboro College, Marlboro, Vermont and a Ph.D. in chemistry from The University of North Carolina at Chapel Hill. He was a postdoctoral fellow at Harvard Medical School. Mr. Stone has served as Vice President Operations and Manufacturing since May 1991. He served as Senior Director of Manufacturing and Engineering Management at Enzytech from April 1990 to May 1991. Prior to joining Enzytech, Mr. Stone was Director of Manufacturing at Genencor, Inc. from August 1988 to March 1990. From August 1986 to August 1988, Mr. Stone was Manager of Operations at the Harbert Lummus Joint Venture. Mr. Kumf joined Opta in August 1996 as Chief Financial Officer and Vice President Administration. He was elected Treasurer and Assistant Secretary in December 1996. Prior to joining Opta, Mr. Kumf served at BostonCoach, Inc. as Chief Financial Officer from September 1995 to August 1996. From August 1994 to May 1995, he was the Chief Financial Officer of Trotter, Inc. and from September 1990 to July 1994 he served as Chief Financial Officer for Polar Corp. Mr. Kumf is a Certified Public Accountant in Massachusetts. -19- Item 11. Executive Compensation - ------------------------------- The information required under this item is incorporated herein by reference from the section entitled "Executive Compensation" in the 2000 Proxy Statement. Item 12. Security Ownership of Certain Beneficial Owners and Management - ----------------------------------------------------------------------- The information required by this item is incorporated herein by reference from the section entitled "Security Ownership of Certain Beneficial Owners and Management" in the 2000 Proxy Statement. Item 13. Certain Relationships and Related Transactions - ------------------------------------------------------- The information required by this item is incorporated herein by reference from the section entitled "Certain Transactions" in the 2000 Proxy Statement. -20- PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K - -------------------------------------------------------------------------- (a) Documents filed as part of this Report: --------------------------------------
(1) Financial Statements: -------------------- Report of Independent Accountants F-1 Balance Sheet at December 31, 1999 and 1998 F-2 Statement of Operations for the three years ended December 31, 1999 F-3 Statement of Stockholders' Equity for the three years ended December 31, 1999 F-4 Statement of Cash Flows for the three years ended December 31, 1999 F-5 Notes to Financial Statements F-6
(2) All financial statement schedules are omitted because they are not applicable, not material, or the required information is shown in the financial statements or the notes thereto. (3) Exhibits -------- Exhibit Number Description - -------------- ----------- 3.1 Amended and Restated Certificate of Incorporation of the Company (Filed as Exhibit 4.2 to the Company's Registration Statement on Form S-8, Registration No. 33-93518, and incorporated herein by reference) 3.2 Restated By-Laws of the Company (Filed as Exhibit 3.4 to the Company's Registration Statement on Form S-1, Registration No. 33-45700, as amended, and incorporated herein by reference) 4.1 Article 4 of the Amended and Restated Certificate of Incorporation of the Company (see Exhibit 3.1) (Filed as Exhibit 4.2 to the Company's Registration Statement on Form S-8, Registration No. 33-93518, and incorporated herein by reference) 4.2 Form of Common Stock Certificate of the Company (Filed as Exhibit 4.2 to the Company's Registration Statement on Form S-1, Registration No. 33-45700, as amended and incorporated herein by reference) 4.3 Form of Warrant Certificate of the Company (Filed as Exhibit 4.3 to the Company's Registration Statement on Form S-3, Registration No. 33- 80860, and incorporated herein by reference) 10.1 Form of Unit Purchase Agreement dated as of April 21, 1994 between the Company and the respective parties thereto (Filed as Exhibit 99.2 to the Company's Form 8-K, Commission File No. 0-19811, and incorporated herein by reference) 10.2 Amended and Restated Master Food Ingredients Collaborative Development Agreement, dated August 11, 1994, between the Company and Pfizer Inc. (Filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994, and incorporated herein by reference)* -21- 10.3 Master Food Ingredients License Agreement dated June 13, 1991 between the Company and Pfizer Inc. (Filed as Exhibit 10.2 to the Company's Registration Statement on Form S-1, Registration No. 33-45700, as amended, and incorporated herein by reference)* 10.4 Form of First Amendment to Master Food Ingredients License Agreement (Filed as Exhibit 10.3 to the Company's Registration Statement on Form S-1, Registration No. 33-45700, as amended and incorporated herein by reference) 10.5 Licensed Product Term Sheet dated March 2, 1994 between the Company and Pfizer Inc. (Filed as Exhibit 10.5 to the Company's 1994 Annual Report on Form 10-K, Commission File No. 0-19811, and incorporated herein by reference). * 10.6 License and Technology Transfer Agreement effective as of May 1, 1991 between the Company and Enzytech, Inc. (Filed as Exhibit 10.6 to the Company's Registration Statement on Form S-1, Registration No. 33- 45700, as amended, and incorporated herein by reference) 10.7 Promissory Note and Mortgage Agreement dated August 19, 1993 between the Company and Springfield Institution for Savings (Filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993, Commission File No. 0-19811, and incorporated herein by reference) 10.8 Loan Agreement dated November 5, 1992 between the Company and Massachusetts Business Development Corporation (Filed as Exhibit 10.12 to the Company's Annual Report on Form 10-K for the year ended December 31, 1992, Commission File No. 0-19811, and incorporated herein by reference) 10.9 Mortgage and Security Agreement dated November 3, 1994 executed by the Company in favor of the Massachusetts Business Development Corporation (Filed as Exhibit 10.9 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994, Commission File No. 0-19811, and incorporated herein by reference) 10.10 Authorization and Loan Agreement dated May 18, 1992 among the Company, Massachusetts Certified Development Corporation and U.S. Small Business Administration (Filed as Exhibit 10.13 to the Company's Annual Report on Form 10-K for the year ended December 31, 1992, Commission File No. 0-19811, and incorporated herein by reference) 10.11 Fixed Asset Line of Credit dated March 29, 1993 between the Company and Silicon Valley Bank (Filed as Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993, Commission File No. 0-19811, and incorporated herein by reference) 10.12 Asset Purchase Agreement dated June 17, 1992, between Williamson Fiber Products, Inc., The Williamson Group, Inc. and the Company (Filed as Exhibit 2.1 to the Company's Current Report on Form 8-K dated June 17, 1992, Commission File No. 0-19811, and incorporated herein by reference) -22- 10.13 Sublease and Consent dated June 17, 1992 among Williamson Fiber Products, Inc., the Company and Spring Street Developers (Filed as Exhibit 28.2 to the Company's Current Report on Form 8-K dated June 17, 1992, Commission File No. 0-19811, and incorporated herein by reference) 10.14 Consulting Agreement, dated January 28, 1992, between the Company and A.S. Clausi (Filed as Exhibit 10.24 to the Company's Annual Report on Form 10-K for the year ended December 31, 1992, Commission File No. 0- 19811, and incorporated herein by reference)# 10.15 Stock Purchase and Repurchase Agreement, dated May 29, 1991, between the Company and Akiva T. Gross (Filed as Exhibit 10.18 to the Company's Registration Statement on Form S-1, Registration No. 33-45700, as amended, and incorporated herein by reference) 10.16 Employment Agreement, dated May 1, 1991, between the Company and Akiva T. Gross (Filed as Exhibit 10.21 to the Company's Registration Statement on Form S-1, Registration No. 33-45700, as amended, and incorporated herein by reference)# 10.17 Letter agreement, dated May 1, 1995, between the Company and Akiva T. Gross (Filed as Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995, Commission File No. 0- 19811, and incorporated herein by reference)# 10.18 Promissory Note dated August 12, 1994 executed by Akiva T. Gross in favor of the Company (Filed as Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994, Commission File No. 0-19811, and incorporated herein by reference) 10.19 Pledge Agreement dated August 12, 1994 between Akiva T. Gross and the Company (Filed as Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994, Commission File No. 0-19811, and incorporated herein by reference) 10.20 Extension and amendment of Employment Agreement, dated October 1, 1992 between the Company and Lewis C. Paine, III, dated December 31, 1993 (Filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994, Commission File No. 0-19811, and incorporated herein by reference)# 10.21 Stock Purchase and Repurchase Agreement, dated May 29, 1991, between the Company and Lewis C. Paine, III (Filed as Exhibit 10.17 to the Company's Registration Statement on Form S-1, Registration No. 33- 45700, as amended, and incorporated herein by reference) 10.22 Amended and Restated Promissory Note dated as of September 19, 1990 executed by Lewis C. Paine, III in favor of the Company (Filed as Exhibit 10.26 to the Company's Annual Report on Form 10-K for the year ended December 31, 1992, Commission File No. 0-19811, and incorporated herein by reference) 10.23 Promissory Note dated January 8, 1993, executed by Lewis C. Paine, III in favor of the Company (Filed as Exhibit 10.27 to the Company's Annual Report on Form 10-K for the year ended December 31, 1992, Commission File No. 0-19811, and incorporated herein by reference) -23- 10.24 Pledge Agreement dated January 8, 1993, between Lewis C. Paine, III and the Company (Filed as Exhibit 10.28 to the Company's Annual Report on Form 10-K for the year ended December 31, 1992, Commission File No. 0- 19811, and incorporated herein by reference) 10.28 Employee Agreement for Protection of Company Property, dated May 1, 1991, in the form executed by Officers of the Company (Filed as Exhibit 10.23 to the Company's Registration Statement on Form S-1, Registration No. 33-45700, as amended, and incorporated herein by reference) 10.29 1992 Employee, Director and Consultant Stock Option Plan, as amended through March 10, 1993 (Filed as Exhibit 28.1 to the Company's Registration Statement on Form S-8, Registration No. 33-65406, and incorporated herein by reference)# 10.30 Amendment to 1992 Employee, Director and Consultant Stock Option Plan, adopted January 19, 1995 (filed as Exhibit 10.30 to the Company's 1994 Annual Report on Form 10-K, Commission File No. 0-19811, and incorporated herein by reference)# 10.31 Employee Stock Purchase Plan, as amended and restated (Filed as Exhibit 28.3 to the Company's Registration Statement on Form S-8, Registration No. 33-48624, and incorporated herein by reference)# 10.32 Amendment to Employee Stock Purchase Plan, adopted February 16, 1993 (Filed as Exhibit 10.41 to the Company's Annual Report on Form 10-K for the year ended December 31, 1992, Commission File No. 0-19811, and incorporated herein by reference)# 10.33 Press Release dated June 4, 1996, announcing that the Company's revenue and earnings for the second quarter and 1996 as a whole are likely to be lower than Wall Street estimates. (Filed as Exhibit 99.1 to the Company's Current Report on Form 8-K dated June 4, 1996, Commission File No. 0-19811, and incorporated herein by reference) 10.34 Amendment to 1992 Employee, Director and Consultant Stock Option Plan, adopted March 5, 1996 (filed as Exhibit 10.34 to the Company's 1998 Annual Report on Form 10-K, Commission File No. 0-19811, and incorporated herein by reference)# 10.35 Amendment to 1992 Employee, Director and Consultant Stock Option Plan, adopted February 26, 1998 (filed as Exhibit 10.35 to the Company's 1998 Annual Report on Form 10-K, Commission File No. 0-19811, and incorporated herein by reference)# 10.36 Employment Agreement dated December 8, 1998 between the Company and Lewis C. Paine, III (filed as exhibit 10.36 to the Company's 1998 Annual Report on Form 10-K, Commission File No. 0-19811, and incorporated herein by reference)# 10.37 Amendment to 1992 Employee, Director and Consultant Stock Option Plan, adopted May 18, 1999 (Filed as Exhibit 10.37 to the Company's 1999 Annual Report on Form 10-K, Commission File No. 0-19811, and incorporated herein by reference)# -24- 10.38 Asset Purchase Agreement dated June 16, 1999 between the Company and Stabilized Products, Inc. (filed as exhibit 10.1 to the Company's quarterly Report on Form 10-Q for the quarter ended June 30, 1999, Commission File 0-19811, and incorporated herein by reference) 23 Consent of PricewaterhouseCoopers LLP (filed herewith) * Confidential treatment has been granted by the Securities and Exchange Commission. # Management contract or compensatory plan or arrangement. (b) Reports on Form 8-K ------------------- No Reports on Form 8-K were filed by the Company during the quarter ended December 31, 1999. -25- SIGNATURES Pursuant to the requirements of Section 13 or Section 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. OPTA FOOD INGREDIENTS, INC. Date: March 20, 2000 By: /s/ Arthur J. McEvily, Ph.D. -------------------------------------- Arthur J. McEvily, Ph.D. President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated.
Signature Title Date - --------- ----- ---- /s/ Arthur J. McEvily, Ph.D. President, Chief Executive March 20, 2000 - ---------------------------- Officer and Director Arthur J. McEvily, Ph.D. (principal executive officer) /s/ Scott A. Kumf Chief Financial Officer, March 20, 2000 - ---------------------------- Vice President Administration, Scott A. Kumf Treasurer and Assistant Secretary (principal financial and accounting officer) /s/ William P. Carmichael Director March 20, 2000 - ---------------------------- William P. Carmichael /s/ A.S. Clausi Director March 20, 2000 - ---------------------------- A.S. Clausi /s/ Harry Fields Director March 20, 2000 - --------------------------- Harry Fields /s/ Glynn C. Morris Director March 20, 2000 - --------------------------- Glynn C. Morris /s/ Frederic Stevenin Director March 20, 2000 - --------------------------- Frederic Stevenin
-26- Opta Food Ingredients, Inc. Balance Sheet (in thousands, except share amounts) - -------------------------------------------------------------------------------- Report of Independent Accountants To the Board of Directors and Stockholders of Opta Food Ingredients, Inc. In our opinion, the accompanying balance sheet and the related statements of income, cash flows and stockholders' equity present fairly, in all material respects, the financial position of Opta Food Ingredients, Inc. at December 31, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Boston, Massachusetts February 22, 2000 F-1 Opta Food Ingredients, Inc. Balance Sheet (in thousands, except share amounts) - --------------------------------------------------------------------------------
December 31, ------------------------- 1999 1998 -------- -------- Assets Current assets: Cash and cash equivalents $ 2,578 $ 30,315 Short term investments 10,004 - Accounts receivable, net 3,927 1,950 Inventories, net 4,678 2,071 Prepaid expenses and other assets 546 384 -------- -------- Total current assets 21,733 34,720 Fixed assets, net 23,820 12,473 Goodwill, net 1,549 - Patents and trademarks, net 592 626 Other assets 121 69 -------- -------- $ 47,815 $ 47,888 ======== ======== Liabilities and Stockholders' Equity Current liabilities: Current portion of long term debt $ 394 $ 426 Accounts payable 1,872 1,003 Accrued expenses 1,280 1,256 -------- -------- Total current liabilities 3,546 2,685 Long term debt 2,733 3,126 Commitments (Note 16) Stockholders' equity: Preferred stock, $.01 par value; 3,000,000 shares authorized, no shares issued or outstanding - - Common stock, $.01 par value; 15,000,000 shares authorized, 10,997,864 and 11,096,002 shares issued and outstanding at December 31, 1999 and 1998, respectively 111 111 Additional paid-in capital 79,807 79,747 Treasury stock, 150,000 shares at cost (444) - Accumulated deficit (37,938) (37,781) -------- -------- 41,536 42,077 -------- -------- $ 47,815 $ 47,888 ======== ========
The accompanying notes are an integral part of the financial statements. F-2 Opta Food Ingredients, Inc. Statement of Operations (in thousands, except share amounts) - --------------------------------------------------------------------------------
Year Ended December 31, ---------------------------------------------------- 1999 1998 1997 -------- -------- -------- Product revenue $ 19,289 $ 13,971 $ 8,799 Cost and expenses: Cost of revenue 12,408 10,146 6,730 Selling, general and administrative 4,553 4,033 3,874 Research and development 3,275 3,665 4,236 Restructuring 350 - - -------- -------- -------- 20,586 17,844 14,840 -------- -------- -------- Loss from operations (1,297) (3,873) (6,041) Interest income 1,344 1,637 1,906 Interest expense (262) (263) (418) Other income (expense), net 58 17 (16) -------- -------- -------- Net loss $ (157) $ (2,482) $ (4,569) ======== ======== ======== Basic and diluted net loss per share $ (.01) $ (.22) $ (.41) ======== ======== ======== Weighted average shares outstanding - basic and diluted 11,031 11,084 11,034 ======== ======== ========
The accompanying notes are an integral part of the financial statements. F-3 Opta Food Ingredients, Inc. Statement of Stockholders' Equity (in thousands, except share amounts) - --------------------------------------------------------------------------------
Common Stock Additional Treasury Total Stock- -------------------------- Number of Par Paid-in Stock at Accumulated holders' Shares Value Capital Cost Deficit Equity ---------- ----- ---------- --------- ----------- ------------ Balance at December 31, 1996 10,965,681 $ 110 $78,989 - ($ 30,730) $ 48,369 Sale of common stock pursuant to exercise of stock options 85,526 1 615 - - 616 Sale of common stock pursuant to exercise of stock warrants 21,918 - 45 - - 45 Sale of common stock under employee stock purchase plan 6,708 - 32 - - 32 Net loss - - - - (4,569) (4,569) ---------- ----- ---------- --------- ----------- ------------ Balance at December 31, 1997 11,079,833 111 79,681 - (35,299) 44,493 Sale of common stock pursuant to exercise of stock options 3,000 - 16 - - 16 Sale of common stock pursuant to exercise of stock warrants 13,169 - 50 - - 50 Net loss - - - - (2,482) (2,482) ---------- ----- ---------- --------- ----------- ------------ Balance at December 31, 1998 11,096,002 111 79,747 - (37,781) 42,077 Sale of common stock pursuant to exercise of stock options 30,899 - 6 - - 6 Sale of common stock under employee stock purchase plan 20,963 - 54 - - 54 Purchase of treasury stock (150,000) - - (444) - (444) Net loss - - - - (157) (157) ---------- ----- ---------- --------- ----------- ------------ Balance at December 31, 1999 10,997,864 $ 111 $ 79,807 ($ 444) ($ 37,938) $ 41,536 ========== ===== ========== ========= =========== ============
The accompanying notes are an integral part of the financial statements. F-4 Opta Food Ingredients, Inc. Statement of Cash Flows (in thousands) - --------------------------------------------------------------------------------
Year Ended December 31, ------------------------------- 1999 1998 1997 -------- -------- -------- Cash flows from operating activities: Net loss $ (157) $ (2,482) $ (4,569) Adjustments to reconcile net loss to net cash used in operating activities net of acquired amounts: Depreciation and amortization 1,607 1,412 1,226 Forgiveness of notes receivable 20 40 40 Changes in assets and liabilities: Increase in accounts receivable, net (521) (541) (406) (Increase) decrease in inventories, net (1,397) 477 942 Increase in prepaid expenses and other assets (155) (222) (26) Increase (decrease) in accounts payable 605 (300) 545 Increase (decrease) in accrued expenses (59) 197 192 Decrease in other liabilities - - (300) -------- -------- -------- Total adjustments 100 1,063 2,213 -------- -------- -------- Net cash used in operating activities (57) (1,419) (2,356) Cash flows from investing activities: Purchase of short term investments (10,004) - (3,944) Maturity of short term investments - - 4,586 Acquisition of businesses (16,005) - - Purchase of fixed assets (769) (1,449) (1,304) Increase in patents and trademarks (93) (63) (124) Decrease in other assets - 49 32 -------- -------- -------- Net cash used in investing activities (26,871) (1,463) (754) Cash flows from financing activities: Proceeds from issuance of common stock 60 66 693 Purchase of treasury stock (444) - - Proceeds from issuance of long term debt - 955 - Principal payments on long term debt (425) (1,513) (1,499) -------- -------- -------- Net cash used in financing activities (809) (492) (806) Net decrease in cash and cash equivalents (27,737) (3,374) (3,916) Cash and cash equivalents at beginning of year 30,315 33,689 37,605 -------- -------- -------- Cash and cash equivalents at end of year $ 2,578 $ 30,315 $ 33,689 ======== ======== ======== Supplemental disclosure of cash flow information: Cash paid for interest $ 262 $ 263 $ 404 ======== ======== ========
The accompanying notes are an integral part of the financial statements. F-5 1. Organization and Basis of Presentation Opta Food Ingredients, Inc. (the "Company") is a leading innovator, manufacturer and marketer of proprietary food ingredients that improve the nutritional content, healthfulness, texture and taste of its customers' food products. Opta is committed to finding solutions to customers' formulation challenges by providing texturizing agents that it markets primarily in North America to the dairy, dressings and sauces, meat and baked goods categories. The Company was legally incorporated on April 23, 1991. 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 revenue and expense during the year. Actual results could differ from those estimates. 2. Summary of Significant Accounting Policies Revenue Recognition Revenue for product sales is recognized upon shipment. Cash and Cash Equivalents and Concentration of Credit Risk Cash and cash equivalents include investments with initial maturities of three months or less. The Company does not believe that it is subject to any unusual credit risk beyond the normal credit risk related to operating its business. Accounts Receivable Accounts receivable are reflected net of an allowance for doubtful accounts of $105,000 and $90,000 at December 31, 1999 and 1998, respectively. Fair Value of Financial Instruments The carrying amount of the Company's financial instruments, primarily cash equivalents and available-for-sale investments, at December 31, 1999 and 1998, approximate fair market value in accordance with Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities". Unrealized gains and losses are reported as a separate component of stockholders' equity. Inventories Inventories are stated at the lower of cost or market, cost determined using the first-in, first-out method. Fixed Assets Fixed assets are stated at cost and depreciated using the straight-line method over the estimated useful lives of the assets, which range from five to forty years. Maintenance and repair costs are expensed as incurred. Patents and Trademarks Patent and trademark costs are capitalized and amortized on a straight-line basis over the shorter of the estimated economic lives or the stated terms of the patent or trademark. Amortization periods are eight and ten years, respectively. Goodwill Goodwill represents the excess of the cost of acquired businesses over the fair market value of their net tangible and identified intangible assets. Goodwill is being amortized on a straight-line basis over a period of 10 years. F-6 Stock Compensation The Company's stock option plans are accounted for using the intrinsic value method to measure compensation expense in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees". In 1996, the Company adopted only the footnote disclosure requirements of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("FAS 123", Note 13) which discloses the pro forma effect of compensation expense of all equity instruments issued to employees. Net Loss Per Share Basic net loss per share is determined by dividing the net loss by the weighted average number of common shares outstanding during the year. All common stock equivalents have been excluded from weighted average shares outstanding for calculating diluted net loss per share because such equivalents are anti-dilutive. Segment Information In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information", ("FAS 131"). The Company adopted FAS 131 on January 1, 1998. FAS 131 establishes standards for reporting information on operating segments in interim and annual financial statements. The Company operates under one business segment. FAS 131 had no impact on the Company's financial position or results of operations. Reclassifications Certain reclassifications have been made to the prior years financial statements to conform to current presentation. These reclassifications have no effect on the Company's results of operations or financial position. 3. Acquisitions On June 30, 1999, the Company acquired the assets of Stabilized Products, Inc. ("SPI"), a privately held manufacturer of specialized stabilized ingredients for the dairy industry, for approximately $2.4 million in cash. The acquisition of SPI was accounted for as a purchase and, accordingly, SPI's results of operations have been included in the financial statements since the date of acquisition. The excess of the purchase price over the fair value of the net assets acquired was $1.6 million and has been recorded as goodwill, which is being amortized on a straight-line basis over 10 years. The purchase price at June 30, 1999 was allocated based on the fair values of the assets purchased as follows (in thousands): Accounts receivable $ 426 Inventories 276 Machinery and equipment 76 Other assets 4 Goodwill 1,630
The Company's statements of operations and of cash flows for the year ended December 31, 1999 reflect the financial results of Stabilized Products, Inc. from July 1, 1999. Pro forma financial information has not been provided because the amounts involved are not deemed material. F-7 On December 31, 1999, the Company acquired substantially all the assets of Canadian Harvest located in Cambridge, Minnesota and all of the outstanding shares of common stock of Canadian Harvest Process Ltd. located in St. Thomas, Ontario, Canada for $12 million in cash, with an additional $1.6 million paid for net working capital. Canadian Harvest is a privately held manufacturer and supplier of dietary and stabilized fibers. The acquisition of Canadian Harvest was accounted for using the purchase method of accounting. The purchase price has been tentatively allocated based on estimated fair values at the date of acquisition as follows (in thousands): Property, plant and equipment $11,790 Intangibles 110 Accounts receivable 1,029 Inventories 934 Other assets 76 Accounts payable 263 Accrued expenses 83
The following unaudited pro forma combined results of operations have been prepared as if the acquisition of Canadian Harvest had occurred at the beginning of 1999 and 1998 (in thousands, except per share amounts):
1999 1998 ------------ ----------- Revenue $27,065 $ 21,365 Net loss $ (26) $ (2,743) Net loss per share - basic and diluted $ (.00) $ (.25)
Such pro forma combined results of operations have been prepared for comparative purposes only and are not indicative of the actual results that would have occurred had the acquisition been consummated at the beginning of 1999 and 1998 or which may result in future years. The 1999 pro forma combined financial results reflect a decrease in interest income for the $13.7 million of cash used as if the purchase had occurred on January 1, 1999 without regard to positive cash flow generated from the operations of Canadian Harvest during 1999. 4. Cash Equivalents and Short Term Investments Following is a summary of the fair market value of available-for-sale securities by balance sheet classification (in thousands):
December 31, ------------------------------------ 1999 1998 ----------------- --------------- Cash equivalents and short term investments: Money market funds $ 900 $24,139 Commercial paper 3,537 4,725 Corporate bonds 7,762 - U.S. government obligations - 995 Repurchase agreement 383 456 ----------------- --------------- $12,582 $30,315 ================= ===============
Gross unrealized gains and losses at December 31, 1999 and 1998 and realized gains and losses on sales of securities for the years then ended were not significant. F-8 5. Notes Receivable At December 31, 1999 and 1998, notes receivable from an employee are included in other assets. The terms of the note forgive the principal and related interest ratably over a five year period as long as the employee remains employed by the Company or if terminated without cause. The balance of this note is as follows (in thousands):
December 31, -------------------------------------- 1999 1998 ----------------- ----------------- Unsecured note bearing interest at 8% $ 40 $ 60 ================= =================
6. Inventories Inventories consist of the following (in thousands):
December 31, ---------------------------------- 1999 1998 --------------- --------------- Raw materials $ 919 $ 420 Finished goods 3,759 1,651 --------------- --------------- $4,678 $2,071 =============== ===============
7. Fixed Assets Fixed assets consist of the following (in thousands):
December 31, ----------------------------------- 1999 1998 --------------- --------------- Furniture and fixtures $ 907 $ 726 Machinery and equipment 20,417 10,861 Building 6,851 4,353 Land 1,863 1,463 --------------- --------------- $30,038 $17,403 Accumulated depreciation (6,218) (4,930) --------------- --------------- $23,820 $12,473 =============== ===============
Depreciation expense (in thousands) for the years ended December 31, 1999, 1998, and 1997 was $1,288, $1,184 and $1,010, respectively. F-9 8. Patents and Trademarks Assets Patents and trademarks consist of the following (in thousands):
December 31, --------------------------------------- 1999 1998 ----------------- ----------------- Patents and trademarks $ 2,089 $ 1,886 Accumulated amortization (1,497) (1,260) ----------------- ----------------- $ 592 $ 626 ================= =================
Amortization expense (in thousands) relating to patents and trademarks for the years ended December 31, 1999, 1998, and 1997 was $237, $229 and $216, respectively. 9. Accrued Expenses Accrued expenses consist of the following (in thousands):
December 31, -------------------------------------- 1999 1998 ----------------- ----------------- Bonuses $ 400 $ 670 Payroll costs and benefits 158 154 Professional fees 171 123 Other 551 309 ----------------- ----------------- $1,280 $1,256 ================= =================
F-10 Opta Food Ingredients, Inc. Notes to Financial Statements - -------------------------------------------------------------------------------- 10. Borrowings Long term debt consists of the following (in thousands):
December 31, ----------------------- 1999 1998 ------ ------ Mortgage payable to a bank due in quarterly installments of $27 including interest at 7.37% with the remaining balance of $1,650 due June 2003, secured by the Company's corporate headquarters $2,035 $2,145 Equipment line of credit due in quarterly installments of $80 plus interest at LIBOR plus 2.5% (8.33% at December 31, 1999) beginning August 1999, secured by certain fixed assets, due March 2002 796 955 Note payable to a state government agency and guaranteed by the U.S. Small Business Administration due in monthly installments of $6 including interest at 5.554% due July 2003, secured by certain fixed assets 215 269 Note payable to a state government agency due in monthly installments of $6 plus interest at prime plus 2 1/2 % (11% at December 31, 1999) due June 2000, secured by certain fixed assets 36 107 Note payable to a state government agency due in monthly installments of $3 including interest at 3% due July 2001, secured by certain fixed assets 45 76 ------ ------ 3,127 3,552 Current portion (394) (426) ------ ------ $2,733 $3,126 ====== ======
Maturities of long term debt outstanding at December 31, 1999 are as follows (in thousands): 2000 $ 394 2001 343 2002 652 2003 1,738 ------ $3,127 ====== The Company's debt agreements contain certain financial covenants and restrict the Company's ability to participate in merger discussions, pay dividends, limit annual capital expenditures, invest in certain types of securities and obtain additional debt financing without bank approval. At December 31, 1999 and 1998, the Company was in compliance with the terms of these agreements. F-11 Opta Food Ingredients, Inc. Notes to Financial Statements - -------------------------------------------------------------------------------- 11. Income Taxes Deferred tax benefits consist of the following (in thousands):
Year Ended December 31, -------------------------------------- 1999 1998 1997 ----- ------- ------- Federal $ 128 $ 918 $ 1,548 State 36 220 389 ----- ------- ------- $ 164 $ 1,138 $ 1,937 Increase in valuation allowance (164) (1,138) (1,937) ----- ------- ------- $ - $ - $ - ===== ======= =======
Deferred tax assets consist of the following (in thousands):
Year Ended December 31, ----------------------------- 1999 1998 -------- -------- Net operating loss carryforwards $ 12,532 $ 12,571 Research and development credit 1,159 1,033 Other state tax credits 7 20 Expense accruals and other 579 489 -------- -------- Gross deferred tax assets 14,277 14,113 Valuation allowance (14,277) (14,113) -------- -------- $ - $ - ======== ========
The Company has provided a valuation allowance for the full amount of the deferred tax assets since realization of these future benefits is not sufficiently assured. As the Company achieves profitability, these deferred tax assets may be available to offset future income tax liabilities and expense. A reconciliation between the amount of reported tax expense and the amount computed using the U.S. federal statutory rate of 35% follows (in thousands):
Year Ended December 31, ----------------------------------------------- 1999 1998 1997 ------ -------- -------- Income tax benefit at statutory rate $ (55) $ (869) $ (1,599) State tax benefit, net (8) (129) (234) Stock option exercises (13) - (3) Research and development credits (140) (160) (146) Other state credits 19 24 28 Other 33 (4) 17 ------ -------- -------- $ (164) $ (1,138) $ (1,937) Increase in valuation allowance 164 1,138 1,937 ------ -------- -------- $ - $ - $ - ====== ======== ========
F-12 Opta Food Ingredients, Inc. Notes to Financial Statements - -------------------------------------------------------------------------------- At December 31, 1999, the Company had federal net operating loss carryforwards and research and development credits which may be used to offset future federal taxable income and tax liabilities as follows (in thousands): Net Research and Year of Operating Development Expiration Loss Credit ---------- --------- ------------ 2006 $ 1,095 $ 76 2007 4,247 128 2008 5,570 144 2009 3,720 112 2010 4,991 70 2011 4,713 48 2012 4,558 101 2018 2,280 107 2019 - 95 -------- ----- $ 31,174 $ 881 ======== ===== A portion of the net operating loss carryforwards and valuation allowances totaling $1,974,000 and $767,000, respectively, relates to deductions for non-qualified stock option exercises and incentive stock option disqualifying dispositions. This amount will be credited to additional paid-in capital upon realization. Ownership changes, as defined in the Internal Revenue Code, resulting from the Company's initial public offering in March 1992 and a second offering in August 1995, have limited the amount of net operating loss and tax credit carryforwards that can be utilized annually to offset future taxable income or tax liabilities. As a result, the amount of these net operating loss carryforwards which can be utilized annually is $3,000,000 for losses incurred prior to March 1992 and $9,077,000 for losses incurred prior to August 1995. Subsequent changes in ownership could further affect the limitation in future years. F-13 12. Stockholders' Equity Preferred Stock Shares of preferred stock may be issued at the discretion of the Board of Directors of the Company with such designations, rights and preferences as the Board may determine from time to time. 13. Stock Option and Stock Purchase Plans During 1992 and 1991, the Company established the 1992 Employee, Director and Consultant Stock Option Plan and the 1991 Non-Employee Stock Option Plan, respectively. These plans provide for the issuance of non-qualified or incentive stock options to key employees, directors and consultants of the Company. The Board of Directors determines the term, price, number of shares and the vesting period of each option grant. However, the price may be no less than the par value of the common shares for non-qualified options, and no less than the fair market value of the shares on the date granted for incentive stock options (or no less than 110% of the fair market value in the case of holders of more than 10% of the voting stock of the Company). Additionally, the term of incentive stock options cannot exceed ten years (five years for options granted to holders of more than 10% of the voting stock of the Company). In May 1999, the stockholders approved an increase in the number of common shares authorized for issuance under the 1992 Employee, Director and Consultant Stock Option Plan from 1,916,667 to 2,166,667. The number of common shares authorized for issuance under the 1991 Non-Employee Stock Option Plan is 101,244. The Company has reserved 1,820,670 shares of common stock for issuance under the 1992 Employee, Director and Consultant Stock Option Plan and 9,838 shares for issuance under the 1991 Non-Employee Stock Option Plan at December 31, 1999. At December 31, 1999, options to purchase 1,714,921 shares were outstanding under the plans, of which 735,826 were exercisable. There were 115,587 shares available for future grant under the plans at December 31, 1999. Stock option plan transactions were as follows:
Weighted Average Shares Exercise Price ---------- ------------------ Options outstanding at December 31, 1996 1,106,839 $7.58 Granted 644,497 $5.90 Exercised (21,918) $2.08 Cancelled (512,938) $9.83 --------- Options outstanding at December 31, 1997 1,216,480 $5.86 Granted 390,050 $4.79 Exercised (3,000) $5.25 Cancelled (52,030) $6.23 --------- Options outstanding at December 31, 1998 1,551,500 $5.58 Granted 335,450 $3.28 Exercised (30,899) $0.20 Cancelled (141,130) $5.96 --------- Options outstanding at December 31, 1999 1,714,921 $5.18 =========
F-14 The following table summarizes information about stock options outstanding and exercisable at December 31, 1999:
Options Outstanding Options Exercisable ------------------------------------ ----------------------- Weighted Average Weighted Weighted Number of Remaining Average Number of Average Range of Options Contractual Exercise Options Exercise Exercise Prices Outstanding Life Price Outstanding Price - --------------- ----------- ----------- -------- ----------- --------- $0.06 - $0.45 32,836 1.4 $ 0.09 32,836 $ 0.09 $2.53 - $3.84 334,350 9.4 $ 3.28 1,750 $ 3.19 $3.94 - $5.50 460,790 7.7 $ 4.87 152,510 $ 4.97 $5.53 - $9.00 843,695 6.0 $ 6.02 510,630 $ 6.07 $10.00- $15.50 43,250 3.6 $10.57 38,100 $10.42 ----------- ----------- 1,714,921 735,826 =========== ===========
In 1992, the stockholders approved the Employee Stock Purchase Plan. This plan enables eligible employees to purchase common shares at 85% of the fair market value of the shares during two six month periods beginning January 1 and July 1 of each year. The Company has authorized 200,000 shares of the Company's common stock for issuance under this plan. At December 31, 1999, 122,227 shares remain available for issuance under this plan. The Company has adopted the disclosure only provisions of FAS 123. Accordingly, no compensation cost has been recognized for the stock plans. Had compensation cost for the Company's stock plans been determined based on fair value at the grant dates for awards in 1999 and 1998 as prescribed by FAS 123, the Company's net loss and net loss per share would have been as follows (in thousands, except for per share amounts):
Year Ended December 31, --------------------------------------- 1999 1998 ------------------ ---------------- Net loss: As reported $ (157) $ (2,482) Pro forma (471) (2,827) Net loss per share: As reported $ (.01) $ (.22) Pro forma (.04) (.26)
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions: dividend yield of 0%, risk-free interest rate of 5.75% and 5%, expected volatility of 65.3% and 64.9%, and an option term of 8 years, for the years ended December 31, 1999 and 1998, respectively. The weighted average fair value of options granted during the years ended December 31, 1999 and 1998 was $2.54 and $3.45, respectively. 14. Retirement Savings Plan The Company has a 401(k) Plan which is available to employees of the Company who meet certain eligibility requirements. This plan is qualified under Section 401(k) of the Internal Revenue Code and is subject to contribution limitations as set annually by the Internal Revenue Service. Eligible employees may enroll January 1 and July 1 of each year. The Company does not make matching contributions. F-15 15. Sales to Major Customers and Export Sales During 1999 and 1998, a single customer accounted for $8.5 million and $5.2 million or 44% and 37% of total product sales, respectively. There were no major individual customers during 1997. In addition, during 1999, 1998 and 1997, $3.0 million, $3.9 million and $3.5 million of product sales, respectively, were to a group of independent bakeries that supply a quick service restaurant chain. International sales, in thousands, were $1,280 ($512 to Europe; $258 to the Middle East; $189 to Canada; $30 to Asia and $291 to Latin America); $795 ($418 to Europe and $377 to the Middle East); and $1,209 ($376 to Europe and $833 to the Middle East) for the years ended December 31, 1999, 1998 and 1997, respectively. 16. Commitments Leases The Company leases certain equipment and facilities under noncancellable operating leases. Total future minimum payments as of December 31, 1999 under these leases are as follows (in thousands):
Year ended December 31, 2000 $ 265 2001 208 2002 167 2003 145 2004 149 Thereafter 336 -------- $ 1,270 ========
Rent expense (in thousands) for the years ended December 31, 1999, 1998 and 1997 was $168, $157 and $159, respectively. F-16 EX-23 2 CONSENT OF PRICEWATERHOUSE COOPERS LLP Exhibit 23 Consent of Independent Accountants We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 33-48624 and No. 33-65406) of Opta Food Ingredients, Inc. of our report dated February 22, 2000 appearing on page F-1 of this Form 10-K. PricewaterhouseCoopers LLP Boston, MA March 20, 2000 EX-27 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM YEAR ENDED DECEMBER 31, 1999 FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 2,578,000 10,004,000 3,927,000 105,000 4,678,000 21,733,000 30,038,000 6,218,000 47,815,000 3,546,000 0 0 0 111,000 41,425,000 47,815,000 19,289,000 19,289,000 12,408,000 12,408,000 8,178,000 0 262,000 (157,000) 0 (157,000) 0 0 0 (157,000) (.01) 0
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